Stock Market Hits New Highs But Lacks Confirmation

While the S&P 500 breaks through 1900 and traders rejoice over the fresh new high, it seems the same level of excitement is not being felt in other parts of the market. There are multiple divergences that are taking place and showing a lack of confirmation. On my blog I’ve discussed multiple times the lack of participation in momentum for the S&P 500, but we can also see divergences in bonds, small caps, and defensive sectors showing leadership. However, the two measures we are seeing excessive risk taking in are the Put/Call Ratios and the Volatility Index which is sitting at historical lows. The other measures I follow appear to be negatively diverging from the overall equity market. Below are some examples.

Below is a chart I referenced earlier this year; it shows relative performance of High Yield Corporate Bonds ($HYG) vs.U.S. 20+ Year Treasury’s ($TLT). In the bottom panel we have the 10-Year Treasury Yield ($TNX). For the bulk of the current bull market we’ve seen these two measurements for the bond market confirm the movements in equity prices. As stocks go up, so does the ratio between HYG and TLT as investors show preference for the more risky high yield market over government debt, and same for the 10-Year Yield which often moves with the stock market. However, that’s now the case today. We have a glaring divergence forming in both measures of risk within the bond market, something we haven’t seen since the 2011 and 2012 highs.

bond divergence

Next we have a chart showing the S&P 500 ($SPX), PowerShares Nasdaq ($QQQ), and the Russell 2000 iShares($IWM). While the S&P hits new highs the Nasdaq and Russell 2000 are off nearly 5% from their 52-week highs. SentimenTrader.com wrote in a recent note that some examples of past instances of this occurring are: 1983, 1987, 1990, 1998, 2000, and 2006. Jason wrote that the eventual ‘reaction’ of this divergence in the S&P 500 varies in length, “from immediately (’83, ‘90’, ’00) to over a year (’06). If traders were feeling more confident in the upswing in stocks, why aren’t they bidding up these higher beta indices?

To keep reading and see the rest of the charts: Stock Market Hits New Highs, But Lack of Confirmation Concerning (See It Market)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 3/3/2014

You think we’ll hear much about Russia this week? Probably. The great aspect of using technical analysis is we don’t need to immerse ourselves in the headlines or know the intimate details of when country is currently invading another country. If the market feels this information is important than it will show up in the price action. It can be easy to get caught up in flashing “breaking news” events and attempting to dissect the impact it will have on price movement. While the situation in Ukraine is important and will affect hundreds of thousands if not millions of lives, we must categorize that in a different part of our thought process and allow our chosen strategy or lens to lead our bias.

Equity Trend

Little needs to be said about the current trend of the equity market. It’s still positive as we hit new highs last week in the S&P 500 ($SPX).

equity trend

Equity Breadth

We had a good week in market breadth last week with the Advance-Decline line continuing to head higher. While we saw some consolidation and an eventual new high in the S&P, the Advance-Decline Line, which measures the number of NYSE stocks heading higher vs. those in the red, has almost gone in a straight line up. As expected, the Percentage of Stocks Above their 200-day Moving Average has broken out of its multi-month range as it tries to kiss 75%.  However, there is one measure of breadth that is still concerning….

equity breadthBelow is a chart of net number of stocks making new highs vs. new lows and then taking a 5-day total to show what’s taken place in a single trading week.This chart shows the last 11 years and I’ve drawn trend lines on the breadth measure to show negative divergences. In 2005 and 2006 we saw the net numbers of new highs and new lows kept hitting resistance while price advanced. This lead to breadth making lower highs, diverging from price before a top was set in 2007. We also had a notable divergence of lower highs going into the short bear market in 2011. Last year with the equity market challenging 30% gains, the new highs-lows indicator mimicked the action in ’05/’06 – hitting resistance. However towards the end of 2013 and into the first two months of ’14 we have begun seeing lower highs once again.

While the previously mentioned measures of breadth are showing signs of confirmation for the new high in the S&P, this measure is not. Is this a sign of future weakness to come in to the market?  Maybe. Although its hard to make that argument with the Advance-Decline line showing such strength, which it was not doing going into the 2007 high.

New High Low 5 day

Equity Momentum

The two more traditional forms of momentum, The Relative Strength Index (RSI), and the MACD, are both not confirming new highs. However, the RSI indicator is still rising and could be just ‘late to the party’ before reach ‘overbought’ status and showing confirmation. The Money Flow Index, which incorporates volume into the momentum calculation has reached an ‘overbought’ status, something we haven’t seen since last October.

equity momentum

Bonds

To keep with the theme of divergences, I want to take a moment and look at the bond market. Below is a chart of the S&P 500 ($SPX) with the ratio between the High Yield Corporate Bond ETF ($HYG) and 20+ Year Treasury ETF ($TLT) in the second panel and the 10-year Treasury Yield ($TNX) in the bottom panel.

It’s often said that the smartest traders are in the bond pits. This may be why we look to bonds to confirm what may be taking place in the equity markets. If the smartest guys (or gals) on The Street are bond traders, then they aren’t showing the same level of excitement as equity traders right now.

One way to measure ‘risk appetite’ is by looking at the relative performance of high yield debt compared to safe-haven Treasury bonds. When this ratio (green line) is rising we know that traders are showing a bias towards high yield bonds which means risk-taking is still in vogue. We also want to see the 10-year yield move with the equity market to help confirm an advance. Right now, neither of these are occurring. It appears bond traders are showing more signs of concern than what’s taking place in equity price action, which raises a yellow flag for the new high we hit last week. Treasury bonds are being favored over high yield and the 10-year yield has been heading lower – both measures diverging from recent equity price action.

Treasury

60-minute S&P 500

As I mentioned last week, the 50-1hr Moving Average would likely be a good place to look for support on any dips. The divergence that was taking place in the Relative Strength Index was able to be worked off as the RSI indicator broke above 70 with the S&P hitting a new all-time high. The MACD is still showing a divergence on the short-term view, refusing to cooperate with the bulls. I’m writing this on Sunday night and if the futures market is giving us any indication to how trading will be today (Monday), we’ll be cutting right through previous support like a hot knife in butter.

60 min sp500

Last Week’s Sector Performance

Two weeks ago the strongest sectors were health care ($XLV), utilities ($XLU), and energy ($XLE), all of which showed relative weakness during trading last week. The materials sector ($XLB) was the strongest sector last week, with consumer discretionary (cyclicals) ($XLY) and consumer staples ($XLP) rounding out the top three.

week sector perfYear-to-Date Sector Performance

For the first time in 2014, healthcare ($XLV) has pushed its way to the top spot in sector performance, showing a repeat of 2013. Utilities ($XLU) still appears to be a trader favorite as it is the second strongest sector YTD. Consumer staples ($XLP) continues to stray from the pack of low beta sectors, as its the worst relative performer in 2014.

ytd sector perf

Major Events This Week

While Russia invading Ukraine will likely hold as the major headline this week, as we approach Friday the focus will shift to the Non-Farm Payroll report.

Monday: ISM Manufacturing Index and Construction Spending
Tuesday: None
Wednesday: Beige Book
Thursday: Jobless Claims and Factory Orders
Friday: Non-Farm Payroll

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Where Could High Yield Be Heading?

Investors have been turning over every rock they can find in the search for yield. Causing the high yield space to be booming as of late. 2012 saw a record amount of high yield debt issued, beating out the previous record set just a few years prior in 2010. With Bernanke doing nearly all he can to suppress rates, fixed income investors are forced to continue walking further out on the risk curve.

The iShares High Yield Corp. Bond ETF ($HYG) is a popular method to play the high yield game. Going back to 2011 we can see that $HYG has been in a fairly large triangle pattern. Typically the closer we get to an apex in this type of pattern the less ‘explosive’ the breakout is, but that doesn’t mean a large move in either direction is out of the question. Momentum (RSI indicator) has been bullish during 2013, finding support at 55 and has been testing this level over the past couple of days. We can also see that bullish volume has been keeping the On Balance Volume (OBV) indicator rising – a sign that buyers continue to step in to move prices higher. Combining the support in RSI, the trend line on OBV and the support line of the triangle on price action we can get a clearer picture if we see a breakdown in the coming days/weeks if $HYG begins to lose its luster.

high yield

To continue the theme of a frothy high yield market, Bespoke put out an interesting piece comparing high yield to Treasury debt:

The chart below is from last week’s Bespoke Report newsletter, and it shows the average yield to maturity on the Merrill Lynch High Yield (Junk) Master Index.  At a current level of 5.24%, investors have never been paid less to own high yield debt.  Yields are so low, in fact, that five years ago the yield on the 10-Year US Treasury was higher than the current yield on junk bonds.  In the chart below, the red dots on the blue line represent periods going back to 2000 where the yield on the 10-year US Treasury was higher than the current yield on the High Yield Master Index.  With yields this low, high yield bonds are anything but high yielding.

High Yield vs 10 Year

Source: High Yield Yields Less Than Treasuries Five Years Ago (Bespoke)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.