Recency Bias Creates Frustration With Stocks

Many investors, both professional and retail, have grown frustrated over the lack of growth within the U.S. equity market. There are probably several reasons for this, one being the over-confidence that’s been molded out of the lack of price-volatility like we saw on 2011 and 2009. But I think a large chunk of the frustration lies with investor’s recency bias.

The chart below is a simple monthly line chart of the S&P 500 ($SPX). I’ve marked with a blue performance line the 23 month period that ended in October 2014, which shows the market rose 46% during that time period. While the last roughly two years has seen less than 5% growth for the U.S. stock market. Investors grew accustom to seeing double-digit gains on their annual statements, requiring practically no outside diversification away from large cap U.S. companies. That market environment has dissipated and a little more effect has been required. And if there’s anything Americans hate, it’s the need for more effort (which is why we’ve invented self-driving cars, shoes that don’t require laces, and voice-activated text messaging).

spx-frustrationWhile the market lacks the heroin-like stimulus provided by the Fed, stocks must begin to learn to walk and grow on their own. Will we eventually breakout and begin seeing those double-digit returns once again? Or will things flip and those double digits will be to the downside? No one knows. But we must adjust our expectations and realize we may need to look outside simple U.S. large caps to find asset appreciation rather than sit and pout, sending Snapshats and answering Twitter polls waiting for something to happen in the S&P pits.
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.

The Make Or Break Moment For Stocks

With the recent rise in stocks the major averages have begun digging their way out of being in the red by double digits. From the September low, the S&P 500 ($SPX) has bounced roughly 8% with another 5% to go before getting back to its prior high. While its made significant improvement from what many believed to have been the ‘edge of a cliff’ we are not quite out of the woods yet. On August 24th, when markets were “in turmoil” and traders were beginning to pull their hair out from stress I wrote a post, That Was Unlikely The Market Top & Where I See Things Going From Here. In which I laid out my thinking that I expected the market to whipsaw for a bit before potentially testing the low and bouncing higher. It seems that’s the scenario we’ve seen play out thus far. However, we can’t ignore the warnings that preceded the decline and the possible impact they can still have on financial markets.

So with all that, I thought it’s time to show a few charts for the broad market and explain my view on equities based on where we are and the environment we’re in. From a seasonal standpoint, we are exiting the historically bearish six month portion of the year, giving equities a bit of a tailwind but the major indices are also approaching critical levels of potential resistance. Can seasonally give enough of a boost to push past and move back to new highs?

Below is a monthly chart of the S&P 500 along with two Moving Averages and a momentum indicator, going back to 2005. Looking at the far right portion, the latest set of data the market’s provided us, we can see that in August the S&P broke through the 20-month and 10-month Moving Averages after a small divergence appeared in the Relative Strength Index (RSI) indicator. I show the 10- and 20-month MA’s because they have acted as support during the up trend and are commonly referenced when traders define a trend, either up or down.

In 2007, the monthly RSI went from being over 70 to having price break through these two Moving Averages price bounced back up and tested what had been support. Except support that had been provided by these MAs had become resistance and the RSI failed to get back above 50 before price continued into a bear market. Looking at present day, we had the RSI bounce on its mid-point, a bullish sign that momentum may still be in a bullish range. Price has been able to re-take the 20-month Moving Average but still remains slightly below the 10-month. I’ll be watching to see if we get a close above these two important levels.

spx monthly current

Another example of this occurred at the 2000 top…. Price broke below these two Moving Averages in late 2000 while the Relative Strength Index dropped under 50. An attempt to regain the 20- and 10-month MAs was made but failed and momentum was unable to get back above its mid-point. A bear market then followed as the 10-month Moving Average that had been support during the up trend switched to act as resistance during the multi-year down trend.

spx monthly 2000

Zooming in a bit, below is a weekly chart of the S&P 500 since late 2012. We can see a similar setup with the 50-week and 20-week Moving Average. Where they had once been support but are now is being tested as possible resistance. These shifts in being support and becoming resistance help show a change in psychology and market sentiment. It doesn’t require an understanding of what’s going on in China, Washing DC, or individual corporate board rooms – just price.

Weekly SPX Current

I call these next few weeks ‘the make or break’ moments for stocks because how they act around these moving averages, in my opinion, will help give traders a better idea about if the market is in the process of shifting from a bull to a bear market. I don’t believe that decision has been made, not when we are this close to a prior high, at this very moment. A fail at these levels of potential resistance, following declines in breadth and momentum, would check quite a few boxes that have led to prior bear markets – while they aren’t requirements they do act as a fairly consistent road map. If price can move above these levels then it’s likely we see the prior high tested and taken out as the bulls remain in control. Price is what matters so that’s what I focus on.

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.

Should We Be Worried About The Lack of Confirmation in Semiconductors?

There seems to be a lot of discussion on Twitter and StockTwits about the lack of confirmation breadth after the rise in equities last week. Some even noting some fairly bearish charts for the Nasdaq going back to the dot-com bubble peak. While it seems many other great traders and bloggers have discussed the breadth issue, most notably my good friend Ryan Detrick. One piece of data that’s also lacking a confirmation signal is one I’ve referenced a couple of times in the past – semiconductors.

While the S&P 500 ($SPX) got within spitting distance of its prior closing high, we did not see the same level of bullishness in the Semiconductors Index. Back in December I wrote an article titled, “Dr. Copper Has Been Replaced” in which I made the argument that Copper has been replaced by Semiconductors as a better barometer of market risk taking. While I don’t expect Semi’s to go in lock-step with the overall equity market, the current lack of confirmation is quite discouraging.

The news today will largely be focused on Apple’s earnings and the large gap down that the stock appears (as of the time of this writing) to be taking. While many great traders were pointing to the lack of breadth confirmation earlier in the week others were pointing to the strength in tech names like Apple and Google as a sign that the sky is still clear. As Apple experiences a kick in the teeth, I wonder if this increase in weakness in semiconductors was a bit of foreshadowing for the tech giant…

Semiconductor

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.