A Week in Review: Volatility, Momentum, Breadth, Sectors, Taxes & Sentiment 11/20/2017

As we move into a holiday-shortened week, here are the charts and articles I think worth sharing on this Monday morning. Hope you enjoy and have a Happy Thanksgiving!

Volatility Index
For only the third time this year, momentum for the Volatility Index reached ‘overbought’ levels with the RSI indicator climbing above 70 before volatility reversed back lower, finishing the weak just under 12.

Volatility Streak Below 20
A great deal of attention has been paid to the low-level of Volatility this year. If you’ve followed me on social media, read my Charles Dow paper, or blog posts then you know my feeling on low volatility being useful. While interesting, the predictive value is well overblown. However, I think it’s interesting that while so much focus has been paid to the recording setting low levels, we’ve yet to exceed the prior records of the VIX being sub-20 as shown from this chart from @VIXContango. In fact, the VIX didn’t break above 20 the entire year in 2005, stretching 558 days of “low” volatility.

Momentum of NYSE Breadth
While many traders often view momentum and breadth in two difference lenses, a viewpoint can also be obtained by looking at the momentum of breadth, which is what this chart shows. Below is the Relative Strength Index (RSI) indicator, a measure of breadth, for the NYSE Advance-Decline Line. The slight dip in equity prices we saw last week sent the Adv-Dec line’s momentum down to prior lows which have acted as support this year. Breadth, along with large-cap equities, have since bounced after this support test in momentum held strong.

Market Reaction to Tax Cuts
As Congress continues to progress in seeking to pass a tax cut bill, the focus of Wall Street is on the implications of the cut and whether it will stimulative for the economy and what the market’s reaction will be. Historically, the market’s had a below par performance in the years following tax cuts when looking at the past five instances. Bloomberg notes, “Looking at the S&P 500’s performance during the year before previous tax cuts, the market returned more profit than during the year following the bill signing. That applied to returns before and after tax bills signed by Presidents Lyndon Johnson (thought up under Kennedy’s tenure), Ronald Reagan and George W. Bush. The only time this wasn’t the case was following President Bush’s second bill attempt in 2003, when the market performed better after it was signed into law.”

Sector Relative Rotation
While equity indices saw a dip last week we do have some noticeable improvements in several sectors relative rotations. Tech, Materials, Financials and Energy all saw positive moves in the ‘leading’ category. While Consumer Discretionary moved higher, inching closer to the ‘improving’ quadrant. Health Care and Utilities continued their decline, with $XLV moving closer to the ‘lagging’ category.

Average Relative Strength Index for the S&P 500
With some selling flowing into stocks recently, we haven’t really seen much ground given up in momentum compared to the other mini-declines over the last twelve months. Below is a chart of the percentage of S&P 500 stocks with a 50-day Relative Strength Index (RSI) that was below 30, the often used level of being ‘oversold.’ At the tool’s highest point over the last week, the % didn’t even break 25% of S&P stocks being ‘oversold’ compared to prior recent declines getting above 35-40%. While each dip has been at varying severities, it’s worth noting the resiliency of momentum by traders holding up the bulk of the large cap equities.

Tech Sector Drives Q3 Earnings Growth
As has been the case for equities as a whole for large chunks of this year, just a few tech names have driven the bulk of the earnings growth in the third quarter. With most of the S&P 500 stocks having reported earnings, the index saw YOY growth of 7%. The Financial Times reports that “Outside of the energy sector, which is still recovering from the oil collapse in 2014, the technology sector has posted the best performance by far. Tech sector earnings grew 22 per cent, double the rate that analysts forecast. The industry as a whole has accounted for 90 per cent of the S&P 500 earnings beat rate. Perhaps more impressive, though, is that the four largest tech groups — Apple, Alphabet, Microsoft and Facebook — have driven half of the S&P 500 beat.”

Uptick in Risk Taking
This chart got passed around quite a bit last week. It shows the results of a BofAML survey of fund managers and shows the percentage that responding to a question regarding the level of risk they are taking within their portfolios. With results going back to 2001, a net 49% of fund managers who are taking higher than normal risk has moved to a record high, surpassing the prior high set in 2015.  The survey, as sourced by Bloomberg, notes “a mini rotation out of banks, though investors remain overweight the sector, in favor of laggard energy names and Japanese equities.”

Yield Curve Flattening May Be Bullish For Stocks
I’ve shared a chart of the yield curve and the relative performance of the financial sector throughout this year, showing that the financials often follow the direction of the curve, which often has been a headwind for the sector’s relative performance. Ari Ward, CMT, Head of Technical Analysis at Oppenheimer, shared on CNBC that the flattening curve may in fact be  bullish for equities as a whole. In a recent CNBC interview Ari said “how we measure it, the S&P 500 has averaged a 16.5 percent gain over the next 12 months based on the current level and direction going back 40 years of history.”

Record Setting Year for Global Equities
In a thanksgiving-themed article, Jeffrey Kleintop, CFA, the Chief Global Investment Strategist of Charles Schwab shared five reasons investors should be thankful this year. One of the charts Jeffrey posted is below, which shows the running streak of positive monthly returns for global stocks, noting this is the first in 30 years every month has been in the green.

A Decline in Equity Shorts
Binky Chadha, Deutsche Bank’s chief strategist, posted this chart as mentioned in a Business Insider article of the aggregate short position in stocks declining to the lower end of its range. While the market on average sees a 2-3% pullback every two to three months Chadha shared, 2017 has been anything but average. While we’ve yet to see any major declines in U.S. equity indices, traders do not appear to be overly concerned as they appear to be holding few hedges or short positions in equities, ETFs, or futures.

Your Time Frame Dictates Your View Point
Morgan Housel is one of my favorite writers and I make sure to never miss a post he puts out – always getting a solid takeaway from what he shares. In Morgan’s recent piece “We’re All Innocently Out of Touch” he discusses that how the market performed in your early years often has a large impact on how you view it going forward, sharing the chart below, which shows the total return of the equities in the U.S. or Japan at various starting points. While the whole article is well worth a read, here’s one of the points Morgan makes, “One quote from the study stuck out to me: “Current [investment] beliefs depend on the realizations experienced in the past.” That’s powerful. Think of the arguments we deal with in investing – over valuation, over expected returns, over moats, over bubbles. Two people with the same education and same data can think bitcoin is either the next tulip or the next internet. The whole reason markets work are because these gaps in opinion exist.” I believe this very much accounts for a great deal of the current market opinions floating around out there and why there’s a growing dichotomy of bulls and bears for U.S. equities.

Growing Spread in Performance for REITS
REITs are also show the growing spread in performance between brick and mortar retail and e-commerce,
“The chart below shows real estate tied to e-commerce continues to have a spectacular year. Data Center and Warehouse REITS are +33% and +24.6% on the year, respectively. Meanwhile, Mall REITs have stabilized but not yet seen a material recovery. Regional mall REITs are -9.6% on the year, shopping center REITs -13.2%.: according to Bianco Research.

The FANG Stocks May Be Shifting In Several Indices
The much beloved FANG stocks may be seeing a shift in their allocations for several major indices, “S&P Global Inc. and MSCI Inc., two of the world’s biggest index providers, plan to overhaul their industry classifications, merging some internet and media stocks with phone companies into a group called “communication services.” It would replace the existing telecommunication sector.” The Bloomberg article notes that Google and Facebook may be leaving the tech industry and Amazon and Netflix may be moving from consumer discretionary to the internet and direct retail marketing category.

Near Record Setting October Temperatures
It seems we are experiencing ‘record’ high temperatures throughout the last few years these past couple of years. NASA, as recorded by MentalFloss, calculated that October of this year was the second hottest on record, “After an unseasonably toasty October, the numbers are in: Temperatures exceeded averages across the globe last month, making it the second-hottest October ever recorded, according to NASA.”

You May Reconsider Your International Overweight
A great post by Newfound Research highlights some considerations that many asset managers may not be taking into account with the global weighting of their portfolios. Evaluating foreign markets may not be a fair apples-to-apples comparison as they have different factors that greatly impact their economy’s growth, valuation, and financial markets.

How Overconfidence Can Wreck Havoc
Nick Maggiulli of the blog Dollars and Sense shared a good point recently with a story of how different aged children have varying success rates of survival when alone in the woods, with younger children capitalizing on their lack of knowledge. Nick discusses how this translates well into financial matters as well, where overconfidence can have a potentially large negative impact on decision-making.

More Americans Hit the Road This Thanksgiving
With nearly 51 Americans traveling for the holiday, Bloomberg reports that  “U.S. Thanksgiving travel will jump to the highest level since 2005 boosted by a stronger economy, even as gasoline prices will be higher than a year earlier.”


Emirates airline offers new £7,000 first class suites on new planes 
“Featuring floor-to-ceiling sliding doors for maximum solitude, most of the suites also provide a window view which can be enjoyed with a personal pair of binoculars. […] Customers can video-call the crew for service requests without leaving the comfort of their suite, and crew can serve drinks and canapes through a special service window without disturbing passengers.”

Millennials Love Cold Brew
As a millennial myself, I can vouch for this article as a fellow cold brew fan. Oddly enough, I personally don’t like the taste of traditional hot coffee but do enjoy cold brew. The WSJ reports that “U.S. retail sales of refrigerated ready-to-drink coffee rose 29% in the 52 weeks ended Sept. 10 to more than $289 million, according to market researcher IRI.”

Carving a Turkey
I personally take great pride in my turkey carving abilities, carving up one this past Sunday in fact at a party among friends, but if you need a reminder on how to carve a bird this Thanksgiving, this video by Bon Appetite does a great job on how to breakdown a big bird.

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.

Breadth For The 9 S&P 500 Sectors

Below are the charts showing price (most charts are price only and not dividend adjusted outside of $XLF, which is divided-adjusted) as well as the sector’s respective Advance-Decline Line. The Advance-Decline Line is one of the most commonly used tools to measure the breadth, which is just a fancy way of saying participation, within a market. A-D Lines simply measure the cumulative number of underlying stocks that are rising or falling. When a sector is hitting new highs, ideally you want its breadth measurement to also be in a strong up trend and hitting new highs. It’s when these two diverge that we see a warning sign that the trend may be changing as the level of participation by individual stocks is not showing strong support.

Health Care
The SPDR Health Care ETF ($XLV) is currently trading in a consolidation pattern with resistance around $71.50 and support of a rising trend line connecting the prior higher lows. The A-D Line for Health Care is near a new high and has shown a solid level of support by the underlying health care stocks.

Consumer Staples
$XLP has been in a down trend since its mid-2016 peak, however price has recently broken above the declining trend line as buyers have re-entered the market for consumer staple stocks. The A-D Line for $XLP has been showing a greater sign of strength having risen back to its prior high and is ready to potentially breakout.

The utilities sector ($XLU) has been improving since November but still well off its mid-2016 high. Breadth has maintained its up trend for $XLU, not putting in any lower lows like price has over the last 6 months.

The materials sector has been in an up trend since its early-2016 low and is currently testing a trend line off its intermediate low from November. $XLB’s A-D Line test its prior high but was unable to break out like price had last month.

Consumer Discretionary
$XLY has been setting new highs after putting in an intermediate low in November. However, its Advance-Decline Line has not been able to breakout quite yet – still sitting under its prior August high.

$XLE had a strong 2016 after declining for several years. However, it’s A-D Line has not been seeing the same level of strength, creating a bearish divergence since for the last several months. While the sector has been rising, it appear many individual energy stocks have not been as lucky.

Financials have been one of the strongest sectors since the November U.S. election. Price has been attempting to set a new high and the sector’s A-D Line has been support of that attempt, remaining strong and confirming price’s advance.

Similar to $XLF, Industrials have been quite strong since the November election with price hitting new 52-week highs. $XLI’s A-D Line has continued to confirm the moves made in price.

Finally, the last of the S&P sectors and one of the strongest of the group. Technology has continue its up trend and practice of hitting fresh new highs. Fortunately, the A-D Line has continued in its up trend as well. While the A-D Line hasn’t quite broken out like $XLK has most recently, it is very close to doing so.

Update: While Real Estate has been added as a sector, I unfortunately am unable to find an advance-decline line for it, so it has to be left out of this post at this time.

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.

Health Care Sector Tests Bull Market Support

The Health Care sector has been one of the strongest performers during the bull market that began in 2009. Being that it provided consistent relative outperformance while also holding a title as a defensive sector gave many investors an increase in confidence in having exposure to this space inside their portfolios. However, recently the performance for health care has begun to decline – notably due to the weakness experienced in the biotech industry.

Below is a weekly chart of the Health Care Select SPDR ETF ($XLV) going back to mid-2009. The setup here is quite simple… In 2010 and 2011 when the equity market as a whole sold-off $XLV found support at its 100-week Moving Average. Currently we have price back to this previously important level of support. Because this is a weekly chart I’m more concerned with where we close on Friday than I am with intra-week price movement.

Each of the prior declines in the Health Care sector were preceded by a bearish divergence in momentum as shown by the dotted lines on the Relative Strength Index (RSI). The selling wasn’t strong enough to push the RSI indicator into ‘oversold’ territory, in fact both instances saw the indicator bottom out around 34. Once again we saw this summer a bearish divergence created as $XLV put in a higher high in price while momentum setup a lower high. Momentum is now back to the level that saw price bottom out in ’10 and ’11, will the same type of bounce occur here?


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.

Which Sectors Are Leading the Market?

With the increase in volatility over the last several weeks, I think it’s time to check back in on sector relative performance. While the U.S. equity market as a whole has gotten rocked since it’s August/September high, understanding what the underlying sectors are doing and what’s leading can be a great tool to stay in control. Over the last 30 days, the S&P 500 has lost 3.5% of its value, Utilities ($XLU) and Consumer Staples ($XLP) are actually positive and the Energy sector ($XLE) is down over 10%. While the S&P 500 ($SPY) often garners the most attention, we can’t lose focus of the nine S&P sectors that make up the index.

Health Care ($XLV) has been a consistent leader this year, spending the bulk of the last 30 weeks in the ‘Leading’ category of the Relative Rotation Graph (shown below). The Relative Rotation Graph (RRG) plots the sectors using their the trend of their relative performance against the S&P 500 as well as the momentum of that trend. Historically the sectors have moved in a clockwise fashion as they go in and out of favor relative to the index and as the momentum of their relative performance rises and falls as well.

About three weeks ago we saw that the Technology sector ($XLK) began to turn lower but remained in the ‘Leading’ category. Since then, and over the last several weeks, this once leading area of the market has shifted into the ‘Weakening’ category throttled by the decline in the momentum of its relative performance.

It’s also important to note the strength out of Financials ($XLF), and Consumer Staples. In a post on September 29th I highlighted the ratio between $XLP and the S&P 500, which was seeing a bullish divergence in momentum and ultimately led to the defensive sector outpacing the market for the last several weeks. Energy ($XLE) has continued to sink deeper into the depths of the ‘Lagging’ category with the momentum of its under-performance intensifying.

RRG chart

2014 has seen the theme of defensive strength with Utilities, Health Care, and Consumer Staples, leading the way for the bulk of the year. This likely worries equity bulls as traders steer away from the higher beta components in favor of the perceived safer sectors.

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 4/14/2014

Selling continued last week with the Nasdaq taking the brunt of the damage being off 3.10%, the S&P 500 down 2.65%, and the Dow down 2.35%. While the selling continued into the final hours on Friday, it appears the selling was strongest on Thursday, where we saw a larger share of volume and issues declining compared to Friday. We closed out the week with the S&P 500 under its lower Bollinger Band. We saw this occur four times in January before the buyers stepped back in and took the equity index higher.  At the end of trading on Friday we had six of the nine S&P sectors trading under their 50-day Moving Averages, at the January low all but utilities were under their respective 50-day MA.

Equity Trend

With last week’s selling we saw the S&P 500 break through the level of support I highlighted last Monday as well as its 100-day Moving Average. We are still 15 points away from the up trend that’s kept many traders bullish for the last five months. If we see the S&P continue to fall, I’ll be watching this trend line as the next level of potential support.


Volatility Backwardation

On Friday I tweeted out a chart of the $VIX futures curve and mentioned that April prices were now trading at a premium to May and June, which puts the $VIX into backwardation. This typically happens when option traders become more fearful of short-term volatility than longer-term price swings and has been a fairly good indicator of short-term bottoms in the equity market. Below is a chart of the ratio between the one-month $VIX and the 3-month $VIX in histogram form. When a bar breaks above 1.0 we know that the 1-month is trading above the 3-month (i.e. backwardation).

BackwardationS&P SKEW

Sticking with our fear/risk theme, I noticed an interesting development in the S&P SKEW index. SKEW attempts to measure the ‘tail risk’ within the options market. As the chart below shows, we’ve seen spikes in SKEW prior to previous short-term declines in the S&P ($SPX). For instance we saw a break of 135 prior to the drop in 2012 and more recently we saw SKEW begin to rise again over 135 in December, January, and February. However, we did not see SKEW rise prior to or during the most recent bout of equity weakness. It does not seem that option traders felt this was going to be a 2+ standard deviation event – we’ll see if they were right.

SKEWEquity Breadth

The short-term up trend I’ve been discussing in the Advance-Decline Line has now been broken. While the S&P is under its March low, the A-D Line is still above its March low when looking at all NYSE issues. Although when we focus on just NYSE common stock, it has broken through its respective March low – confirming the weakness in the overall equity market.

equity breadthEquity Momentum

With respect to momentum, we are at an important juncture for the Relative Strength Index. For the duration of the 2013 and start of 2014 up trend the RSI indicator has held above the 35 level, which is the lower end of the bullish range for this momentum indicator. With selling on Friday the RSI is now at 38, just a few points above this critical level of support.

We had a momentum break support in January before buyers rushed back in and took stocks higher but did not push the RSI over 70, this was the first chink the bulls armor. If we see another break under 35, after the Relative Strength Index was unable to get into ‘overbought’ status then we may see the creation of a bearish range as the current short-term correction develops into something more serious.


Crude Oil

With oil being in its historically bullish seasonality time period, it is also testing its falling trend line resistance. In March we saw oil drop and test its 100-day Moving Average, creating the lower end of a symmetrical triangle pattern. If price of crude oil can break this trend line resistance then we’ll also need to quickly see a break of the previous short-term high around $105.

Crude Oil

60-Minute S&P 500

In last week’s Technical Market Outlook I discussed the rising trend line off the February and March lows, which is where we had finished up trading two weeks ago. This level eventually broke and support became resistance when buyers attempted to regain control last Wednesday. This sent prices lower and the Relative Strength Index once again sits in ‘oversold’ territory as sellers overwhelmed buyers. We now have a lower-high as a down trend on the 60-minute chart is created. If we see buyers step back in this week then this trend line and the 50-1hr MA will likely be important levels to overcome.

60minLast Week’s Sector Performance

Utilities ($XLU) continued to lead last week with traders seeking shelter in the ‘risk off’ sectors of $XLU and consumer staples ($XLP). Interesting enough, health care ($XLV) was the second worst performer last week, largely due to its near 20% biotech weighting. Finally, financials ($XLF) was the worst relative performance sector last week.

Week Sector

Year-to-Date Sector Performance

I could pretty much copy and paste this portion of the Technical Market Outlook since it doesn’t seem to be changing very much this year. Utilities ($XLU) continue to lead while health care ($XLV) is still the second strongest, it’s lost much of its gain as biotech pulls it lower. Just three sectors are under-performing the S&P 500 YTD, with consumer discretionary (cyclicals) ($XLY) leading the pack of losers.

YTD Sector

Major Events This Week

This week we get another set of inflation data with the CPI report on Tuesday. Import and export data out of China has been weakening so it’ll be interesting to see what the Industrial Production numbers look like on Wednesday and if U.S. manufacturers are seeing any of the ripples from overseas.

Monday: Retail Sales
Tuesday: Consumer Price Index
Wednesday: Housing Starts and Industrial Production
Thursday: Jobless Claims
Friday: Market is closed


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.