The homebuilding sector continues to look upbeat

The homebuilding sector continues to experience a gradual recovery off the historic collapse of 2005-2009. New and existing homes sales have been steadily trending up since 2011, housing inventory has been steadily trending down since 2008, and home prices have been rising since early 2012. For the most part, industry data has been universally heading in the right direction, creating a bullish backdrop for housing equities. 

Not surprisingly, home building stocks have indeed responded to the good news with equity prices well above the lows of early 2009.

Source: Stockcharts.com

Whereas much of the industry data bottomed in 2011-2012, the chart above of ITB (iShares US Home Construction ETF) shows equities bottoming at least two years ahead of the oft-quoted industry numbers. Many times on this blog I've written how stocks tend to lead, whether it be commodities, news or economic data. In fact, in early September I wrote about housing stocks climbing higher several months before the low was established for home prices. For what it's worth, since that blog post the ITB is up 14% compared to the S&P 500 rising by 9% in that time. 

I'd like to point out a few things in the ITB chart. First, as already mentioned, home builder stocks put in their final lows in 1Q2009, but note in 2011 another significant higher low was established creating what can be regarded as a double-bottom. Encapsulating this double-bottom formation is a larger, more massive cup-with-handle formation -- typically a very reliable bullish pattern. Finally, after spending several months at an elevated level, the MACD pulled back to below zero only to turn up and trigger a recent Buy signal.

In addition to housing data and equities heading north, it's both understandable and encouraging to see lumber likewise enjoying a longer-term recovery. 

Lumber prices have steadily risen since the lows of 2009, advancing within a very well-defined, multi-year channel. I would mention that COT interest is shown in the lower inset and despite lumber rallying from 300 to it's current level of about 375, the generally smarter crowd, commercial hedgers, remain conspicuously neutral on the commodity. Note in the past the green line has tended to decline when lumber has rallied, indicating commercial hedgers getting short, and yet that has not occurred with this recent 25% rally inferring that lumber likely has more room to run. 

Below is a chart of the Case-Shiller Home Price Index and I thought it would be interesting to view the Index as if it was a stock, including a few indicators. 

The Index itself established a double-bottom comprised of early 2009 and the end of 2011. Note the second bottom for the Index was a lower low compared to housing equites (ITB), which made a higher low in mid-2011. As reflected by this Index, home prices have been trending higher for nearly two years. 

For the entire history of the Case-Shiller Index, both the MACD and RSI indicators have flashed just two signals, a Sell and a Buy (actually three, both indicators were in Buy mode when the Index was launched). The MACD has tended to be a bit premature in its signals, registering a Sell in 2006 and a Buy in 2009, but in either case it certainly got you on the right side of the more macro trend to follow. The RSI did a better job of timing, crossing down through the 50 level in 2007 (Sell) and rising up through 50 in 2012 (Buy). Granted, with this Index we're dealing with monthly data meaning the sample size of data is limited, but the larger point was to show that home prices remain in a solid uptrend with at least two well-known technical indicators supporting the bullish case. 

With Fed tapering on the horizon, it will be interesting to see how housing stocks fare with presumably higher interest rates in store. However, Bernanke made clear that exceptionally low interest rates will continue to be the Fed's goal and policy for the foreseeable future. Regardless, housing equities will almost certainly give us plenty of lead time to act if and when the industry climate changes to more bearish.

Gold bullion vs. gold mining stocks

It's been several weeks since I last commented on gold and in that time it has dropped about $100 to a level that matches its prior multi-year low established in late June.

$1200 is key support and so far price is more or less holding at this level. The daily chart above displays a well-defined descending triangle formation, which includes a longer-term declining trend line. I would also point out in the lower inset of the chart that commercial hedgers (typically smarter money) are the least bearish they've been since the late-June low, and frankly it's their least bearish bias since pre-2009.

Taking a longer-term view, the following chart shows gold and the Gold Bugs Index (HUI) since 2005:

Source: Stockcharts.com

The HUI is comprised of gold miner equities. As I've discussed here several times in the past concerning crude oil and energy stocks, it's been my experience that equities tend to lead their associated commodity(s) and this tendency likewise holds true for gold and gold mining stocks. Note that whereas gold bullion has returned to a level that approximates the highs in 2009-2010, the HUI has retreated to a level that approximates prior lows set in 2008 and 2005. Clearly as bad as gold bullion has performed since its breakdown earlier this year, it has fared relatively much better than gold stocks. However, if in fact gold equities tend to lead gold bullion, the chart above does not bode well for the precious metal. 

For the HUI, I would also point out the massive bearish complex head-and-shoulders formation carved out since late 2009, with a breach in the neckline occurring earlier this year. Note the breakdown in the neckline happened well before the breakdown in gold bullion in April. Also note the parabolic rise in gold bullion, the increasingly arching-upward green trend line, with the first breakdown at the pinnacle in 3Q2011 followed by three attempts to make a new high only to fail (horizontal green line). All during this time in 2011 when gold bullion was going parabolic and topping, gold equities (HUI) were consolidating within a $500-$600 range, ultimately breaking down in 1Q2012 when gold bullion was still holding up quite well. 

I wanted to show gold vs. the HUI from 1998-2005, when both were making new lows at the time.

Again, as shown via the blue lines, gold equities tend to lead the metal. Note the HUI peaked well ahead of gold in 1999, bottomed before gold in 2000, led higher in 2003 and peaked before gold in 2004.

What does all of this mean for gold today? As I already mentioned, longer-term, the fact that HUI has reached lows far below gold in relative terms would not appear to be a bullish sign for gold. However, shorter-term the picture looks a bit more promising.

The weekly chart above shows the HUI breaking down in 1Q2012, about a year ahead of the break down in gold (blue lines). Note also that the MACD for HUI was trending downward as the HUI price continued to make minor new highs in 2011 -- a bearish divergence. Interestingly, with the decline in HUI during this past June to date, the MACD has risen creating a bullish divergence. That said it wouldn't be surprising to see gold equities rally from their current very oversold level and in so doing provide an underlying bullish indication for gold bullion.

I would reiterate that although gold could very well hang tough at the current $1200 support level, esp. given the developing bullish MACD divergence in the HUI, the more important point is the longer-term chart for gold remains ugly and there have been better places to play for many months now. Until further notice, gold has been and remains a tactical trading vehicle.

Is the sun setting on solar stocks?

On June 28th, I wrote about how much I loved the chart of TAN, the Guggenheim Solar ETF. Since that posting, TAN rose by almost 80% to a peak price of near $42 before pulling back to its current level of $34-$35.

Source: Stockcharts.com

With the gain at just under 50%, prudence dictates unloading half the position given the weight of the evidence or the chart's risk/reward skew. 

On the negative side, during October and November the ETF made a few attempts at climbing higher than $42 only to fail and give way to its current level, breaking down through the 50-day MA in the process. Price has rallied a bit over the last few days, but the action is weak today and my fear is another shoe could drop. The next area of support is approximately $28, which is where the 200-day MA meets the prior highs established in the summer. I would also add that volume inflated at peak prices ($40-$42) and spiked again when TAN retreated earlier this month -- possible signs of a blow-off top.

However, TAN also has several positives. For one, price continues to be in a longer-term uptrend as evidenced by the 200-day MA. It's also encouraging to see price holding at the intersecting trend lines (blue). In addition, the ETF is one of the better performers on the year, up well over 100%, and vehicles with such stellar returns and inherent price momentum typically don't roll over and abruptly die. Instead, many an investor looks at such near-term price weakness in a longer-term winner as an opportune time to enter, to hopefully get on board for the next leg up. Whether or not that next leg higher materializes is not the point; rather it's psychology and public perception that ultimately is a key reason for why such high-fliers hang in there quite well during corrections. The high longer-term momentum behind TAN bodes well for continued gains given thrust has follow-through effects, but even if October-November was the top for solar stocks in general, there should be time to better assess this matter in the days ahead.

All of that said, I always stress prudence, discipline and risk control first and foremost and since the evidence appears to be mixed, taking some but not all gains appears to be the sensible decision at this point.

Divergences vs. momentum and seasonal tendencies

Since early last month, I have been pointing out and discussing several developing negative divergences for the stock market. In that time, the S&P 500 has risen, pulled back and with last week's Fed announcement, shot up to attain a new all-time high -- net net, about a 3% gain. Impressive. 

A defining characteristic of divergences is they can very often emerge and develop for some time before having their effects materialize. Divergences can also eventually disappear as conditions change and whatever disconnect was in place dissipates, taking with it any implication stemming from the divergence.

Currently, some key negative divergences do remain in effect. One in particular is the percentage of NYSE stocks above their 50-day moving average.

Note in the chart above that the percentage of NYSE stocks above their 50-day MA is just shy of 60%. This figure has improved from the recent low of 45%, but remains well below the 70% threshold (blue line) that typically is reached or surpassed when the S&P 500 registers a new high. This indicator could continue to climb and get to 70+%, however for now it continues to qualify as a negative divergence.

I would mention that some of the bearish divergences that were lingering in place for the last few weeks have in fact disappeared. One that I had identified on December 15 as already showing signs of becoming a near-term bullish divergence was the relative performance of cyclical stocks versus staples.

The CYC:XLP ratio achieved a new high early last week when the S&P 500 was still near its pullback lows of approximately 1780. 

In the face of any headwinds associated with persistent bearish divergences are the tailwinds that come with favorable seasonal tendencies coupled with healthy momentum. As I stated last week, we have entered what has historically and consistently been one of the best three-week periods for the stock market. Whether considering a trailing 5-, 10- or 50-year average, mid-December through the first week in January has typically been exceptionally bullish for equities. 

As for momentum, I submit the following S&P 500 chart:

The lower insets show the 5-day (weekly) rate of change (ROC), the 21-day (monthly) rate of change and the stochastic (STO), respectively. Recent momentum in the market has been very robust as evidenced by the 5-day ROC and the STO. Whenever price has accelerated at 2+% over five days and the stochastic has lifted higher in near vertical fashion, it indicates well above-average momentum which provides significant thrust to typically drive stocks higher for days or even weeks to come. And it's also important to note that more intermediate-term momentum as depicted by the 21-day ROC is not already stretched or at an extended level, meaning the near-term rally is not occurring within a longer-term potentially peaking or exhausted advance.

In sum, shorter-term momentum has been very strong and is synchronized with more intermediate-term momentum to suggest further gains should ensue. Also supporting the case for a continued rally is the previously mentioned seasonal tailwind. For the time being, worrisome implications from any bearish divergences will likely take a backseat -- at least until early January.

(Source for all charts: Stockcharts.com)

We're not out of the woods just yet....

On Wednesday, one of the most anticipated Fed announcements in some time occurred and it was a pleasant surprise to investors. Stocks soared after Bernanke said the Fed would curtail monthly bond buying (QE) to $75 billion, with the $10 billion monthly haircut viewed as tepid and thus bullish for equities. Investors were also relieved to learn for certain that tapering would come in the form of measured, gradual reductions and not in a more abrupt and severe fashion, which could have adversely shocked our still-fragile economy. Bernanke further described economic activity as improving and exhibiting underlying strength, but that the Fed would continue with asset purchases as long as unemployment remained elevated. Finally, it was made clear that current interest rate targets would remain in place even after the rate of unemployment fell below 6.5%, an indication the Fed planned to remain quite dovish despite the imminent changing of the guard with incoming Yellen. All in all, this announcement threaded the needle masterfully.

The S&P 500 Index shot up 1.7% for the day with the mega-cap DJ Industrials surging 1.8%. However, the flatter, more equal-weighted Russell 2000 Index rose just 1.3% on Wednesday, noticeably lagging behind its larger-cap counterparts. Given the bullish firepower that came with the Fed statement, I would've expected to see the generally higher beta small-cap stocks surpass the performance of larger-caps, especially since small-caps tend to have a higher sensitivity to the domestic economy. But such relative price action was not to be.

Source: Stockcharts.com

The upper-most chart above shows the DJ Industrials decisively breaking out of a flag formation, the middle chart shows the S&P 500 trying to break out of what appears to be a broadening wedge formation, and the bottom chart displays the Russell 2000 having yet to make a new high. None of these charts look overly concerning or bearish per se, but it goes without saying the near-term outlooks become less bullish as the cap size shrinks. Generally we want to see smaller-caps fully participating in, if not leading, a robust move for equities, serving to confirm underlying strength in the advance. We're obviously not seeing that yet. 

With Wednesday's surge, it was encouraging to see a spike in the 10-day moving average of the NYSE up/down volume:

The indicator has risen from -100 to near 50 in a matter of days, a good sign. It stalled a bit yesterday, but it's still early and another spike upward could occur soon. However, if it were to remain under 100, not to mention 50, over the next few days, odds increase that this pop in the market could lack follow through or roll over. Stay tuned.

One significant tailwind for stocks at this point in time is the seasonal calendar. Starting last week, we have entered one of the best three-week periods of the year for equities.

On average, stocks have performed extraordinarily well from mid-December through the first week in January. And in that time, small-caps tend to outperform large-caps. 

The charts above showing the Russell 2000 lagging the larger-cap indices are concerning, but if history is any guide I would expect small-caps to soon outdistance their larger-cap brethren. Failing to do so will only raise concerns heading into the new year.

Market Update

Apologies again for the extended silence on this blog, but I explained my circumstances in a prior post. Thank you for the many supportive emails, I appreciate your kind words and understanding. 

Since my last post, the S&P 500 has declined by about -1.7%, pulling back to within earshot of when I became cautious in early November. The daily chart below shows the Index has retreated to an area of meaningful support with a rising trend line residing at about 1765 and the 50-day moving average at just above 1760.

Also note the continued bearish divergence in the MACD versus price (orange lines), but at least the stochastic is now oversold (green circle), suggesting risk of further downward pressure is less likely at this point or odds favor residual erosion being more tempered. 

I've been asked, "what will get you more bullish in the near-term?" Longer-term the market (S&P 500) remains in a solid uptrend and we're currently approaching the sweet spot for seasonality, with mid-December through early January typically offering the best returns on average. But as for the short-term, I'd like to see a few things change starting with the MACD turning up and triggering a Buy signal (histogram meaningfully above zero) as well as the stochastic reverting up and getting through 50. 

In addition, I would prefer to see small-caps begin to outperform larger-caps:

Since the start of October, the relative performance of the IWM vs. SPY (blue line in chart above) has been trending south. Although the relative return of small-caps registered a higher low more recently, to further indicate improving underlying breadth will require the IWM:SPY ratio to successfully break its down trend, which has yet to occur.

Another indicator that needs to reverse course is the percentage of NYSE stocks above their 50-day moving average:

This indicator has been trending down since mid-October, creating a bearish divergence as the S&P 500 has risen for most of that time. Currently just 45% of NYSE stocks are above their 50-day MA. To get more bullish in the near-term, I would want to see this indicator put in a bottom and get to above 50% minimum.

But the following chart exhibits at least an initial sign that the risk appetite for investors is perhaps ready to reignite: 

The relative performance of cyclical stocks to staples (orange line) is one surrogate to measure the risk-on/risk-off bias; when the line is rising, the climate is risk-on and bullish for the market. Since early October, cyclical stocks have more or less been performing in line with staples. However, note that more recently the CYC:XLP relative return line is close to hitting a new high despite the S&P 500 losing ground -- perhaps a bullish divergence in the making.

The key focus for this week: to see if the S&P 500 can successfully hold at or above 1760-1765 support. I will be traveling tomorrow, but I promise to return with an update by mid-week.

(Source for all charts: Stockcharts.com)

Several near-term troubling signs remain, including some bellwether stocks

As promised in yesterday's blog post, I've returned from an extended silence with plenty of charts. Also mentioned in yesterday's post, since my short-term stance has become cautious over the last few weeks, the S&P 500 has climbed to just above 1800, translating into a move of about 2.5%. The Index has retraced some this week, reducing the rally's percentage to just 1.5% since the start of November. The longer-term outlook for the market remains bullish, but in the near-term I continue to see some troubling signs.

The daily chart of the S&P 500 depicts an overall bullish picture, including a breakout in October from an ascending wedge.

However, as I've noted in prior posts, the MACD has been trending down as the S&P 500 has risen higher setting up a negative divergence. The MACD histogram (red rectangle) is another way to view this divergence as it shows nary a positive bar, further illustrating the weak underpinnings of this recent move.

Another non-confirming chart is the relative performance of the Russell 2000 vs. the S&P 500.

The return of the IWM vs. SPY (black line) peaked at the start of October and has been trending downward ever since then -- with the S&P 500 (red line) climbing higher for most of that time.

Another non-confirming chart: the percentage of NYSE stocks above their 50-day moving average.

This indicator peaked in mid-October and has been steadily eroding, currently approaching the very anemic figure of 50%. Having just about half the stocks on the NYSE above their 50-day MA while the S&P 500 has reached new highs is not what I would call healthy internals. In fact, prior peaks in this indicator (blue circles) have more often coincided with peaks in the S&P 500, yet in this recent instance a bearish divergence is clearly developing. 

The chart showing the percentage of NYSE stocks above their 200-day MA further makes evident this divergence.

And mind you with just 63% of NYSE stocks currently above their 200-day MA, this number is well below the 80+% peak of earlier this year. I realize this indicator can frequently lag and does not always "nail" corrections, but for it to attain lower levels over a matter of months in the face of a market advance is less than ideal and suggests a weakening foundation. Focusing more on the near-term, fewer stocks able to stay above their 50- and 200-day MAs as the market moves higher by definition exhibits an increasingly narrow and less robust rally.

Last chart, the Morgan Stanley Cyclical Index vs. the Staples SPDR.

The relative return of risk-on cyclical stocks versus generally risk-off staples often gives a reliable estimation of investor sentiment. When the CYC:XLP relative return (black line) is trending higher it infers that investors remain in a more aggressive, risk-seeking mode and is bullish for the market. Cyclicals had been outperforming staples until October, when the uptrend in relative performance flat-lined and has been traversing sideways for the last several weeks. Yes, I'm sounding like a broken record at this point, but this is another non-confirmation of the market's recent advance.

Actually, I thought I'd show one more chart.

I'm always keeping an eye out for bellwether stocks of the moment, those equities that are flying high and quickly becoming the darlings of CNBC. One can argue TSLA is one and we know what's happened to that stock of late (I wrote about TSLA on November 6, in quite bearish terms to say the least). But the chart above is of Facebook (FB), which has been on a tear since July. However, I would point out what appears to be a bearish head-and-shoulders formation in the chart, complete with a break in the neckline (important, a H-&-S formation is not necessarily bearish until the neckline is breached). Earlier in November, FB rallied back to the neckline and 50-day MA only to fail, and more recently price has again climbed back to the neckline and 50-day MA -- we'll see if it rolls over and fails again. 

I think it's safe to say that the charts of TSLA and FB are at minimum a bit concerning and to the extent that these bellwethers serve as canaries in the coal mine for the overall market, it's just another worrisome near-term observation.

(Source for all charts above: Stockcharts.com)

Risk vs. Reward

First off, I apologize for not having posted here for several days. Yes, there was the Thanksgiving holiday, but frankly my time has been primarily devoted to what has become a top priority: finding a new employer. During the last few months, I have been actively pursuing new opportunities and I will say that in many respects I'm working harder now than I did while employed! The job search is what you make of it and I've been spending a great deal of time trying to find an investment firm in the Boston area that could use my skill set. Let it be known I've debated whether or not I should even mention my situation here, not knowing the proper "blog etiquette" for this predicament, if it would be in poor taste or too blunt. But in the end I wanted to be up front with readers of this blog and let them know why I haven't posted on a more regular basis. Starting this blog earlier this year has been one of the best decisions I've made in quite some time. I love sharing my observations and analysis with you and it's been gratifying and educational to receive your emails. Granted, I would greatly appreciate any assistance that you the readers may have to offer (job leads, people to contact, suggestions, etc.), but again my main goal was to explain why there have been stretches with no blog updates. Okay, moving on....

Readers know that in early November I became cautious on the market in the short-term. The S&P 500 was then at about 1760 and several red flags were present or developing, not confirming the market's recent advance. The S&P 500 proceeded to rise to just over 1800 last week until pulling back some this week. I continue to see some worrisome divergences and non-confirming indications, but I'd like to make a point about risk vs. reward. Since getting more bearish in the near-term, I've watched the market (S&P 500) climb by a bit more than 2%, a nice gain in about a month's time. Yet given I was seeing more than a few worrisome signs (and still do), which to me could have resulted in a correction of 5%-7%, I'm not kicking myself about this most recent advance. Always exercise discipline and prudence, and ask: are the odds as I see it in my favor? Is the risk vs. reward skew favorable? What is the weight of the evidence saying? The 2% rise versus potential 5%-7% decline is a trade-off I'm always willing to accept.

I apologize (red face) but I need to run, I have some appointments today (now you know what for), but I promise to return this evening or early tomorrow with plenty of charts and analysis. Again, as I mentioned, this recent rally appears to be increasingly narrow and top-heavy with several breadth and internal metrics not confirming -- more to come.

Unemployment Rate vs. S&P 500

Since the start of this month, my near-term outlook for the stock market has been cautious due to several non-confirmations of the S&P 500's new high. More on that tomorrow.

Today I thought I'd say something about the longer-term picture. Needless to say, the market has been in a secular uptrend since the lows of March 2009. All along the way there have been more than a few corrections, but the general uptrend for the market has remained intact in that time.

When considering the longer-term outlook, based on weekly and monthly charts as opposed to daily, a key question at turning points involves the likely severity of the turn. Is this trend change just a short- to intermediate-term counter-move within a larger secular trend, or is this current counter-trend move the start of a change in the overall secular trend? Perhaps the most important question facing investors. 

I monitor many longer-term, slower-moving charts that collectively help to get at the answer to this crucial question. One of them involves the unemployment rate vs. the stock market (S&P 500).

Source: Stockcharts.com

The chart above plots the S&P 500 (red line) with the unemployment rate (black line) and the 12-week or 3-month moving average (MA) of the unemployment rate (blue line). Not surprisingly, the S&P 500 and unemployment rate consistently exhibit inverse correlation. In my experience, when the unemployment rate breaks trend in meaningful fashion, i.e. when it clearly crosses through its 3-month MA, it tends to confirm a secular trend change in the stock market (S&P 500). Note the breaks in trend for the unemployment rate in 2000-2001 and 2007 with the rate rising above the 3-month MA (red circles), confirming the high probability of an ensuing bear market for equities. And vice versa when the unemployment rate has broken trend downward as in the early '90s, 2003 and early 2010 (green circles), offering further evidence or recognition of a favorable environment for stocks and that a secular bull market should take hold. 

The unemployment rate currently resides at 7.3% and the 3-month MA is 7.56%. At this point for the S&P 500 to gravitate into secular dangerous territory, the unemployment rate would need to increase to 7.7% or higher (again, want meaningful clearance through the MA, not by a hair). Until that happens, it remains clear sailing for equities in the long-term. 

Some quick updates

Apologies, I've been under strict time constraints this week necessitating a very brief update today.

As I've been writing for the last several days, the market continues to look vulnerable in the short-term. The recent rise has been met with developing negative divergences and other non-confirming red flags. For example, note the following chart:

Source: Stockcharts.com

The S&P 500 (red line) has made a new high but the Russell 2000 Index (green line) has not, a non-confirmation and establishing at least the start of a negative divergence. Also note the MACD is rolling over, exhibiting bearish-divergence tendencies similar to that in late July-early August.

Moving on to crude oil, and speaking of divergences, the commodity continues to move in the opposite direction of energy equities. Needless to say, this price action is highly unusual, as shown in the chart below.

The rolling 3-month correlation between crude oil (WTI) and energy stocks (XLE) is currently an astonishing -0.84, the lowest Coefficient since the inception of the XLE. Wow. The correlation between energy equities and their associated commodity has generally been positive with the rolling 3-month Coefficient usually well north of zero. I have to believe this relationship will soon revert to norm as it has in the past when the correlation has become negative. I'll repeat again that in my experience equities tend to lead their associated commodity and as shown in the chart above, the XLE (black line) remains in a nice uptrend despite the recent decline in crude oil (red line). That said I continue to expect crude oil to remain in its longer-term uptrend and eventually break higher.

In fact, the chart above shows that crude oil is currently at an inflection point with the rising trend line meeting a shorter-term descending trend line, forming a triangle.

Further serving as a tailwind for crude oil is my bearish take on the USD (see here and here). Crude and the USD tend to move in opposite directions and I continue to interpret the above chart of the USD as bearish. As I've pointed out before, note the complex head-and-shoulders pattern (red circles) including the breached neckline in September at around 81. The more recent snap-back rally to the neckline is fairly common behavior post-neckline breach, often followed by price rolling over. The USD is also currently facing dual overhead resistance via the neckline and the declining trend line (blue). Stay tuned.

Finally, as I anticipated, the Nikkei recently broke to the upside, successfully emerging out of its pennant formation. As previously discussed, pennants and flags are continuation patterns, meaning they typically develop within an existing trend and the next move in price is more often than not in the direction of the existing trend -- in this case, up.

What's wrong with this picture?

I find the set of charts below to be a bit odd and of some concern. The S&P 500 Index has recently surged to new highs and yet none of the nine major sector SPDRs have attained a new high relative to the Index. Industrials (XLI) are close, days ago hitting a new relative return high, but have since retrenched. Consumer Discretionary (XLY) also registered a new relative high near the start of this month, but has yet to do so again with the S&P 500's latest move. 

I fully understand this observation is very short-term in its focus as the S&P 500 broke to new highs only last week and relative performance can lag initially before taking hold and establishing a trend. In other words, these relative charts could look quite different in another week or two. 

However, I've already noted that cap size is not confirming the market's latest rise and based on the charts below there's so far not much definitive sector leadership. And I'd also mention that with this new S&P 500 high the percentage of NYSE stocks above their 50-day moving average has risen to 69% -- a seemingly elevated number until you consider that during the prior new high in the Index the number was near 85% and with the S&P 500 high prior to that the number was 75%.

I continue to let prudence dictate at this juncture, meaning I remain cautious and hesitant near-term. For me to return to bull mode will require better resolution of these non-confirming red flags.

Source: Stockcharts.com

Cap size not confirming S&P 500 new high

With the S&P 500 recently hitting a new high, it's once again all systems go and off to the races, right? Not quite. Any which way you slice it, cap size has yet to confirm the market's new high.

Source: Stockcharts.com

Market continues to look dicey near-term

As I've been writing since the start of this month, the near-term stock market outlook has looked weak, showing signs of wanting to pullback or correct. In that time, the S&P 500 has more or less traversed sideways, as shown in the daily chart below.

Source: Stockcharts.com

Note that a negative divergence is developing in the stochastic, with the S&P 500 flat and yet the stochastic trending down. Also, the MACD has registered a sell signal (blue circles). In the recent past, the market has retrenched under these conditions. Support resides at 1720 and 1700.

The following chart also depicts some foreboding indications.

The percentage of NYSE stocks above their 50-day MA (red line) is now at 61%, steadily trending lower since its peak of 85% attained last month. A rising S&P 500 coupled with a declining % of issues above their 50-day MA is typically a bearish harbinger with price weakness often the outcome. The VIX (green line) has submerged below 13, suggesting sentiment has become a bit frothy and complacent. A low VIX number in isolation is not necessarily bearish as the VIX can remain at repressed levels for months during a rising market environment. However, coupled with weakening internals as per the $NYA50R as an example, a low VIX index takes on new meaning.

In prior posts this month, I've written that the market could indeed correct via time as opposed to price and so far it appears to be doing so as it consolidates sideways. But I still remain cautious in the short-term, preferring to hold all stop-loss sells as cash and await a more opportune time to reallocate into active positions. My mantra: always side with prudence, risk control and discipline.

FIVE Alive!

I also considered using "Five Below is Heading Up!" as a blog post title; I struggle with the titles. More importantly, the chart of Five Below (FIVE) looks terrific, exhibiting several bullish features.

Source: Stockcharts.com

The daily chart above shows FIVE carving out a triangle formation from April to July with a breakout occurring in July. Price then ran to just shy of the prior high at $42 only to retrench back to the lower boundary of the triangle. In September, price made a run in the first week of the month and then gapped up on very high volume to near $48, breaking out of both the triangle and prior highs at the $42 level. During the latter half of September and first half of October, shares of FIVE retraced about 50% of the gap up ("filling the gap") with a pennant formation eventually developing. Pennants are continuation patterns, meaning odds greatly favor the ensuing breakout to occur in the direction of the existing trend, in this case being up. The breakout in mid-October did indeed serve to continue the trend as the stock price climbed to near $50. FIVE traversed sideways for several days between $48-$50 and on Monday the stock once again broke out to new highs above the $50 level.

The relative chart portrays a similar picture:

The relative price of FIVE vs. SPY more clearly depicts a cup-and-handle formation including the breakout of the handle more recently -- all bullish.

I am obviously very bullish on the stock given the chart and technicals, but the CFA side of me also very much likes the fundamentals and growth drivers for the company. Five Below is a chain of stores that sells items for no more than $5. The company was founded in 2002, went public last year at $17, and now has over 250 stores. The primary audience for FIVE is the youth/teen market, affording the company no direct competitors. Its square footage growth and profitability metrics are some of the best in the retail industry. The company is expected to experience 25% annualized growth over the next several years with the target being 2000 stores nationwide.

I can't help but compare FIVE to its cousins, the dollar store stocks:

Over the last four years, DG, DLTR and FDO have easily surpassed the performance of the S&P 500. And up in Canada, Dollarama has simply blown away the performance of the TSX. My hope and expectation is that FIVE will do something similar to these stocks, if not better.

(Disclosure: I have owned FIVE and still do. I will report here before I sell, if and when I ever do.)

TSLA: Time to Sell

As they say, all good things must come to an end. After the close yesterday, Tesla (TSLA) reported what appeared to be better-than-expected earnings, but investors disagreed and the stock is off about 10% this morning. 

TSLA was the subject of one of my first posts on this blog, entitled "Tesla: Earnings, Smernings!" I highlighted several bullish items for TSLA, not to mention a classic breakout from a base on high volume. With periodic follow-on posts, trailing stops were discussed as being appropriate and prudent.

With today's action, I believe taking gains are in order.

Source: Stockcharts.com

The chart above highlights my April 4th bullish blog post (green circle) when the stock price was $44. TSLA soared to a peak of just beyond $190 before breaking the uptrend and working lower since late September. Note the 50-day MA was never breached until last month. I've also plotted the 10-day and 20-day MAs with the 10-day MA recently plunging through both the 20-day and 50-day MA, and the 20-day MA getting below the 50-day MA as well -- first-time occurrences since early April and clearly an indication of potential trend change (down). In addition, with the April breakout note the RSI (upper inset) remained above 50, frequently eclipsing 70, a bullish condition, and yet last month the RSI broke down through the 50 threshold and since then remained more/less sub-50 -- bearish.

With today's gap down in price, I wouldn't be surprised to see TSLA enjoy a brief relief rally. Such high-momentum stocks with great fanfare typically do not fall off a cliff overnight. Rather, during moments of abrupt and significant weakness, many view the price decline as an opportunity to enter the high-flyer stock at a steep discount, driving the share price north. But very often such a rally is anemic and fleeting as many holders who have ridden the stock higher for months (smart money?) look at this bounce-back in the stock as a good time to dump the shares given the previous gap down or weakness, and the stock resumes its descent. That doesn't have to happen in this case, obviously, and may not, but in my experience I've observed it happening quite often and I prefer to be on the side of prudence and risk control. One can always re-enter the stock, and frankly a relief rally doesn't have to occur at all and the stock could just head lower from here.

The bottom line is after what peaked at a 335% gain when the stock was hovering above $190, I would have no problem settling for "just" a 260% increase today. It should always be about discipline, risk control and letting the stock (i.e. price, volume, indicators) tell you when it wants to be sold.

Time for a pause?

In recent posts, I've been commenting that while the market outlook remains healthy, in the near-term some red flags or grey clouds (pick your color/noun) have been appearing, suggesting a reprieve or pause was in order. Such worrisome developments have not dissipated, but rather have grown in number.

Mind you, the daily chart of the S&P 500 shows a bullish uptrend:

Source: Stockcharts.com

The Index broke out of a rising wedge last month, an occurrence that is quite rare according to Tom Bulkowski's web site where he cites the breakout for rising wedges is down 69% of the time. Support now resides at the upper boundary of the wedge (1750), followed by the prior high of 1725 in September, and then the high in early August combined with the 50-day moving average, both at around 1700.

The hourly chart of the S&P 500 has me concerned:

Note during the rally in the latter half of last month, the rise went parabolic, with trend lines becoming increasingly steep. The ascent broke down on October 30th, followed by the Index trying to rally only to fail. Again, keep in mind this is an hourly chart with its implications being very near-term.

Other indications for an imminent pause include small-cap vs. large-cap performance:

Source: Stockcharts.com

In the chart above, the lower inset shows the IWM vs. SPY relative return and it recently broke an uptrend and has not been able to make a new high with the S&P 500 (upper inset). 

Another related indication is high-yield bonds vs. T-bonds:

The lower inset depicts the relative return of high-yield bonds vs. T-bonds with the uptrend broken in September and relative performance stalling, not yet confirming the stock market's new high. 

Finally, cyclicals vs. staples exhibits a similar picture:

The relative return of cyclical stocks vs. staples broke its uptrend last month and has yet to make a new high. 

In sum, all three risk-on/risk-off metrics (cap size, fixed-income quality, cyclical/non-cyclical equities) have not (yet) confirmed the S&P 500's new high, suggesting risk-off sentiment could be taking hold which would further suggest a pause is in the cards. A pullback to 1725 is a 2.5% correction from the peak, and to 1700 is 4% off the peak, nothing cataclysmic or overly alarming. And as I wrote in my last post, "the overbought condition can be worked off via time rather than price, meaning a sideways consolidation could do the job as opposed to a decline."