Getting very nervous, but....

I continue to be patient with this market, but I'm growing increasingly nervous. As I wrote last week, my indicators and metrics continue to show a mixed picture, with some bullish, some bearish and some neutral. However, recent price action has me concerned.

Source: Stockcharts.com

The daily chart of the S&P 500 Index (above) shows the market gapping down yesterday -- this after gapping down earlier this month. A move like yesterday can often serve as a final shake-out of nervous holders ("weak hands") and as shown in the lower inset, the stochastic is at oversold levels which has indicated short-term lows within the market's rising intermediate trend (see orange circles). While the Index has clearly broken down through its 50-day MA, note that the 100-day MA (red line) served as support in December and again in June. Also, there's the chance a head-and-shoulders formation is developing (labelled above), which if true would infer that the Index should rise to the 1670 level to form the right shoulder -- we'll see....

Two things in particular worry me. First, the stochastic recently hit an extreme low level, well below 20, and is remaining depressed -- "bad oversold" characteristics. 

The second item of concern is more subjective but worth mentioning. The market has sold off hard whenever possible U.S. strikes against Syria have been reported. On the surface, such limited attacks should not prompt such a harsh reaction from the stock market. This is not the first time that the U.S. has indicated air strikes against a country could be forthcoming and very often in the past the market has taken such news in stride, barely reacting adversely. 

The fact that the market has been undergoing abrupt and meaningful declines with this recent talk of strikes is concerning. It can signify that current investor sentiment is very fragile, with many potentially looking to "knee-jerk" sell and lock-in gains from the impressive YTD rally, and/or it could suggest that if strikes were to occur (as seems to be the eventual case), such limited attacks may have serious repercussions with Syria reportedly targeting Israel for retaliation. I cannot vouch for the veracity of such reports or rumors, with much of this likely posturing, but my point is the market typically does a good job at getting to the truth and recent price action would intimate that investors are very apprehensive and/or military strikes against Syria may result in significant complications.

That said I also wanted to once again discuss seasonality.

Source: Bloomberg

The chart above shows the 5- and 10-year average performance for the S&P 500, the average of just post-election years (back to 1981), and the S&P 500 performance for this year (blue line). I would argue that since May 1st,  the S&P 500 has more or less tracked the seasonal averages directionally. Note that all three seasonal lines show the S&P 500 rising from the end of August and peaking out not long after mid-September (see orange trend lines). 

As discussed, the Syria situation could make any seasonality studies meaningless, and I also don't wish to put too fine a point on timing issues given the chart displays just a 2-3 week tendency for the market to rise from here. But it's more evidence to consider -- never a bad thing. 

At this point, I continue to let holdings dictate when they should be sold via stop-loss targets and relative performance, and I'm not reallocating proceeds back into equities but rather building some cash, awaiting better clarity on this mixed picture.

Eurozone: Rising Like A Phoenix

Not too long ago, the Eurozone looked doomed. It was all but a forgone conclusion that the region would descend further into a deep, protracted recession.

But a funny thing happened on the way to that expectation -- it didn't happen. Well, at least not to the degree of pain and suffering that was expected.

On a related note, since the start of this quarter, Eurozone stocks have been tearing it up.

The S&P 500 is up a healthy 3% in the quarter, but the Euro STOXX 50 has almost quadrupled that gain, soaring by +11% and change. It's also interesting (and perhaps telling) to see the ETFs of two of the most decimated Eurozone countries, Italy and Spain, up 15% and 15.6% respectively, as compared to the equities of a much stronger Germany rising by "just" 8.7%. I say "perhaps telling" because very often before a recession ends, lower-quality tends to lead higher-quality and in this case, with the more fragile and precarious countries like Italy and Spain outperforming stalwart Germany, it could mean economic recovery in the region is for real and not just a temporal blip.

I think with Eurozone equities doing so well, esp. when compared to the U.S., this could very well be another case of prices moving before the news. It's fairly well known that stocks tend to discount recessions by roughly 6-12 months and it appears that here equities have done it again.

Source: Bloomberg

As shown in the charts above, in early 2008 the Euro STOXX 50 had declined by -24% off its peak -- when GDP growth was still positive. We know what happened to GDP over the next few quarters (ugh). Vice versa, for many months the Eurozone has been mired in woeful economic misery, and yet since about mid-2012 to date the STOXX 50 has risen by almost 38%. It's only very recently that there's been reports of their recession coming to an end. 

Of course, many dangers remain for the Eurozone and equities could simply be moving prematurely. However, as with my recent comments on Apple, during this quarter Euroland stocks have made outsized moves, exhibiting extreme momentum ("good overbought") that should have positive carry-over effects into the near future. 

We will undoubtedly continue to read gloom-and-doom prognostications about the region and it's anyone's guess if they'll come true. I would just remind that at the start of 2009, with the world seemingly coming to an end financially, in large part due to a deeply in-debt and beyond-extended U.S. consumer, the last area most experts thought would do well over the next several years would be the consumer cyclical/discretionary sector. These stocks were deemed a no-brainer must-avoid.

Judging from the chart below, such stocks have not performed all that badly (!), in my mind putting together one of the most stellar periods of outperformance since tech stocks in 1999 to early 2000. Wow.

Apple No Longer Rotten

At the end of last month, I wrote that AAPL continued to be a stock to avoid and if anything should be treated as a trading vehicle. I discussed several reasons for this belief, but also wrote "that's not to say AAPL is bereft of any encouraging signs" and went on to list a few bullish indications.

Month to date through yesterday's close, AAPL has returned 11.9% versus the S&P 500's decline of -1.5%, a very strong short-term move. One of the reasons I remained negative on the stock was that momentum for AAPL continued to be muted or constrained, with any rallies being anemic and lacking significant thrust. 

Well, all of that changed in a heartbeat over the last few weeks. Typically when a stock is suffering from below-average momentum, it takes some time to evolve out of this subdued condition, with stronger momentum eventually coming after a period of gradual improvement. However, there are times when a stock can explode out of what was a mired state, doing so abruptly and with tremendous force. That appears to be what's happened for AAPL and, in my experience, is quite a bullish indication.

Source: Stockcharts.com

The daily chart above shows AAPL breaking out at the end of last month, successfully getting through the neckline of an inverse head-and-shoulders pattern. Earlier this month, the stock broke out again on high volume. Note in the upper inset that the relative return of AAPL likewise broke through a declining trend line at the end of July -- overall, a very nice chart.

Granted, this recent move has price very extended and you can see in the chart that resistance exists in the 500-550 range due to price congestion at these levels during late last year. It wouldn't be surprising to see AAPL pause here and consolidate, or even retrace some of these gains. Assuming it occurs in orderly fashion, I would consider such action normal and even bullish as the stock is then able to reenergize for another move higher. Note also that given the huge fanfare surrounding AAPL, if such a retreat were to occur it would attract the attention of many investors looking to make an opportunistic entry into this once high-flyer -- further providing support or a floor for the stock price.

I would also mention that with this recent move, money flow has turned positive.

Source: Bloomberg

The chart above shows the break out in money flow, turning up earlier this month, inferring underlying accumulation of the stock.

I believe AAPL has finally turned the corner and should do well in the near future. With this apparent change in the stock's bias, some important lessons can be gleaned. I was bearish on the stock -- now I'm bullish. The evidence dictated a change was in order. Always try to stay objective and process-driven. Never get seduced into believing a stock should do this or that based on prior beliefs. Such beliefs are just that, things of the past, and should be updated when new info presents itself. I could go on and on with other behavioral finance investing tenets that apply here (never get wedded to a stock or a company's story, stocks are to be rented not owned, avoid becoming overconfident, etc.), but you get the point. It's not easy, but then that's why it generally works.

Patience Still Warranted -- For Now

I've returned, glad to be back. While I was gone the S&P 500 declined by -2%, one of its worst weeks in quite some time. On July 31st, I wrote that while some bearish divergences were developing, there still remained more than a few healthy bullish confirmations in place or at worse were neutral, and that patience was in order. Based on what I follow, I continue to believe that at this time patience is still warranted -- for now.

Let's first look at a daily chart of the S&P 500 Index:

All rising trend lines remain intact, and over the years the trend lines have become steeper as the market has abruptly accelerated in late 2011 and again late last year. Support can be found in the 1635-1650 range based on the most immediate trend line residing at about 1635 and the prior highs in May of around 1650. The 50-day moving average (blue line) -- though recently breached -- serves as further support in the 1650 area.

The chart above plots the relative return of the S&P 500 versus the Russell 2000 Index (red line), with the S&P 500 shown in the background (black line). As discussed here many times, in general it's bullish (risk-on) for the market when smaller-caps are outperforming larger-caps -- a relationship that's readily apparent in the chart. For the most part, small-caps have been outperforming since late last year and although most recently this trend has stalled and shows signs of reversing course, it has yet to do so in a meaningful way (when it comes to technical analysis, I've learned it's important to let things play out, i.e. do not attempt to anticipate what will or could happen and act with an itchy trigger finger).

The chart above shows the relative return (red line) of the Morgan Stanley Cyclicals Index versus Consumer Staples (XLP), with the S&P 500 (black line) in the background. A rising CYC:XLP line infers a risk-on environment, typically bullish for the market. As I've discussed in the past, when the CYC:XLP line has crossed up through its 100-day MA (meaningfully), the market has tended to do well and vice-versa, when the CYC:XLP line has breached its 100-day MA the market has tended to not do as well. Currently this indicator remains above its 100-day MA and more so it's interesting to see that as the market has receded in the past several days, the CYC:XLP has climbed to a new multi-week high, a bullish inference.

I've also discussed the above chart in the past, which shows in the upper inset the relative performance (dotted line) of the S&P 500 versus the mortgage REIT Annaly (NLY). The blue arrows on the S&P 500 (black line) are buy and sell signals triggered by the MACD for the SPY:NLY relative return. With the MACD histogram continuing to be well above zero, the S&P 500 remains bullish or in buy mode.

Above is another chart discussed on this blog in the past, it shows the relative return (red line) of high yield "junk" bonds (HYG) versus T-bonds (TLT). A rising HYG:TLT line is generally bullish for the market as it infers risk-on behavior. As shown above, note that a breakdown in the HYG:TLT trend line has frequently given a decent heads-up for an impending stock market correction (and vice-versa for breakouts above a declining trend line, suggesting the market should rise). That said with this recent market decline, the HYG:TLT line has actually risen and is quite far from breaching its rising trend line to the downside.

The chart above shows the percentage of NYSE stocks above their 200-day MA (red line). Currently this indicator is at 59%, which is still a fairly high number but what's worrisome is the gradual decline of this indicator YTD. The percentage of stocks above their 200-day MA peaked in January-February and has been making lower highs as the market has risen to new highs. Such a bearish divergence can exist for an extended period of time with no negative outcome. However, the longer it remains in place and develops the more concerning it becomes for the fate of the market, and it's been diverging for about seven months now.... 

Finally, the above chart shows the NASDAQ Summation Index (NASI, lower inset), with the S&P 500 (upper inset). I prefer to use the NASDAQ as it often leads the S&P 500. When the NASI pierces up through 400, it's a buy signal which then remains in place until the NASI pierces down through -400, triggering a sell signal. As I always say, no indicator is perfect, but this one has done a reasonably good job at being on the right side of the market's intermediate trend. A buy signal was triggered in January and with the NASI currently at 306, a sell signal is still quite a ways off.

In summary, bearish indications do indeed exist and are cause for concern, yet several indicators and charts remain bullish. I've only shown a handful of the charts I keep tabs on, but the point is the near-term picture is mixed regarding the market. I maintain patience and for now the intermediate trend continues to be up. As always, stay tuned.

(Source for all charts above: Stockcharts.com)

Gone fishing

Meant to post this on the weekend. I will return by next Monday. May the markets be with you!

Green With Envy

Many alternative energy or "green" stocks have been stellar performers over the last 6-12 months if not longer. Although there have been times in the past when these stocks were left for dead, expected to die and whither into bankruptcy, more than a few have done anything but that.

As for solar stocks, on June 28th I wrote a blog post entitled "I love this chart," where I listed several reasons to be bullish about the Guggenheim Solar ETF (TAN).

TAN has increased by 13.5% in that time, surpassing the 6% rise in the S&P 500. This appreciation includes the recent price gap-down for TAN as one of its largest holdings, First Solar (FSLR), disappointed on earnings. The plunge in price occurred on high volume, a red flag. But as shown in the chart above, the immediate trend line remains intact and the prior May-June highs of $26 further serve as support, so I remain bullish on TAN -- for now.

Another green-theme equity I've written about in the past is Tesla (TSLA). I first wrote about it on April 4th with the blog post entitled, "Tesla: Earnings, Smernings!" I discussed two bullish patterns in place for the stock and how a chart can often appear very compelling for companies that either haven't turned a profit (yet) or are believed to be destined for bankruptcy. TSLA stock was $42 then and has since risen 267% in that time compared to a 9% return for the S&P 500.

On May 30th, when the stock was around $105, I felt caution was in order and discussed trailing stop-loss precautions, with the first trigger set at around $94. The stock did in fact retreat from extended levels above $100, but never got below $94, meaning any stop-loss was avoided and the stock remained held. TSLA went on to appreciate another 50+%. With the stock recently gapping up on company news of a profit (!), trailing stop-loss precautions remain prudent, with the 10-day MA at $140 and 20-day MA at $130.

And it's not just solar stocks or Tesla that have been doing well. Another alternative energy / green area that has been soaring: wind energy. The chart below shows the FT Global Wind Energy ETF (FAN) versus the S&P 500. Wow, ride like the wind (Christopher Cross anyone?).

Source for all charts above: Stockcharts.com

Bonds reflecting economic news

Bonds have been in retreat-mode for the last few months. The daily chart of the 10-year note shows support at 132 gave way earlier this year, followed by a break through 130 near the end of May.

The T-bond proceeded to selloff fairly dramatically, approaching 124 before reverting and holding at its current 126 level.

The weekly chart below depicts the longer-term rising trend line for the 10-year, which is still intact -- for now. If the T-bond were to get below 124, the trend line would be breached. 

As it is, longer-term support appears to exist at around 125. Also, note in the chart what looks to be a bearish head-and-shoulders formation (blue circles), with a plunge through the neckline in May -- foreboding. 

This recent weakness in bonds can be attributed to continued signs of strength in the economy, with the unemployment rate now down to 7.4% and the recent manufacturing PMI number shooting up to 55.

U.S. Unemployment Rate
(Source: Bloomberg)

NAPM PMI
(Source: Bloomberg)

The better the economic news, the more likely the Fed begins to taper sooner rather than later. It's assumed less QE will translate into higher interest rates, a belief that's putting pressure on bonds. 

However, another potential reason for bond weakness in the face of encouraging economic news is bondholders sell in favor of reallocating funds to riskier assets, such as equities. Many are asking the simple question: if the economy is improving, it should benefit companies/stocks so why continue to hold bonds?

To further illustrate the recent bout of good economic news, the chart below shows the Citigroup Economic Surprise Index for the U.S.

Citigroup Economic Surprise Index - U.S.
(Source: Bloomberg)

The Index is a composite that measures the degree to which economic data is surpassing expectations. When the Index is rising, economic data is coming in better-then-expected and vice versa, a declining Index means data has been disappointing. As shown in the chart, the Index bottomed in early June and successfully broke through its declining trend line last month, ripping higher in just the last few weeks.

The directional relationship between bonds and economic news can be seen more clearly in the chart below.

Source: Bloomberg

When the Citigroup Economic Surprise Index (upper inset) is rising and/or above zero, bonds (TLT, lower inset) tend to not fare well. And vice versa, when the Index is declining and/or below zero, the TLT tends to do much better.

As already mentioned, bonds remain in a longer-term uptrend, but just tenuously. And I would point out that when the Citigroup Index first turns positive -- as it did recently in significant fashion -- it tends to stay positive for some time. That said, and assuming this tendency plays out once again, bonds are likely to remain under pressure in the near future.

U-S-A! U-S-A!

In early May, I wrote about the strength of the U.S. stock market versus the rest of the world and that despite our enduring struggles economically, we continue to do quite well in a relative sense. I posited, "the success of U.S. stocks is due to a relative game of being the 'prettier pig.' The U.S. may have a number of serious issues needing resolution, but compared to the problems facing the rest of the world, we're doing just fine."

And as shown in the charts below, U.S. stocks have been enjoying an extended relative run:

S&P 500 vs. MSCI EAFE

S&P 500 vs. MSCI Emerging Markets

S&P 500 vs. MSCI World ex-U.S.

S&P 500 vs. Shanghai Composite

Granted, relative performance for U.S. stocks has been stretched far above most trend lines, inferring consolidation or even retracement is overdue. However, longer-term relative returns remain in a solid uptrend.

What factors will disrupt or break this favorable trend for U.S. equities? I would argue that one worth keeping an eye on is the strength of the U.S. dollar.

Source: Bloomberg

The chart above shows the U.S. dollar (DXY, upper inset) and the S&P 500 vs. FTSE All World ex-U.S. (lower inset). Clearly the relative strength of the S&P 500 appears to be correlated with the trend in the U.S. dollar. As long as the USD remains in an uptrend, it bodes well for the continued global outperformance of U.S. equities.

Gold not out of the woods

The last time I wrote about gold (July 19), I commented on how both the round-number of 1300 and the 50-day moving average (MA) served as overhead resistance. Since that time, the price of gold has successfully broken through the 1300 level (green line in chart below) but stopped dead when it hit the 50-day MA (blue line).

For the last nine trading sessions, gold has closely tracked the 50-day MA, gradually descending with it. On Friday, gold gave way and traded below 1300 down to as low as 1285, but then recovered and closed above 1300, forming a candlestick hammer. Although this action on Friday was encouraging with the hammer indicating buying interest below a certain level, the fact is gold's price remains below the 50-day MA, which -- as shown in the chart below -- has served as very effective resistance for the past several months.

Also of note in the chart above, I discussed the RSI indicator in my last gold post, specifically how it can oscillate in a confined lower-bound of approximately 0-50 when the trend in momentum remains subdued. I wrote then, "The trend will remain down until this 50 level for RSI is breached meaningfully to the upside, getting to the 70+ level, inferring renewed thrust as buyers have overtaken control from sellers." With this recent price break above 1300, the RSI did not reach the 70+ level and if anything continues to be confined to the lower-bound range as depicted by the red rectangle. Again, to indicate a bullish change in the trend of momentum, the RSI needs to get to the 70+ level. 

Note also in the chart above that the stochastic has been declining from overbought levels. In the recent past, when this indicator has descended from an 80 or higher level, price has eventually headed south. I would emphasize that if the RSI were above 70, inferring positive momentum has indeed kicked into a new gear, the decline in the stochastic would be less worrisome. The meaningful change in momentum would suggest any price retreat would likely be moderate and present a potential opportunistic entry point. But, given the current level of RSI, that's not the case.

I continue to be wary about gold, preferring to allocate assets elsewhere. I would also remind that unless I state otherwise, any comments I have about gold also apply to gold equities. The chart below shows the fairly tight relationship between gold the commodity and its associated mining equities (GDX), with the rolling 100-day correlation almost always well above 0.50 (except during the first-half of 2011, when gold bullion took off and yet gold equities went nowhere, traversing more or less sideways).

(Source of all charts above: Stockcharts.com)