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.