We explore the implications of the very narrow trading range in the Dow. Then we trend check bonds and gold. The NLY chart caught our eye. I also annotate the market's path of least resistance.
Dow 30 Industrials: Less Vol Now, More Vol Later?
The Dow 30 is showing a 5-o'clock shadow. They have traded in such a narrow range, that the shadows of the candlesticks are growing like whiskers (see Chart 1). Since the end of January, about 70% of the closing percentage changes have been within +/- 0.25% of the previous close. The narrow range makes the market vulnerable to event risk, as we saw in August, 2015. Today the market spent most of the day below its 50-day average. An outside event could easily stampede the market lower toward 19,750 and the 200-day average. A raft of technical levels offer support in that area. On the other hand, it could bob along, like an aircraft on autopilot at cruise altitude. Geopolitics, the French elections and the earnings season are just a few of risk factors.
Chart 1: The Dow 30 has traded in a very narrow range for the past three weeks. The Chande Trend Meter (lower panel) has trickled down into the trend-less region.
Well, the volatility is low now, but what could happen later? To study this question, I looked at the 50-day average of the absolute daily percentage change (see Chart 2). The current level is the lowest it has been since late 2006, which means that we are probably headed higher over the next few years. Note that the volatility expansion has occurred during declines, so the chart is saying something about the future range and direction. The chart also shows that it could take many months to expand the range: so enjoy the smooth ride while it lasts.
Chart 2: This is the 50-day average absolute percentage change in daily closes going back to early 2007. The current level of volatility is the lowest since late 2006. Such a low level is probably not sustainable for long. Note that the volatility expansion has generally occurred during declines (2008), but builds up relatively gradually.
Bonds: A Trend Check
The weak unemployment report on Friday did little to help bonds, but the selloff earlier today in the Dow helps pushed bonds higher into overhead resistance (see Chart 3).
Chart 3: The broadly diversified Vanguard Total Bond Market ETF (BND) continues to dig into overhead resistance. The middle panel shows it is trending nicely with a CTM at about 85. The multi-period trend-following models are long in the short-to-intermediate term, but short in the long-term. With chart resistance at the election night gap at 82, this is the classic counter-trend rally against a long-term down-trend.
Bonds climb a wall of worry, and as the lowest panel summarizing the trend-following model status shows, this is the classic counter-trend rally against a long-term down-trend, with resistance on the charts all the way to the gap at 82. It is not clear what the bond market is worrying about, even as the Fed tries to shrink its footprint and the economy is humming along. The bond rally is helping mortgage REITs as the following NLY chart shows very nicely.
Chart 4: The rally in bonds has helped REITs like NLY move along smartly, with the CTM enviably above 95.
Gold Tracks Bonds Higher
Gold has followed bonds higher. We use the SPDR Gold Shares ETF (GLD) to show the breakout towards resistance at 124 (see chart 5). Gold is trending with the CTM at 84. The 100-day correlation between GLD and BND (see third panel) is high, at 0.86, which means that the two have tracked closely. The trend-following models (lowest panel) are long from medium-to-intermediate term, and flat on the long-term (unlike short over the long-term for bonds).
Chart 5: The GLD ETF (top panel) has moved higher in lock-step with bonds, with a CTM at comparable level of 84, and the 100-day correlation (in the third panel from top) at 0.86. The trend-following models are long from the short-to-intermediate range, and the long-term trend is now flat (unlike bonds). The chart shows resistance begins at 124.
Market's Path of Least Resistance
The S&P-500 index is trending lower within a down-trend channel, approximately parallel to its down-trend in the summer of 2016 (see Chart 6). We will need a close outside the channel to start turning the trend around. We apply the trend-following models to the Russell-1000 universe and roll-up the data to find the path of least resistance (see Chart 7). The broader market is also trending lower in the short-to-medium time frame, and is net positive thereafter.
Chart 6: The S&P-500 index is consolidating within a down-trend channel roughly parallel to its consolidation last summer leading into the election. The Chande Trend Meter has dribbled into the trend-less region. The trend-following models are flat in the short-to-medium term, and long thereafter.
Chart 7: The roll-up from the Russell-1000 universe suggest the path of least resistance is lower in the short-to-medium time frame, and upward from there on. The intermediate-term bears watching, as it is getting close to flipping its bias.
The narrow range in the markets makes them vulnerable to event risk. Bonds have climbed an invisible wall of worry, and gold has closely tracked bonds. The current path of least resistance is lower in the short-to-medium term, and higher at longer time frames.