ChartWatchers Newsletter

Wilshire 5000 Composite Index Nears Old High, Transports Play Catchup

The Dow Industrials and S&P 500 continue to hit record highs. I've been showing upside breakouts in other parts of the market that include small caps and the NYSE Composite Index. Here's another one. Chart 3 shows the Wilshire 5000 Composite Index ($WLSH) having risen above its November/June highs to initiate a new uptrend. The WLSH is the broadest measure of the U.S. market (and includes more smaller and midsize stocks). It's now heading for a test of its old highs.

With the Dow Industrials having exceeded their 2015 high to reach a new record, chartists are taking some encouragement from the recent upturn in the Dow Transports. According the Dow Theory, an upturn in one of them needs to be confirmed by upturn in the other. The Transports aren't anywhere near their old highs. They are, however, approaching a test of their spring highs. An upside breakout there would make Dow Theorists feel a lot better about the market rally. Chart 4 shows the Dow Transports surging to a two-month high this week on rising volume. It's nearing a test of its April high. A close over that peak would put both Dow Averages in uptrends. The recent rise has been driven by airlines and rails.

Earnings Season Shifts into High Gear

The "official" start to earnings season began when Alcoa reported its numbers after the bell last Monday. The market liked what it saw and heard with AA up close to 10% by the time the week ended. We also saw some major banks report their numbers with mixed results. But that was only the tip of the iceberg as thousands of companies will be reporting their earnings over the next several weeks.

There's no telling what the collective results will end up being but looking at the market action of late, expectations could be greater than most expect. After all, both the Dow and S&P are at record highs. On the other hand the NASDAQ continues to lag, indicating reduced expectations on the tech side.

What makes earnings season so interesting is you never know how the market will respond to specific numbers. In other words a company might beat all expectations and still see its stock slide. Or a company might come up short and see its stock rise. And this is what makes it tough to hold a stock into an earnings report; you could wake up to a stock down substantially which is never a pleasant sight.

One way to avoid being blindsided is to wait until a company has reported its numbers, see how the market responds and then wait for a good entry level on a pullback. For example, JP Morgan beat expectations and got a nice pop the same day its numbers were released. So it could be in high demand if it gives up some of its gains as traders gravitate to those stocks that beat expectations. Being patient could lead to a better entry point as seen in the chart below.

At EarningsBeats we are constantly scanning the market for companies that beat or miss earnings expectations. This in turn allows us to provide a list to our members. From that list we look for the best reward to risk opportunities, issuing alerts with entry price, price target and stop losses. If you want to see a sample of the most recent alerts and results just click here.

Earnings season can be exciting but it can also be costly if you aren't careful. Trying to "guess" how the market might respond to an earnings report is a crap shoot at best. There's no need to risk your precious capital on something you have no control over when you can potentially profit by being patient and looking for solid opportunities once the dust has settled.

At your service,

John Hopkins

Are You A Chart Watcher?

Hello Fellow ChartWatchers!

Are you a watcher of charts?  By that I mean how much do you trust what you see on price charts?  Do you trust the charts more than the commentary/opinion of others?  Do you trust stories in the financial press more than what you see on the charts?  The reason I'm asking these seemingly straightforward questions is because last week was the kind of week that separates the true chart watchers from the rest.

If you trust the charts, you probably took action last week.

Last week we had the breakout to new highs that we have been waiting for for months.  Did you see it?  Did you take action?  If so, terrific!  If not, ask youself very honestly why not?   Here's the chart of the Dow:

Seriously, it doesn't get any clearer than this folks.  A big breakout to new highs with increasing momentum. Moving averages in the right position and turning up.  Six straight days of gains.  The only thing that isn't 100% bullish about this chart is volume - it didn't increase significantly.

Again, if you didn't do something in response to this week's price action, ask yourself why and be clear with yourself about your answer.  Situations like this - a clear breakout after a long considation period - are rare.  Here's the longer-term picture:

This chart confirms that, in terms of price action, last week was huge.  Now, let me address some of the reasons some people are throwing around for still being skeptical of these charts:

1.) "The breakout makes no sense given <insert favorite news story here>."
Folks, let me be clear - as investors, we do not need to understand why something is going up in order to profit from the move.  We do not get extra money if we know the reason for a stock's rise.  Similarly, we do not get punished any less if we can "prove" that a stock "should not have gone down."  Being a true chart watcher means that you are watching for trends and riding them effectively - usually without knowing (or caring) about why the those trends exist.

2.) "The market is clearly overbought right now."
Last year I wrote an article about momentum investing.  In that article I said that "In order to be a momentum investor, you must be willing to buy stocks 'at the top'."  By that I meant that in order to ride a big trend, you need to buy after the trend has been established but before the trend ends.  Think about what such a chart would look like.  It would look "overbought."  It would look like you have missed the move.  But now think about it a little more.  The idea that you can buy a stock right at the start of a big uptrend is unrealistic/impossible therefore you will always be buying after the first (or second or third) move up and therefore the chart will almost always look "overbought."  (For more on the "overbought" fallacy, please see Greg Morris' thoughts on that subject.)

3.) "Volume didn't spike."
I will admit that volume is a concern however there are some mitigating factors to consider.  First off, it is the summer and volume is usually light in the summer.  In addition, there have been lots of non-stock-related news events recently that have (correctly) overshadowed the markets.  In the past, whenever the Dow was setting new highs it was often the top story on the nightly news.  Unfortunately, that wasn't the case last week.  Regardless, the fact that volume didn't increase is a reason for caution, but it doesn't negate the price action.  Volume is just one piece of the puzzle.

4.) "But what about <insert favorite economic/fundamental metric here>?"
Again, technical investors don't care about "why?"  They focus on "what is happening now?"  Momentum investors use technicals to identify stocks with strong uptrends that are more likely than not to continue moving higher.  They also use solid risk management techiniques to limit their losses if things don't work out.  That strategy can work in any market (there's always something going up!)  but it works really well in a rising market where most things are going up.

(For a different perspective, check out our latest DecisionPoint article on S&P P/E Ratios).

5.) "I missed the move!  I should have done something last week but I didn't and now it is too late."
It is never too late and you haven't missed the move.  Chart watchers live in the present, in "the now."  It is the only time period you can control.  Successful technical traders are constantly asking themselves "What can I do right now based on what the charts are saying?"  You should do that too.

Breakouts to new highs after a multi-year consolidation period are rare.  When something big like this happens, technical investors constantly re-evaluate their positions and their strategy and adjust it as needed.  Last week's price action should challenge everyone to re-evaluate things.

Stay focused on the charts!
- Chip


Long-Term Cycle Chart Suggests Higher Prices

Let me first profess that I am not an avid follower of cycle charts. They generally take too much tinkering for my taste as they never quite fit over the long haul. However, as I was flipping through some of my longer-term charts, I ran into a chart I created last year. I was determining visually whether the very long-term bull and bear market cycles were telling us anything regarding that first large correction of the year. My sense was that we were extraordinarily vulnerable to a deep correction/bear market and the cycles were lining up.

Continue reading "Long-Term Cycle Chart Suggests Higher Prices" »

Treasury Yield Falls to Four-Year Low, Lower Mortgage Rates are Boosting Homebuilders

The plunge in global bond yields continues. Yesterday's statement from the Bank of England of its intention to lower rates sometime this summer pushed the British 2-year yield into negative territory for the first time, and its 10-Year to another record low further below 1%. Treasury yields continue to follow foreign yields lower. Chart 1 shows the 10-Year Treasury Yield falling again this morning and coming dangerously close to its 2012 closing low near 1.40%. The drop in yields is boosting dividend-paying stocks like consumer staples, telecom, utilities, and REITs. Falling yields are also boosting gold which is a non-yielding asset that attracts money when yields are low and falling. Falling yields may also be responsible for recent buying of higher-yielding emerging markets. Homebuilders are also getting a lift.

Mortgage rates, which are tied to the direction of bond yields, are also falling. That's good news for homebuyers and homebuilders. Charts reflect that optimism. Chart 1 shows the U.S. Home Construction iShares (ITB) moving up close to a new high for the year after bouncing off chart support along its May low and 200-day average. It's also back above both moving average lines. The ITB/SPX ratio (top of chart) is also close to a new 2016 high. Chart 3 shows KB Home (KBH) already trading at a 10-month high. Other homebuilders nearing upside breakouts are PulteGroup (PHM) and DR Horton (DHI).

Bizarre to the Max

Exactly how bizarre has the market action been over the last six trading days? Let me count the ways.

First, the British voted to leave the European Union which put the market in a tailspin with the S&P losing almost 6% in just two days. But by Friday's close virtually all of the losses were recovered as though nothing had happened.

Next, the VIX spiked almost 35% in just one day as fear engulfed the market. By Friday's close the VIX had fallen almost 45% from Monday's high. Fear practically turned to elation.

Next, the equity only put/call ratio climbed 40% in one day then fell 40% within two trading days.

While all of this was going on, the yield on the ten year US Treasury Note fell by over 16%, closing at 1.45%, a level not seen since July, 2012. And the US dollar spiked as well, going from $93.53 the day before the British vote to as high as $96.86 two days later before settling down some by Friday.

Then there was gold rising almost 7% over the course of the six trading days. And I should toss in European officials saying they will take whatever monetary easing steps are necessary to keep things from falling apart.

What makes all of this so fascinating is seeing a flight to safety (treasury bonds, gold) while at the same time seeing traders piling into riskier assets; stocks. It certainly has me scratching my head and wondering what might be next? Some experts feel the US has become a safe haven with bonds producing positive yields while stocks provide for possible appreciation. But seeing all of this going on over a week's time was something to behold and makes me extremely skeptical.

I forgot to mention that just about everyone has now come to the conclusion that there's no way the Fed will be able to raise rates this year, not with all of the economic turmoil around the world. So money is going to stay cheap for a long time and that seems to be of more interest to traders than the fact that economic troubles abound.

All of this coming a week before the monthly jobs report and with Alcoa set to report its numbers on July 11 as another earnings season gets underway. So you can be sure the market will remain extremely volatile with the bulls aiming for an all time high on the S&P while the bears will do their best to squash any attempts to take the market higher.

As part of my daily update to EarningsBeats members I include a market analysis to help guide them through the daily land mines. It includes  key support and resistance levels on the major indexes as well as where I see the market heading in the very short term. If you are interested in getting my analysis for free just click here and you will be added to the list.

At your service,

John Hopkins

Looking For Better Markets In Rough Waters? - A Beacon Shines Offshore

After a rough week where many traders sold on the news of Brexit, a four-day climb has taken us back to the highs before Brexit. This increases the weekly range and volatility, but interestingly enough, the market shocks all seem to come from offshore these days. Let me outline a problem, and then provide a chart that looks investable.

If Brexit does end up being the trigger for a systemic banking problem, you'll need to evaluate your entire portfolio. Looking at the chart of Deutsche Bank, it looks a lot like a Lehman Bros. chart in the terminal phase. When the CEO has to comment  'no need to raise cash' and on the other hand, they are failing to meet regulatory levels, the clarity is not high.

Continue reading "Looking For Better Markets In Rough Waters? - A Beacon Shines Offshore" »

A Clear Trend and Pattern Emerge on Monthly S&P 500 Chart

Chartists will look back at the long-term charts and try to figure out where exactly this big Brexit panic actually occurred. Was there even such an event? There is something to be said for monthly close-only charts because they filter a lot of noise, and June was definitely a month with lots of noise. Despite some volatile swings, the major indexes ended the month with little change. Outside of the Nasdaq 100, the monthly gains and losses were between +1% and -1%. The Dow Industrials led and the Nasdaq 100 lagged. In a rare divergence, the S&P Small-Cap 600 was up a fraction and the Russell 2000 was down. 

Continue reading "A Clear Trend and Pattern Emerge on Monthly S&P 500 Chart" »