Transports and Utilities are Holding Market Back

I've been writing about the continuing discrepancy between three Dow Averages. But things may be starting to improve. Chart 1 shows the Dow Industrials closing at a three-month high and just shy of its early March peak. [The S&P 500 ended at a record close]. All of this is good. Volume, however, didn't pick up much which shows a certain lack of enthusiasm. I've been suggesting that the industrials are being held back by much weaker action in transportation and utility stocks. Chart 2 shows the Dow Transports trading below its 200-day moving average and near the bottom of its 2015 trading range. Rising crude oil (black line) is a big reason why fuel-sensitive transports have been so weak. [A weaker dollar has also been part of the problem since it's supporting the price of oil]. Chart 2 shows the TRAN bouncing off its early April low. But it has to climb back above its moving average lines to improve its chart picture. It's hard to imagine the industrials climbing strongly without some help from the transports. Chart 3 shows an even weaker picture for the Dow Utilities which is also below its 200-day moving average. Weak utility performance is tied to a weak bond market (green line). The correlation between the two is pretty apparent. The good news there is that the UTIL is bouncing off its March low with some help from bonds (more on that shortly). A move above its April high is necessary, however, to signal a bottom. That would also help the rest of the market, and rate sensitive stocks in particular.

Sector P/E Ratios Fall Into Two Groups

Hello Fellow ChartWatchers!

Last time I reviewed our PE Ratio symbols for several major indexes (!PEDOW,!PESPX, !PEOEX, and !PENDX) and promised that this time around I'd show you the PE Ratio symbols we have for the nine S&P Sectors.  Promise fulfilled!

(click for live version)

This chart contains P/E lines for 6 of the 9 S&P sectors.  You can see their symbols in the legend of the chart.   Note that I added these indexes to this chart using the "Price (Same Scale)" _overlay_ instead of the "Price" indicator.  That ensures that they are all plotted using an identical vertical scale and can be correctly compared visually.

Just like in the index-based PE charts, you can also see that the Financial Crisis in 2008 and 2009 has played havoc with several of these indexes - first the black Discretionary (Cyclical) sector, then the blue Technology sector, and finally the green Energy sector.  Even though each of those sectors "exploded" at different times, it is interesting to see how they all "calmed down" around the same time - May of 2010.

On the right half of the chart, we see that the purple Healthcare sector has been gradually increasing since 2012 and, since around October of last year, it's increases seem to have accelerated.  Finally, on the right edge of the chart (and in the Zoom Thumbnail area on the right side of the chart) we see that Energy P/Es have doubled in less than a month(!).

Something else that is very important to understand is less noticeable on the chart above but much more noticeable on the chart below:

Yikes!  What is that?   That is what happens when our various vendors can't agree about which stocks belong to which sectors.  We are actually working on cleaning up that data and trying to prevent this kind of anomaly from happening again but it will take some time.  In the mean time, it is important for everyone to understand that our PE indicators can contain unexpected surprises and should be used with both caution and common sense.

- Chip


Natural Gas ($NATGAS) Buyers Are Showing Up In May

Natural Gas ($NATGAS) has had a flickering pilot light since February 2014.  During November, 2014, Natural Gas finally got back above the 200 DMA only to lure in buyers and then starting falling. By February it had lost 40% so this is always a market that having a stop in is essential. As we head into Air Conditioning season, this can be a good time in the market for Natural Gas.

Chart 1

Continue reading "Natural Gas ($NATGAS) Buyers Are Showing Up In May" »

Trend Model Joins PMO with BUY Signal on Gold

As of 5/16/2015 Gold is on a Trend Model BUY signal. The 20-EMA crossed above the 50-EMA triggering the new intermediate-term Trend Model to initiate a BUY signal. The long-term Trend Model, which informs our long-term outlook, is on a SELL signal as of 2/15/2013, so our long-term posture is bearish. The long-term Trend Model is dependent on the location of the 50-EMA and 200-EMA. Simply put, when the 50-EMA is above the 200-EMA it's in a "bull market" and when the 50-EMA is below the 200-EMA it's in a "bear market".

Gold is teasing us. Wednesday it nearly reached overhead resistance. Thursday it poked through and Friday it closed above. That sounds great, but overhead resistance has not been broken in a significant way. There's still plenty of time as the dollar doesn't appear ready to get its strength back any time soon. Additionally, the May 13th Price Momentum Oscillator (PMO) crossed above its signal line and generated a PMO BUY signal. 

The weekly picture is still bright with a double-bottom formation that hasn't quite aborted yet. The Weekly PMO switched gears and had a positive PMO crossover generating a weekly PMO BUY signal.

Everything is lining up for Gold right now. It has an excellent opportunity to break out, given the weakness in the dollar. A Trend Model BUY signal combined with a PMO BUY signal makes Gold especially attractive right now.

Happy Charting!

Consumer Electronics Need A Wake Up Call

Over the past month, the Consumer Electronics Index ($DJUSCE) has fallen close to 9%, which ranks it as the third worst performing industry group.  Only gambling stocks (-12.64%) and business training & employment agencies (-15.68%) - two consumer discretionary industry groups - have performed worse.  Normally, I tend to steer clear of underperforming areas of the market, but many times in a rotating bull market they can provide some of the best opportunities.  Earlier in 2015, I wrote about two areas of technology that were lagging badly - computer services and semiconductors.  But they both were testing support in bullish wedges.  The short-term charts were weak, but the longer-term charts suggested there was likely to be a reversal.  In both cases, we saw recoveries.  In February, in the consumer discretionary space, it was the footwear stocks that also lagged for a few months until support was challenged.  Check it out:

While footwear was an absolute and relative leader throughout the latter stages of 2014, that changed as we opened 2015 and footwear fell to relieve overbought conditions and the group lagged badly.  An incorrect conclusion could have been drawn that footwear was an area we should avoid.  Instead, the pullback provided a great opportunity to trade a group primed to outperform once again.

So back to consumer electronics.  Which type of pullback are we watching?  Is the group simply underperforming for a brief period before resuming its relative uptrend?  Take a look at the chart:

It's difficult to say if consumer electronics will follow the lead of footwear, but the recent selling certainly has improved the reward to risk for entry into this space.

Enjoy your weekend and happy trading!


Weakening Dollar Boosts Large-cap Stocks

The falling Dollar is boosting large-caps and they are outperforming small-caps. This makes sense because large-caps are typically multinational companies that derive a good portion of their revenue abroad. The Financial Times estimates that companies in the S&P 500 generate around 40% of their revenues abroad. These foreign earnings must be converted to Dollars and a strong Dollar translates into lower earnings. A weaker Dollar, on the other hand, helps the bottom line for companies that generate revenues abroad. 

Chartists can see this relationship in action by comparing large-cap performance against the Dollar. The first chart shows the S&P LargeCap 100 relative to the Russell 2000 using the price relative ($OEX:$RUT ratio). $OEX outperforms when this ratio rises and underperforms when this ratio falls. As the chart shows, large-caps underperformed small-caps as the Dollar rose from October to March. This performance ratio reversed in April and turned up as the Dollar turned lower. Notice that large-caps have been outperforming small-caps as the Dollar moved lower the last five weeks. 

Continue reading "Weakening Dollar Boosts Large-cap Stocks" »

Index P/E Charts Can Show You If the Market is Too Expensive Right Now

Hello Fellow ChartWatchers!

Is the market too expensive right now?  Our P/E ratios for the various market indexes can show you the answer to that question.  Currently, we have P/E values for the following indexes:

  • The Dow (!PEDOW)
  • The S&P 500 (!PESPX)
  • The S&P 100 (!PEOEX)
  • The Nasdaq 100 (!PENDX)

These symbols are updated on a daily basis after the market closes.  Basically, we add up all the prices (i.e., closing values) for each stock in those groups and then we divide that total by the total of the TTM Earnings value for each of those stocks.  We store the results in the appropriate database and voila!

OK, so let's chart these bad boys and see what they can tell us about current market conditions:

This chart shows the P/Es for the Dow, the SPX and the OEX going back to late 2010.  Unfortunately, if we go back much further, things start to get jumbled due to the echos of the 2008 Financial Crisis.  Late 2010 is where these charts start to become useful again.  In addition, you'll notice that I've left off the Nasdaq 100 P/E graph.  The Nasdaq 100 P/E numbers are much higher than these P/E numbers and that makes sense considering the higher P/Es of the companies than make up the tech-heavy Nasdaq.

So what is this chart telling us?  First off, the P/E for the S&P 100 (green line) has recently surged up to around 22 - higher than it has been in quite some time.  Similarly, the P/E for the entire S&P 500 (black line) has also moved higher recently and is retesting the high it set at the start of 2014.   Finally, the P/E for the Dow Industrials (blue line) has been treading water for months now and is actually towards the bottom of its recent range.

So how does this compare the "historical norms?"  Well, unfortunately, our historical data for all of these symbols only goes back to the middle of 2004 (and, as I mentioned, the data from 2008-2010 is jumbled).  Here's a chart of the pre-Crisis years:

So we can see that - under "normal" conditions - the OEX P/E has been as high as 25 and the Dow P/E has been as high as 22.5 which suggests that the current P/E values for those indexes are not unusually high at all.

There's good news with respect to historical data for the S&P 500's P/E chart.  We have data for its P/E ratio going back all the way back to 1926(!).  You can see several historical charts of the S&P 500 and its P/E ratio in our Historical Chart Gallery - yet another "hidden gem" on our website.  Here's the current version of the S&P P/E ratio chart (click to see the full-scale version):

On this chart, the S&P 500's P/E ratio is the second line from the bottom of the chart.  You can see that - excluding the Financial Crisis - the number has stayed near 20 since 2004.  You can also see that it hovered near 20 for the entire 1960s.  Based on this chart, I think it is fair to say that 20 is the "new normal" for the S&P 500's P/E ratio.   Given that, the current value (20.61) seems fine.  Looking at the data around the time of the "Dot Com" bubble, it looks like readings above 30 would be cause for concern.

Here's a list of the other P/E ratio datasets that we track.  Next time, I'll drill down into the Sector P/E charts!

- Chip

Do Earnings Really Matter?

And the answer is...You bet!

Why do earnings reports matter? Because it gives investors a quarterly snapshot of how a company is performing and what they can look forward to down the road. And when you stop to think about it, when you filter out everything else out there going on day to day, just about the only thing investors care about is a company's bottom line.

All of us have seen instances where a company comes out with earnings that blow away expectations only to see the stock tank after hours. But that usually happens when, a)The market has already priced in blow out numbers and/or b)The company lowers its earnings forecast for the future. But, the combination of strong earnings plus a strong going forward forecast is generally bullish for a stock.

Now, to take this even further, imagine a company reports strong earnings, raises its forecast for the future PLUS has a strong technical chart. THAT is the type of company you want to invest in because they've demonstrated actual success plus guided forward plus show technical strength, giving the company the edge in even weaker market environments.

Here's a a perfect example below of what I'm talking about and one of the stocks we put on our "Candidate Tracker" at on February 17. It made our list because it beat earnings and we liked the way the chart looked. BUT that wasn't the best time to enter the stock as it was up against price resistance and was technically overbought. Instead we remained patient and suggested an entry at $21.54 three weeks later with a closing stop of $17.75 and a target of $30, We removed it from our Watch List near $26 and just before earnings were reported, so a nice 20% winner!

The point is, the combination of strong fundamentals and strong technicals can be potent. In fact, I want everyone to get a chance to see what I'm talking about by offering a "One Week Pass" so you can explore the Earnings Beats site, check out our full Watch List and our new "Candidate Tracker" feature that currently has almost 100 stocks that fit the initial criteria of beating earnings plus strong charts. Just click here to get your pass!

At your service,

John Hopkins
Invested Central/

Are Bonds About To Take A Major Dive?

The long bond price looks to be at a level of major reversal. Diving into the chart, we can see that the PPO is at another one of the extreme levels in the entire 30 year bond run. The extreme reading on the MACD is not as clear a signal because the MACD will form higher waves as the price moves higher. The PPO is a percentage oscillator. It shows us when there is an extreme percentage price move. So a 4% move on the PPO is significant throughout the time frame of the chart. The bond price bottomed out in 2014 after a nice divergence showed up on both the PPO and the MACD. Chart 2 shows a zoomed in version.

Chart 1

 Notice the positive divergence  on the $USB price in January 2014 on Chart 2. Now in April 2015, we have a typical negative divergence. 

Chart 2

 For a foreign investor, this reversal in bonds is a problem. However, this also coincides with the reversal in the $USD. If the $USD rolling over is added in, the bonds will lose value much faster to create losses very quickly.

Chart 3

The main problem here is that no one expects the bonds to sell off, whereas a year ago, no one expected the bonds to be the upcoming trade of the year.

I expect the bonds to retrace quickly as foreign bondholders abandon their positions. We'll see if that happens. Investors would buy TBT to try to profit in this trade. Foreign investors will have trouble making money in a TBT trade if the $USD is falling. This is a trade for US investors. Because of all the global turmoil, this could reverse but it looks to me that the signals are clear at this point in time. As always, an exit strategy is as important as an entry strategy.

Good trading,
Greg Schnell, CMT

Ultra-Short Term Spikes Bullish

Last week was not only an interesting for price, ultra-short-term indicators finally woke up. With indicators staying mostly mum this week, it was exciting to see movement in the shorter-term.

Continue reading "Ultra-Short Term Spikes Bullish" »

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