ChartWatchers Newsletter

Move to Risk Began in July and Continued in November

The market began its move to riskier assets in July and this move simply accelerated over the last two weeks. The chart below shows stocks (risk assets) bottoming in late June and Treasury bonds (safe-haven assets) peaking in early July. The S&P 500 SPDR (SPY) hit a new high this week and the 20+ YR T-Bond ETF (TLT) is trading at its lowest level since January. The indicator window shows the price relative (SPY:TLT ratio) bottoming in February, forming a higher low in early July and surging to its highest level since summer of 2015. This means stocks are outperforming T-bonds and this reflects a strong risk appetite in the US markets. 

Continue reading "Move to Risk Began in July and Continued in November" »

Put/Call Ratio and PMO Analysis Intermediate-Term Bullish

The Dow has shattered records, small- and mid-caps are doing the same. Those that have not yet reached record highs are still participating, preparing to break above all-time highs. Indicators for some time have been leaning bearish, but in the past week DecisionPoint indicators in the intermediate term have a new decidedly bullish bias.

Continue reading "Put/Call Ratio and PMO Analysis Intermediate-Term Bullish" »

When Market is Stretched Patience is Required

The market has been in non-stop higher mode ever since the election. The NASDAQ is up over 6%. The Dow rose 1000 points in four trading days. The small cap Russell 2000 rose over 13%. At the same time, bond yields have soared with the ten year US Treasury Note up 60 basis points from its recent low. The US Dollar index climbed over 100, hitting its highest level in 13 years. What do all of these have in common? They are extremely stretched.

Let's take a look at the Russell 2000.

Just look at what small cap stocks have done since the November 3 bottom. The Russell 2000 has risen 13.5%. On top of that stochastics are now close to 100 with a RSI at 74. These are levels that almost always indicate a near term top is near.

Of course we all know the market, sectors and individual stocks can remain extended for a long period of time. But what happens is it gets harder to advance in any meaningful way and the reward to risk shifts to the downside.

Think about it. A 13.5% move in an index would be considered a great year, let alone two weeks. Tack on massively overbought technical indicators and it gets harder and harder to justify going long.

Interestingly, I studied 50 stocks in our "Candidate Tracker" which includes stocks on companies that beat earnings and have strong charts. In the vast majority of cases the stocks have performed very well since they reported their earnings and most of them are stretched, making them too tough to chase. On the other hand, if we remain patient I'm fairly confident many of them will pullback on any market correction, making them strong trading candidates.

That's where the patience comes in. If the market is stretched, bond yields are stretched and the US Dollar is stretched, it makes total sense to sit on your hands and wait for better opportunities. If you end up missing some upside, so what?

You might be interested in checking out some of the stocks in our Candidate Tracker so you can see for yourself how stocks with strong earnings have performed. Just click here.

One final thing. Just prior to the election fear had escalated big time with the Volatility Index (VIX) touching 23. Since then fear has evaporated, with the VIX close to 13. What does this tell me? That traders wanted nothing to do with the market when it had pulled back sharply prior to the election and now they can't get enough of stocks just when it might be primed for a breather. Classic!

At your service,

John Hopkins

Now The Bear Market Concerns Begin

The "under the surface" signals have been quite bearish for the past 1-2 years.  Money has rotated away from aggressive areas and I've discussed it here and my Trading Places blog quite often.  But it was very difficult to think bearish thoughts as long as the combination of price and volume remained bullish.  So I've been waiting to get the bearish price breakdown before re-evaluating the market.  That breakdown came last week during one of the most historically bullish periods of the year - strange indeed.  Let's look first at the warning signs and price breakdowns prior to both the 2000-2002 and 2007-2009 bear markets:

Continue reading "Now The Bear Market Concerns Begin" »

Rising Bond Yields Boost Insurers, Have Negative Impact on Stock Indexes

LIFE INSURERS LEAD FINANCIALS HIGHER ... Rising bond yields continue to give a boost to financial stocks like life insurers. Bear in mind that premium income in insurance stocks is invested mostly in fixed income markets. Higher bond yields mean higher income. Life insurers are leading the financial sector higher today. Several of the big life insurers are seeing nice gains after beating earnings estimates. Chart 1 shows the Dow Jones US Life Insurance Index ($DJUSIL) climbing more than 2% today and nearing a new 2016 high. The index is in a clear uptrend, as is its relative strength ratio (top of chart). Several individual stocks are already hitting new highs.

RISING RATES ARE WEIGHING ON STOCKS IN GENERAL ... There's good and bad news in the prospect for higher bond yields. The good news is that it favors financial stocks. To the extent that rising rates are also hinting at higher inflation, it may also be good for commodity related stocks like energy and materials. The bad news is that rising rates are bad for dividend payers, and possibly even consumer discretionary stocks that are hurt by rising consumer prices. Which helps explain why stocks have been basically flat since midyear. More groups have been falling than rising. Since midyear, only three sectors are in the black: technology (+8%), financials (+6%), and industrials (+2%). Energy and materials are basically flat. All the rest are in the red. That's three up, two unchanged, and seven down (counting telecom). Combined losses in the four dividend paying groups (and healthcare) are bigger than gains in financials and technology (with tech turning down this month). That makes for a flat market with a downside bias. For the market to make any upward progress, either the more economically stocks need to strengthen and/or the dividend payers need to stop falling. That leads to a couple of possible conclusions. First, the net effect of rising bond yields has been negative for major stock indexes. That calls for a more cautious stance. Beneath the surface, however, money is rotating into stocks that should benefit from rising yields and higher inflation. That may offer a way to take advantage of the current situation. Chart 2 shows rising relative strength lines for stock ETFs tied to energy (red) materials (blue), and financials (green). Traders are also buying put insurance (volatility) to hedge against possible stock losses.

The Bigger they Surge, the Harder they Correct

The S&P 500 SPDR (SPY) and the Russell 2000 iShares (IWM) both broke below their September lows with IWM leading the way lower. QQQ is still holding up the best because it hit a 52-week high the week before and remains above the September low. Looking at SPY first, the ETF fell around 5% from high to low over the last eleven weeks. This modest decline comes after a 22% advance from the February lows and a 10% advance from the late June low. Even though the inability to hold the breakout is negative, I still view this as a correction within a bigger uptrend. The blue trend lines mark a possible falling channel to define this correction and I am marking resistance at 215.50. 

Continue reading "The Bigger they Surge, the Harder they Correct" »

NDX at Breaking Point

If you look at the DP Scoreboards by themselves, you would note that the NDX appears to have internal strength given that two July BUY signals are still intact in the intermediate term. However, a look at the charts reveals those signals are about to break. 

Continue reading "NDX at Breaking Point" »

The Monthly Close For October Couldn't Have Been Closer To A Sell Signal

While the technicians usually write about the short tem, I want to zoom out a little and use a monthly chart of the New York Composite ($NYA). For those who follow my webinars, we are following the charts very closely as the market conditions are frail in my opinion. We could rally from here, but the long term charts continue to disappoint in my work. This New York Composite chart ($NYA) shows the close Friday, November 4th, 2016.

While the October 31st close did not close below the 10-month Moving average or give a MACD sell signal, it only took a pullback of one more day (November 1) to generate a sell signal on both the MACD and the 10 month moving average. That is a fine detail on a monthly chart. These can be seen looking at the Zoombox on the far right. By the Friday close shown below, the picture was getting a little more difficult. Martin Pring's Monthly KST is below zero as well. 

Continue reading "The Monthly Close For October Couldn't Have Been Closer To A Sell Signal" »

Examining Market Response to Earnings Reports

When the market is under fire like it has been for the past few weeks it becomes harder to trade successfully. This is particularly true if your focus is on the long side.

One way we've tried to combat a difficult trading environment at EarningsBeats is to focus specifically on those companies that beat earnings expectations with the theory being they will hold up the best, no matter market conditions. But that strategy can prove to be tricky when the market moves into a "shoot first and ask questions later" mode.

As an example, we issued a long alert on ETFC on October 24 after it posted strong earnings. It had gapped up on strong earnings and looked like a good reward to risk trading candidate on a pullback. But right out of the chute the stock continued to move lower, resulting in a failed trade.

It turns out that the most recent leg down in the market started on October 24, the same day of the ETFC alert. In fact, the NASDAQ was down 8 straight days in a row. So the timing of the alert was unfortunate; the strength of ETFC's earnings was not enough to avoid getting sucked down with the rest of the NASDAQ.

This doesn't mean there aren't stocks that hold up better than other ones when the market is unraveling. Traders DO have a tendency to flock to those stocks with strong fundamentals and strong charts when things are rocky. So it makes sense that your odds of experiencing a successful trade increase if the market cooperates as well

I will be conducting a webinar on Thursday, November 10 at 4:30 pm eastern where I will be showing examples of stocks that reported strong earnings and how they performed during the recent pullback. This will include some that held up well and some that fell apart. Then we'll have a discussion to see if there were tell tale signs that might have predicted which ones were more likely to succeed, or fail. If you want to join me for this FREE webinar just click here.

At your service,

John Hopkins

Stock Bounce Fades as Yields and the Dollar Keep Climbing

A morning bounce in stocks faded by the end of the day. Chart 1 shows the S&P 500 ending the day at its low. That keeps stocks in a short-term downside correction and well below a falling 50-day average (blue arrow). It also leaves open the possibility that the September low could still be retested. Rising bond yields continue to weigh on stocks. Chart 2 shows the 10-Year Treasury Yield ending the week on a strong note after bouncing off its 200-day moving average. That pushed bond prices lower again. The jump in yields pushed utilities lower while supporting financials. Rising Treasury yields continue to push the dollar higher. Chart 3 shows the U.S. Dollar Index (UUP) ending the week at a seven-month closing high. That's also weighing on large cap stocks.