Monday, July 28, 2014

Bearish Equity Divergences

Highlights
  • Note the stress pickup in the dollar ruble exchange rate today as the ruble falls in value (capital flight risk) towards its spring (Ukraine invasion) nadir. This thrust higher is a new high for the move up since the tragic, criminal destruction of the Malaysian airliner over the Ukraine. Additionally, the US has turned up the banking screws on three of Russia's largest companies in an attempt to circle the wagons around Putin after his Crimea annexation. 

  • Treasuries stutter-stepped with selling Thursday but regained their out performance footing Friday as the safe-haven bid showed sharp demand at the riskiest long end with ZROZ surging to a new high. The 30yr bond future consolidates tightly at its move highs while the 10yr future consolidates lower but within its uptrend. I note the sharp uptrend in TLT outperformance to the commodity space in the following spread chart. This is equity bearish and shows trend towards risk off.
  •    The SP 500 under performs Treasuries:
 
  • The high yield "risk-on" space stalled Friday after rebounding from its sharp selloff lows last week. It under-performs Treasuries and has made a new near term move lower on its weekly spread chart. This break and stalling action from high yield credit is a large divergence from equities and a warning sign. BKLN or the proxy for the leveraged loan index stalled as well and consolidates under both its 50 and 200 day moving averages (not shown). 



  • The VIX is above its 50 day exponential average which is an important marker of periods of increased volatility. 

  •  On a weekly chart the homebuilders have a large top in place and hug a key support trend line. Last week saw price fail at the 200 day SMA resistance and create a shooting star candle showing the overhead selling supply.
 

  •  A key near term trend line-in-the-sand for the SP 500 I show below:


  •  I note there are quite a few technical divergences stacking for the SP 500 on the daily chart. The NASDAQ shows similar problems:
  • Growth stocks showing signs of strength on earnings include: BIDU, SKX, FB, CMG, SWKS (note the selling in the SOX last week now below its 50 day SMA), and UA.
  • The most bullish indicator on my screen is the general oversold level of NYSE McClellan oscillator.

Credit ultimately drives the equity bus. Risk on credit in the form of junk and the leverage loan index have broken key long term technical support lines and moving averages. Treasuries show abnormal strength in the face of a rising equity market led by a thinning net new high herd shown here of large cap tech. Again, note the breakdown in the formerly leading SOX index. I remain defensive in the growth equity space given the aforementioned intermarket relationships and how fast and hard the tide can turn in the space shown here.

Thursday, July 24, 2014

Complacent Sentiment Remains As Entrenched as the Equity Uptrend

Complacent sentiment remains entrenched as the SP 500 and large cap NASDAQ NDX attempt to extend their breakout gains. How hard are investors chasing this move? Here are some examples: (blue line charts courtesy of Sentimentrader.com - I heartily recommend the service)
 




Smart money remains concerned.



The next chart demonstrates a pickup of internal selling pressure in the SP 500 showing stocks making an RSI low below 30 rising to one standard deviation above normal. This is a new high since the February selling spike eclipsing the highs of April and June.

Also notice the growing negative divergence in the 10 day average of new highs minus new lows.



I suggest longer term accounts consider using this rally to begin legging out of positions and raise cash levels should the market continue to higher. Note the above trend lines in the Wilshire 5000 chart directly above as some key lines in the sand short term should the current breakout fail.

For a systematic way to do this besides breaks of the above trend lines, use a closing break of trailing moving averages of different time constants to remove pieces of exposure. Some examples include 14 day, 28 day, 42 day and the 56 day simple or exponential moving averages. This allows accounts to stick with the uptrend while honoring signs of froth and a changing fixed income picture (risk off in junk and leveraged loans JNK/BKLN).

Tuesday, July 22, 2014

Anecdotal: Rupert Murdoch LBO Maket Timing Model

A colleague sent this to me from ZeroHedge. Murdoch tends to lever and buy after big runs that coincide with important tops. His prior two buys came after the top on rebounds (at the second top). This LBO comes into the strength and is fourteen times bigger than his last. This is not a market call but an interesting co-incident. He is again buying far from a market low and in size.

Brokers and Registered Investment Advisors who have been in the business long term know of clients who are "wrong way Charlie's" who contact them in fear at bottoms and in euphoria at tops. They are valuable clients as consistent timing indicators for risk application or reduction. Rupert Murdoch is human, puts his pants on one leg at a time, and is vulnerable to the same foibles of the human condition. Again, I just note the interesting flower that seems to bloom consistently every seven-ish years in price and time.

_____________________________________________________

Brief update on my prior posts here and here regarding a shift in risk.  Fixed income continues to play defense with long end Treasuries outperforming. Despite equity strength, Treasuries act bullish on an absolute basis as well. Junk credit has jumped the shark with the sharp declines in JNK and HYG (the latter puncturing under the 200 day). This includes deterioration in relative spreads to Treasuries and corporates.

Dollar yen has bounced slightly from its lows of last week. This morning it has shown stalling action from the the past two days and change of rebound from last Thursday's drubbing. The cross remains just above critical support for bulls as volatility stays tightly compressed. Dollar/yen tends to positively correlate very highly (pegs 1 on the 20 period) with the SP 500.

In another galaxy far far away, equities - for now - care not. Led higher by a thinning herd of large cap out-performance, stocks look set to power higher despite continued extreme sentiment readings in the CS Fear Barometer, CBOE put/call ratio (weekly 5 day exponential average), CBOE Skew, and the Rydex Ratio. Despite the negative divergence with credit, SP 500 sector internals show risk-on money-flows from the relative rotation graph.


Here is my NASDAQ chart showing its key risk-on above, risk off below trend lines:


For my growth system and given the prior six distribution sessions for the NASDAQ and five for the SP 500, I await a follow-through day (1.2% gain in the major averages on increasing volume from the prior session before redeploying risk capital.) For more on distribution definition, go to page 29 here and page 30 for follow through session examples.

I suggest using a faster time constant exit on equity positions given the action in credit. Go with the uptrend and buy any dip mantra, but keep positions on a tighter leash as well as perspective. The  uptrend may really accelerate here but the credit foundation has shifted.

Friday, July 18, 2014

A Background Inter-Market Change Towards Risk Off

I am short time this morning so I am providing a summary versus  report with charts detailing market machinations. Without further ado:

  • Summary: Inter-market and intra-equity market moves are clearly risk off. This is not a case of equities getting the jitters while other measures of risk act fine. Because of these broad-based markets, spreads, and indicators showing risk-off, I suggest that current equity market weakness may have some legs either immediately or after working off an oversold condition.
  • Moreover, sentiment heading into this nascent decline has been and still remains reactive money bullish and smarter money bearish. This did not change materially with yesterday's very high volume distribution session in the major US equity averages. Now let's review the details.
  • Intermarket measures of risk show risk off.
    •  Credit drives the bus in our financial system and is a leading indicator.
    • Treasuries - I have been highlighting repeatedly over past posts the strength in Treasuries, especially long dated Zeros (ZROZ) and the benchmark 10 year future. Their strength did and does not jive with prior equity strength.
    • A yield curve's spread compressed to a new low for its move down yesterday for 2014.
    • I have been mentioning the issues in junk credit (JNK), spreads, the negative divergences and increasingly poor technical condition. I have mentioned the potential for the JNK and other junk ETFs to have real problems given the complacency and the risk-free reach for yield mentality pervasive and invasive in the space since 2009. Note the JNK chart sell-off yesterday that sliced a three year primary support trend line. Change is afoot in credit.
    • I have been mentioning the uptrend momentum stall, deterioration, and vulnerability in the Bloomberg Financial Conditions Index. It is a broad base measure of credit stress. It has been pegged at 1.2 standard deviations above normal. These are historic complacency levels.  It dropped 19% yesterday or showed a 19% pickup in downside risk. This is a large downward momentum thrust. It broke a 4 month uptrend.
    • The spread between the SP 500 and long dated Treasuries I mentioned yesterday had hit a seven year extreme of equity out-performance.
    • The spread between Treasury and commodity performance has broken out of a year long trend line that favors Treasuries and has made a new uptrend high yesterday for 2014.
    • The dollar/yen carry trade dropped further below both its 50 and 200 day SMAs yesterday and sits on six month support. It has made a very, very tight consolidation shown by the major contraction in volatility in the tightness of Bollenger Bands on price action. Tight price action tends to precede and provide very fertile ground for large, fast, and persistent trends. Dollar yen is very positively correlated to to the SP 500 and frequently hits .75 to 1.0. 
  •  Sentiment remains at complacent levels despite yesterday's selling.
    • The Rydex ratio remains at 10 year highs and actually upticked slightly yesterday. That's eye opening, entrenched complacency to inter-market movements.
    • The CS Fear Barometer, while down-ticking remains very close to fourteen year highs.
    • The weekly CBOE put/call ratio's 5 day exponential moving average has just turned up from 10 year extreme lows. 
    • The VIX surged above its 50 day EMA yesterday  -  an important technical hurdle showing elevated risk of higher equity volatility.
    • The CBOE Skew index has hit historic highs and has just turned down.  It has much further to go, from my research, to show a clearing of risk-off. More on this later.
    • Investors Intelligence newsletter writers remain pegged at 10 year highs. AAII sentiment has improved but it is not at contrarianly bullish levels.
  • The NASDAQ has undergone a seventh day of high volume distribution in its now slowing uptrend. Three to five is enough typically to derail rallies. Growth has and continues to act poorly with the IBD 50 High Growth Index lagging the leading equity bourses.
    • Yesterday's NYSE TRIN showed high volume selling only hitting a 1.46 reading. This is not capitulation levels. 
    • Bellwether bank BAC slipped below its 50 day SMA yesterday on its second decline on very heavy volume post earnings. WFC slipped below its 50 day. This action causes me to cast a more skeptical eye towards the earnings surges in both JPM and C. They may be morphing into buying climaxes versus new momentum up trends. More broadly, the banking ETFs show technical stress.
    • The most bullish indicator I have is the total market McClellan oscillator nearing three year lows
    • The NASDAQ flirts with the red trend line-in-the-sand I mentioned July 9th here and connects the lows of June 12, 13, and July 10. Price undercut yesterday and closed  below this trend line. This morning the NASDASQ opens above it. Another break today of this trendline, and a move below yesterday's low for the NASDAQ raises further selling risk. This would be a clear trend line violation.
In summary, the aforementioned points show a changing risk landscape. I suggest that remaining status quo with asset allocation strategies is high risk given current inter-market movements. Short term market internals are very oversold with a still complacent sentiment backdrop despite the selling. As a growth equity PM, I remain flat on long side risk in the space.

Thursday, July 17, 2014

Bearish Fixed Income Tells for Equities

The biggest fly in the bull equity try  to my eye (and their are a few) remains the action in fixed income. Long end Treasuries and ZROZ (the 25+yr Zeros ETF) have caught very strong bids over the past week despite harsh sell-offs in both June and July (ZROS slightly stronger). This technical strength is eye opening.  Fixed income is not buying the bullishness equities are selling. The benchmark 10yr Treasury future had made a higher high from late June while ZROZ have begun consolidating just under their June high on a daily chart. The weekly shows breakout while a classic Treasury spread continues to compress and shows technical signs of potential acceleration in that trend. 




What does the spread between the SP500 and Treasury bonds say? It's at an extreme:



How about the Treasury/commodity spread? Treasuries out-perform and show a large breakout.




Why (rhetorical) do Treasuries ignore equity strength - albeit stocks are bifurcated between large and small caps. Treasuries tend to rally on economic weakness or flight to quality/geopolitical instability. Either issue depresses equities on the asset allocation shift and repricing of economic conditions and risk. Fixed income tends to be ahead of the asset allocation game and skates to where the puck will be more aggressively than equities- to paraphrase and somewhat bastardize a great quote from Wayne Gretzky.


This is clearly the case in junk. Junk credit via the JNK ETF shows sharp near term weakness and a change of character. This coincided within one day of this article:





This is a borrow short/lend long liquidity problem for the ETF purveyors - welcome back to the credit crisis circa 2008. History seldom repeats but does tend to rhyme. ETFs allow for instant asset allocation exposure and liquidity while holding longer term underlying assets that are - comparatively - much less liquid and completely illiquid when the elephants head for the door.
 

All the above impacts the financials which are a leading equity market sector. The regional bank ETF eroded yesterday and moved decidedly lower in is right shoulder of a head and shoulders top while the broker dealer ETF remains negatively divergent to the broad market with a clearly lower recent high.


In TBTF bank-land BAC bucked the C/JPM rally trend on its earnings release yesterday with a drubbing. WFC has been riding its 50 day SMA (bearish) versus rebounding off it like a scalded cat (bullish).  Note the triple top of resistance at the $72-$72.50 area for the BKX index on its daily closing line chart. This action shows a loss of upside momentum demonstrated clearly in RSI's negative divergence with price over the past month along with its absolute level nearing 50:





As I mentioned yesterday, big equity growth stocks continue to act poorly. They have for the past few weeks. This erosion has become more pronounced with yesterday's churning action. As a group they have trouble finding their footing and mounting rally from an oversold condition. So far this shows relative weakness to the general market's large cap led move higher.

In the past two sessions, two major leaders have given up the ghost - LCI yesterday and SNDK this morning. While two stocks does not necessarily a broad trend make, their blowups along with growth's general sluggishness (low dispersion) and six distribution days stacked for the NASDAQ flashes more caution as a poor long side risk reward period for growth.

Wednesday, July 16, 2014

Midweek Lay of the Technical Land

Equities appear to have sold themselves out over the past week and a half. At this prior post, I presented a chart of the NASDAQ 100 stocks with the % of them showing an RSI reading above 70. It hit two standard deviations. I suggested near term caution. Since then, leading growth stocks have undergone sharp corrections as I noted yesterday. Here is an update of the above chart showing the pressure release of the prior overbought condition: 
 


Internally, the total market McClellan oscillator has hit my first of two oversold levels. It "should" support a bounce in the market: 



Note the two trendlines in the Wilshire 5000 in the above graph. The latest decline held the red trendline -  a first key "line in the sand" for bulls. So long as price holds above that trendline, the path of least resistance remains up. The black trendline is the latest 18 month uptrend and is another key barometer. If the red trendline above fails, take defensive action as the market likely targets the long term trendline.

The bifurcation in the equity averages is striking between the leading NASDAQ NDX and the lagging small-cap Russell 2K. Intel's earnings beat and new yearly high in pre-open action may add additional near term fuel.




However on the spread chart, the bifurcation is getting extreme and falling onto major long term support for the Russell. While I advise against catching a falling knife, I suggest relative value moneyflows around these levels may begin to lend some support to bludgeoned small-caps relatively. The spread decline slope has a climactic speed characteristic:



An important bullish underpinning near term for equities is the sharp moves higher on earnings from key bank barometers including C and JPM. (Note BAC undergoes heavy selling on its release this am - a clear fly in the ongoing bull try.) The BKX banking index has negatively diverged with the SP 500 over the past few months by failing to make a new high for its uptrend. And very near term it has yet to make a higher high as well:



That said, the action is a positive for now and gives bullish breathing room for the equity uptrend to continue. If the rallies in C, JPM, and others turn out to be a "liquidate into the bullish news" event, I will provide that update. That is a key character change.

As a quick comparison, the regional banks are under-performing the BKX and have an unconfirmed head and shoulders top in play with a bearish right shoulder trend line break. Earnings season, now upon us, likely resolves this technical issue for the regionals.




Based on this award winning paper, the utilities outperformed the broad market by last week's close and threw a risk-off signal. I bring it up because it's an important signal.
 

This week, utilities are under-performing and showing a risk-on signal IF they close at current levels by the end of the week. This would be a whipsaw back to risk-on. However, this is a weekly closing signal, not intra-week and their are three long days left. I just note the current signal is risk-off and provides another 'sum of the evidence' indicator. 


(Note for those Austin metro locals - Michael Gayed CFA will be presenting the paper locally the first week in August for the Austin chapter of the Market Technicians Association of which I am the lead co-chair. Email me if you'd like to attend.)

The XOI oil index has an extremely strong positive correlation to the SP 500. The following chart shows that. It also shows the XOI breaking a key trend line last week as the market declined. The XOI has fallen onto support at its 50 day SMA which has contained the decline so far. Like the BKX bank index, this gives the broader market breathing room near term. If the XOI makes new lows for its move down, this would be a clear warning of potential further risk-off selling. 



Rates deserve a large post here, but in the interest of time this morning, I am going to highlight just three points and do a larger piece later this week. First, junk acts weak showing large technical cracks for the second time this year. I notice the top in the JNK etf is one day after this article appeared at Bloomberg. Hmm.

Second, to confirm equity strength, the benchmark ten year Treasury future really needs to start showing weakness. It's relative strength surprises me - so far. A weaker ten year is curve spread bullish for debt providers and asset allocation bullish for equities. 

Third, the economic and inflation sensitive ZROZ ETF (long end zero coupon Treasuries) needs to show weakness as well. It remains, so far, stubbornly bullish. 

On the high relative strength growth front, market leading growth stocks have taken it on the chin over the past week (see link above). LCI adds further credence to that this morning. Yesterday's action in prior leading names was down and sloppy. Despite the poor action, most failed to make new lows from last week . This is a near term positive if they can begin to right the ship and rally with the market. More selling or stalling action would act as a bearish tell from this key area of the market.

The NASDAQ has undergone six distribution days since the rally began with the follow through days of market has undergone since May 27. Those distribution days are 6/9, 6/12, 6/24, 7/7, 7/8, and 7/15. A distribution session is a decline of at least 0.2% on increasing volume from the prior session (selling into weakness) or a mid-range or lower close on increasing volume (selling into strength) from the prior session. It takes between three to five to derail a rally and begin some form of decline. 

The NASDAQ has flashed six. Leading growth stocks have reflected this negative action. So for my specific space of expertise and portfolio management, I remain very defensive and in capital protection mode. I note my comments on leading growth under-performance in my last post on the Investor's Business Daily Top 50 Growth Stock Index under-performing most of the major averages. The fact that leading growth stocks sporting huge fundamentals and high relative strength are not at or near the top of the index leaderboard suggests a late stage for this bull market.

Monday, July 14, 2014

Market Leading Growth Stock Volatility

Here's what drives me regarding being technically sensitive to market action and its recent divergent bearish/bullish extremes from smart and "dumb/reactive" money. It' the market's effect on high relative strength growth stocks in my space. Below are volatility loss examples high relative strength growth leadership experienced in last week's market stutter-step pullback:



Current



Decline
Hi Low
ANET -21.59%
80.53 63.14
AERI -20.06%
29.71 23.75
KING -19.08%
23.48 19
OPHT -18.69%
47.99 39.02
ITMN -16.58%
47.65 39.75
Z -14.77%
145.49 124
LCI -14.42%
51.66 44.21
CAVM -13.34%
53.31 46.2
VNCE -12.89%
38 33.1
MEI -12.47%
38.57 33.76
RH -11.57%
94.5 83.57
WWAV -10.68%
33.15 29.61
XRS -9.74%
29.97 27.05
SLXP -8.94%
141.8 129.12
GMCR -6.07%
128.5 120.7
NXPI -5.52%
67.79 64.05
EOG -4.63%
118.89 113.39
ZBRA -4.21%
86.02 82.4


As you can see, the level of volatility in my space is extreme. My indicators provide perspective in active risk management. When complacency reigns and the sellling occurs, it hits hard in my space. Elephants leaving the room at the same time, take out the wall with the door and frame.

Here are another series of examples from the sell-off that occurred this past March:   SCTY -35.91%, QIHU -29.67%, DATA -29.62%, UBNT -24.01%,TSLA -23.40%, NFLX -22.33%, SILC -20.79%, FB -20.13%, ALXN -19.54%, BIIB -18.45%, PANW -17.12%, CSTE -15.36%, CMG -11.02%, UA -9.64%, and AGN -8.95%. 

Broad market direction has a profound effect on market leading growth stocks. Knowing when the general market is internally stretched, overbought and with complacent sentiment are key factors helping mitigate and manage the risk associated with this space. There are the quick and those smiling and counting ephemeral profits in front of a steam roller.




Wednesday, July 9, 2014

Growth Stocks Shellacked in Tuesday's Fourth Distribution Session for the Major Averages

Growth stocks were nailed to the wall in Tuesday's session as recent complacency extremes bit  hard on market leaders. Note the declines in FB, GLOG, Z, LCI, XRS, ITMN, WWAV, PANW, KING, and ANET. Growth acted very sluggish to end last week's trading and that relative under performance accelerated markedly over the prior two sessions. Relative strength/weakness cuts both ways. Momentum is stalling and under performing once again:



 After yesterday's drubbing, the major averages logged a second consecutive session of distribution (a decline of 0.2% or more on increasing volume from the prior session.) This makes four in the current eight week rally: 6/12, 6/24, 7/7, and 7/8. Rallies typically fail anywhere between three and five.

The graph below is of the Investor's Business Daily Top 50 growth stock index. Note a few things. The index of leading fundamental/technical growth stocks has failed to make a new high this year in the latest rally. Leading growth stocks underperform. This adds evidence of a late stage move for the general market. In a new or middle bull market, growth leads. In an increasingly stale market, growth lags.  This is a negative divergence. Second, the red arrows show the higher volume distribution sessions over the past eight weeks.


Of the major averages, the Russell remains the laggard and has made a secondary high. This puts a near term double top in place and ten percent trading range  between the highs/lows of 2014. It's failure to make a new high is a negative divergence to the other market indices that have.

The NASDAQ's steepest speedline uptrend broke yesterday on a closing basis:

Here are technical analytics on the NASDAQ daily chart updated from my last post.

 
For a longer view, here are technical analytics on the NASDAQ weekly chart updated from my last post.


In my last post I mentioned the strong correlation of the XOI oil index to equity prices (correlation not causation). Here is an update showing the XOI breaking a key five month, intermediate term support trend line.


Banks lead. The regional bank ETF has broken an important near term support trendline on a closing basis in a developing head and shoulders top formation now six months in development:


In credit, I notice the Bloomberg Financial Conditions Index had a clear and sharp upside breakout failure yesterday. If this gains downside traction, it will show an important risk-off confirmatory change.


Canary-in-the-coal mine long term zeros, while very volatile on a daily chart, maintain their consolidative composure on the weekly. They remain in a constructive, six month uptrend (up is equity bearish):


I will have more on credit spreads at the end of the week.

In my previous posts and presentation, I have been beating the drum regarding extremes in bearish smart money and frothy bullish dumb money indicators. The market took notice over the past two sessions. The drubbing experienced by leading growth stocks is a testament.  Near term the market is oversold and I expect a rally/stabilization attempt. Tactically, I remain in a cash position given the four distribution sessions in effect and stalling-to-bearish action in growth leaders.

Monday, July 7, 2014

Perspective and Key Trends

Highlights and Perspective:
  • The trend is up.  Stick with the trend.
  • Longer term, the NASDAQ is at the high end of its MACD and RSI ranges.  Keep perspective as well. Note the current level compared to the last last six years :
 
  • Here is a shorter term, tactical chart:


  • Here is a chart of the CBOE put/call ratio showing its entry into ten year extreme bullish levels. The bottom panel is a five day exponential average to smooth the raw, top data. The current level (and even lower) has coincided with volatility pickups which hits high momentum, leading growth stocks hard (like this Spring's selloff.) The yellow box shows a time where the CBOE was this ebullient and ground its way higher. Remember the adage about the trend and waiting for it to break.

 


  •  CS Fear Barometer:

  •  Since the market is in upside blowoff mode, I am using the following shorter term indicators to monitor developing exhaustion extremes: NASDAQ McClellan advance/decline oscillator, the percent of NASDAQ NDX stocks with RSI greater than 70, a breakdown in the highly correlated XOI oil index, and NASDAQ up/down volume ratios (not shown). Let's take a look:

 


The "wall of worry" has morphed into "What, me worry?" Go with the trend, but keep tactical perspective.