Wednesday, April 23, 2014

Midweek Highlights

Highlights:

  • Dollar/yen is under pressure this morning after topping out the past three sessions at the 102.70 level. It made a lower high and slipped under its 50 day SMA. This is a global macro deleveraging barometer.
  • China continues to come under pressure:
  •  Market advance decline internals are well on their way to first overbought levels on the NYSE McClellan Oscillator with the NASDAQ already there.
  • Other market internals show growing negative divergences and a weaker technical condition. I will show these tomorrow. They include new highs and the AD line compared with A/D volume.
  • The NASDAQ is overbought and bumping up against key trendline resistance which is important given the negative divergences brewing in the background.
  • The VIX and CSFB Fear Barometer remain pegged at extremely complacent levels. 
  • Note that the BKX Bank index remains below its 50 day SMA.
  •  First SP 500 future support lies at 1868.
  • Yesterday failed as a Trend Change Day up despite the advance. Risk remains open that the current overbought rally stalls without a TCD up trigger. This puts the quality of this low volume rally on sketchy ground and highlights the move as corrective within a larger unfolding down trend. 

Tuesday, April 22, 2014

Which Way?

I have little to add from yesterday's post. Upside market momentum is stalling as the market rises on contracting volume. This is classically bearish price action for the current rally after the sharp move down April 4th through the 11th. Market internals are now well into the green as the VIX has collapsed and the CSFB Fear Barometer remains at extremely elevated (contrarianly bearish) absolute levels inconsistent with past market bottoms. Key resistance that has capped SP 500 future gains, so far, is 1868. This is an important level.


The bifurcation between the SP 500's technical condition and that of the NASDAQ/Russell 2K remains wide. Note the relative positions of the former and latters' current price and their respective 50 day SMAs.

I notice stalling action in the dollar/yen carry trade after its support induced rebound over the past eight days. It has retraced a normal 50% of its April 4th to April 10th move down.

I still await a Trend Change Day up for the major averages to initiate long side risk.


Monday, April 21, 2014

Pregnant Pivot

Highlights below: 
  • Thursday saw defensive sectors ebbing and oversold offensive sectors flowing. 
  • There is no oversold near term advance/decline condition in the SP 500 or NASDAQ. The market worked it completely off.
  • The volume pattern in the NASDAQ and SP 500 futures is rising price, declining volume over the past three sessions. So far this is classic bounce.
  • The SP 500 is above its 50 day while both the NASDAQ and Russell 2K are well below. The SP 500 may drag the latter two higher but expect significant resistance at the NASDAQ/Russell 2Ks 50 day SMA given how far below it both fell and the level of overbought internals that will generate to get the lagging duo to that level of logical resistance. 
  • On the other hand, if the laggards stall here, the SP 500 is vulnerable with its technically weak bank/broker/financial sector.
  • Thus, the market is at a pregnant pivot point in time and price. 
  • The window for a Trend Change Day up opens today for the NASDAQ/Russell 2K and is already open for the SP 500. A TCD up is a gain in the major averages of 1.2% or more on increasing volume from the prior session and absolute increasing volume as well. All intermediate term rallies generate one. Sometimes they fail like the April 1 NASDAQ and Russell 2K's did. There is a signal to noise ratio, but waiting for this trigger - over the long term - lowers risk of both missing an intermediate term move and buying into an ongoing down trending/correcting market. It's a positive odds shifter.
  • Here are some words from sentiment statistician Jason Goepfert at Sentimentrader.com:
“There have only been two other times in the past 20 years that the Nasdaq Composite had dropped more than -8% from its 52-week high, but the VIX "fear gauge" was still below 17.5, a scenario we have now. It shows relative complacency in the face of a sell-off in higher-beta stocks. Those two occurrences were March 28, 2002 and May 15, 2008. The S&P 500 sold off more than -15% over the next three months both times.”
  •  Note I am not expecting declines like those dates he mentions above. Credit markets don't suggest it at this stage and are nowhere near stress levels of 2008 in context. From a sentiment standpoint, last week's rally qualitatively feels bouncy within a larger unfolding down trend. 
  • I  note the complacency I continue to see in the CSFB Fear Barometer from all last week. Its current very complacent level is inconsistent with past market bottoms. In fact, the combination of this indicator's level and the current VIX ten day rate of change reading are flashing a very risky complacency condition. My system uses this indicator duo to reduce risk. It's flashing red this morning.
  • The benchmark 10yr note gave up the safety bid ghost last Thursday and plunged below its 50 day SMA.  This is short term, money flow positive for equities, though I caution the COT commercial levels (smart money) remain at multi year bullish levels. 
  • Energy is the dominant equity theme.
  • Prior growth leaders have undergone beat-downs to their 200 day SMAs and grope for a bottom around that long term support. 
For now, I remain defensive. The growth environment is poor. I need to see upside follow through. There are enough downtrend characteristics above that I prefer to protect capital.

 

Thursday, April 17, 2014

Market Neutral

Highlights:

  • SP 500 future has rallied back into its March trading range and eclipsed its 50 day SMA yesterday. The strength is a bit eye opening. At its Wednesday high the contract retraced 61.8% of its 4/4 to 4/14 selloff. It ran into a wall of selling at the close at this figure. The venerable index remains the place to hide. Besides yesterday's high, the 1868 figure is a another point of key resistance.
  • The NASDAQ and Russell 2K aren't even close to their respective 50 day SMAs showing the level of selling intensity that has hit these lagging indices. 
  • All the market averages have worked off their oversold condition based on advance/decline internals.
  • Utilities, Oil and Consumer Staples sit atop the sector leaderboard. Oil is late stage bull and utilities/consumer staples are defensive, early bear/downtrend plays.
  • Despite the large rally in stockland, the benchmark 10yr Treasury - so far - has maintained a relatively tight, consolidative range trade over the past four sessions at its resistance highs. This comes on the heels of a five day, two handle surge during the equity sell-off. It has obvious reasons to come under more pressure but fails to do so. The COT report showed a large pickup in smart money commercial longs last week which remain at multi-year highs.
  • The Commitment of Traders Report shows extreme commercial long levels across 2's, 5's and 10's with the largest rate of change pickup at the short end. The absolute levels are at seven to eight year highs by the smart money professionals.
  • The dollar/yen carry trade has rebounded off key support but stalls under its 50 day SMA it so effortlessly broke on 4/8. It's quiet but looms.
  • The TBTF banks generally look ugly. From C to shining BAC, these are broken charts. JPM looks really heavy as well. These are diametrically opposite charts than what they were just three weeks ago. This fast delta between the sector and SP 500 is a technical, structural weakness that was not present before. 
  • Tactically, the SP 500 can rally further and drag the NASDAQ and Russell 2K along for the ride given how far below the 50 day each of the latter remain. Resistance for the NASDAQ lies at 4110 and 4150-70 on a much larger rebound.
  • Or the market can begin stalling here given the market neutral advance/decline internals, the boat anchor effect of the lagging aforementioned indices, and a dominant down trend influencing. It's a rubber meet road moment. 
  • Growth-wise, the market has not generated a Trend Change Day up. That window is open for the SP 500 but not the NASDAQ/Russell 2K. That window opens tomorrow. Quantitatively, new highs and all time new high numbers lag significantly in this rebound rally. It shows another structural weakness compared to rallies of the past year. I suggest using a short time constant exit on long side risk.

Wednesday, April 16, 2014

Sign of Upside Accumulation; Indices Out of Phase

Highlights

  • The US equity indices showed strong accumulation with Tuesday's sharp closing rally. Intraday, the action was volatile as the initial rally failed and the NASDAQ/RUSSELL 2K made new move lows before reversing hard off long term logical support of their 200 day SMAs (RUT undercut.) Then all the averages made new intraday highs where they closed. Yesterday's midday spike low draws a clear support line in the sand. Volume was huge. I think we're still in the woods but I note the positive. Additionally it comes on the heels of the market groping for a bottom the prior two sessions (Fri/Mon).
  • Overnight, the SP 500 future has retaken its 50 day SMA and pushed through resistance at 1840-1845.
  • One major difference on this rally in the SP 500 is the technical condition of the bank sector. It has gone from leader to laggard and remains under its 50 day SMA. This shows a deteriorated condition of a key sector lynchpin.
  • Late business cycle sector leader XOI continues to show relative strength.
  • The only average that has a Trend Change Day up window open is the SP 500. The badly lagging NASDAQ/RUT 2K have three days to go given their fresh move lows yesterday. The averages are out of phase and given that fact, I await confirmatory signals from the lagging indices. If the market wants to do more than bounce and vent oversold pressure, the laggards - at some point - must change their trend tune. Until then, failed abortive rallies in those underperforming indices can put the kibosh on SP 500 strength.
  • Yesterday, I mentioned the large (and late) volume pickup into inverse ETF shorts. I suggested they would likely feel some heat. So they did and do. When they give up might present an interesting timing signal.
  • The McClellan Oscillators for the NYSE and NASDAQ remain well into negative territory and have oversold room to rally further.
  • The benchmark 10yr Treasury continues to consolidate near its highs and above its 50 day SMA.
  • Both the BLS Spot Industrial Commodities and Foodstuffs indices surged yesterday on very large continuation thrusts to new highs for their current, steep uptrends. Since the beginning of the year, the Industrial Commodities index has surged % while the Foodstuffs has rocketed 22%.

Tuesday, April 15, 2014

Equities Attempting Bottom

Hightlights

  • The US equity averages are attempting to bottom with all the majors holding/reversing from Friday's lows. The SP 500 future has made a piercing line candle reversal formation while the NASDAQ manifests a inverted hammer and near hammer over the past two sessions. The Russell 2K has held above key long term support at its 200 day SMA and is the relative laggard.
  •  Internals are fully supportive for bounce - from the McClellan Oscillators to the percent of stocks under their 20/50/200 day SMAs.
  • Inverse equity funds that gain on market declines have hit three year asset extreme levels (Sentimentrader's 10 day SMA of volume). Awaken the sleeping crowd within. Given the bottoming candles and oversold nature of market internals, I suggest odds for continued rebound are higher. The lows of the past two days are a clear risk management stop for longs to squeeze shorts. Welcome to the pain trade late bears.
  • Resistance for the SP 500 future lies at 1837 or the 50 day SMA and the 1840-45 level of prior vacillating support/resistance since the turn of the year.
  • The spread between momentum growth and the SP 500 has reached extreme trendline support. This is a proxy for a growth vs value asset allocation gauge. The trend for growth has corrected sharply - the sharpest in nearly three years. The current year-and-a-half uptrend is under heavy pressure.  I expect support to hold given the severity of oversold growth stocks. Odds of a sharp snapback are higher. However, the damage done is harsh and opens the door to further declines post-bounce. That is not today's business (unless the primary uptrend fails to stem this move down).
  • China was weak overnight and sagged 237bps. The technicals remain long term bearish with a head and shoulders top over the past two years in play and a near term lower high this year. 
  • The dollar/yen carry trade has held near term support. The fact that it stopped its sharp move lower relieves equity pressure. The carry remains in a bear flag consolidation at its lows. A continuation of this pattern raises odds of another test of key support. The breathing room air remains thin. 
  • My system remains sidelined on long risk. It avoids short term bounces given its longer time constant calibration. In general, bear market rallies can have sharp to extremely sharp rallies but are abortive on the time constant. They lack follow-through - exactly what sustained bull markets provide. Yin/Yang.

*TM Thomas Vician CMT

Monday, April 14, 2014

Bounce

The SP 500 future groped for a bottom overnight and found one near term after dropping roughly 8 handles. It has now rallied nearly eight handles - yin/yang - as of this morning's pre-open writing. 

Tick showed some extremes last Thursday and on the Friday open hitting -1072 and -1172 respectively. TRIN showed nothing Thursday but hit 2.21 Friday for a "normal" bear spike. This raises odds of a short term pause from down as evidenced by this mornings initial bounce. Based on a 10 day exponential average of advances minus declines, the NASDAQ is twice as oversold as the NYSE and nearing some previous extreme levels. Rates, as I mention below, are at some key resistance levels. This favors bounce as well. Lastly, the NASDAQ is at its February lows  -  a natural point of support low.

Equity Sectors:

  • Clearly a defensive trade. Maybe too clear very short term given the negative percentage moves down.
 
  • The damage in the financial sector is eye-opening. It was only six sessions ago that the KBE broker ETF was 3% away from an intermediate term new high. Friday it broke and closed below its 200 day SMA. All the financial related sectors I follow have fallen to test long term logical support at the 200 day SMA. This is an obvious bounce level in a very oversold condition. But due note the damage that this wave down has produced. It is an obvious longer term momentum shift. The financial sector has gone from leader to laggard in less than two weeks.


Rates:
  • The Commitment of Traders Report shows extreme commercial long levels across 2's, 5's and 10's with the largest rate of change pickup at the short end. The absolute levels are at seven to eight year highs by the smart money professionals.
  •  The 2, 5, and 10yr futures are at key resistance highs after sharp moves straight up over the past seven sessions. This is a logical pause point given their overbought nature. If they break this resistance despite their overboughtness, it is a large safety tell. If they hold at current resistance, the consolidation remains bullish as price easily broke and remains above the 50 day SMA in all three contracts.
  • Junk paper technicals weaken:






Carry Trade
  • Dollar/yen shows support at 101.30/40 level that has stopped the carry trade's recent six day swoon. This remains a key level as I mentioned last week given the confluence of short and long term trendline support as well as the support lows from March.
 Commodities:
  •  Near term the major commodity indices/ETF trackers are double topping (DJP/GCC), but I note that the longer term momentum that launched them to current levels is strong.
 All Time New Highs:
  • Energy names dominate my left margin list. The XOI shows leadership as the baton passed from financials and the semiconductor index.
  • The earliest a Trend Change Day up window can open is Wednesday for the major averages. This is a gain of 1.2% or more on higher absolute volume and higher volume from the prior session. Until that trigger, rallies remain suspect and abortive as oversold bounces in an ongoing and evolving intermediate term downtrend.

Friday, April 11, 2014

Technicals and Market Deteriorate Together

A few days ago I mentioned that institutions were hiding in the large cap value names of the SP 500. The venerable index showed impressive relative strength compared to the Russell 2K, NASDAQ and Credit Suisse High Price Momentum Index. I suggested that the market would come after the Spoo too.
I continue to believe the market is going to go after this hiding space and that higher odds remain for a short term rotational shift to more intense SP 500 selling as the bearishness works its way through the system. 
So it has come to pass. The SP 500 failed at the 1868 level for a 61.8% retracement before collapsing into this further unfolding selloff.  Technical deterioration in the banks has intensified. The last lynchpin for bulls is getting surgically removed without Novocaine or Propofol.

This morning bellwether JPM reported earnings and clearly disappointed. JPM has dropped like a stone to its March low which coincides with long term support at its 200 day SMA. Just six trading days ago, it was in a bull flag consolidation preparing to "break out."  A clean slice below to support at 54 is a chip-shot given current volatility surrounding earnings.  Should that happen, next week's attempt at rebound -both in quality and magnitude - will be very important to analyze given JPM's financial bellwether status. The laggard Too Big Too Fail is C.

Technically, TRIN picked up markedly yesterday but not to extreme levels despite the drubbing. TICK plumbed slightly below -1150. This is sharp and sinus clearing, but the indicator can have multiple abyss forays before the market's purge completes itself. I mentioned a few days ago that neither TICK nor TRIN registered "take me out of the name" level selling pressure April 7 despite the prior Friday's sharp reversal lower. Now I have a higher expectation to see it near term. 

Internally, the NASDAQ McClellan Oscillator is more oversold than the NYSE's and it's summation index has fallen below zero (bearish longer term). The NYSE McClellan hasn't reached my first oversold level, though the open this morning "should" do it. Note that extreme selling spikes on the indicator go much lower.

How oversold are individual stocks on the SP 500? Not very. Here is a chart showing the percent of SP 500 stocks with RSI less than thirty in standard deviations. Note the prior spikes (even small ones) to the current blip.
 
 
The daily VXN volatility index for the NDX has broken above the 20 level for the third time in four days after whipsawing back down from this level. It made a new intraday and closing high yesterday. It punched and closed above the upper Bollinger Band. These technicals are very bullish for a volatility launch. Moreover, the weekly chart below shows vol creeping higher towards the highs of a very tightly compressed fifteen month trading range. That's is a fertile technical launch pad.




The CSFB Fear Barometer indicator - a measure of hedging with put collars - showed increased bullishness yesterday despite the selloff. It remains at extremely (contrarianly) bearish levels. These levels are inconsistent with prior bottoms. I read it as bullish intransigence. Typically, that ends with reverse portfolio peristalsis. 

 Below I provide a weekly technical chart of the SP 500 that reads clearly bearish. Because it's a weekly chart so it confirms after today's close.



Let's broaden our view with global macro machinations. The dollar/yen carry trade remains under heavy pressure given its large move over the past five trading sessions. It attempts to find support at its March lows. My comments below from yesterday still stand:

The dollar/yen carry trade undercut trendline support of its February/March lows overnight. It has since rebounded. This overnight low of 101.415 is a key level. A break sets the stage for a market that wants to test (and quickly) very long term support at the 100.75/101.10 level. A confluence of critical support rests here - the 200 day SMA, a trendline dating from early 2013, and intermediate term low from the beginning of February. Should that fail, it will send a strong bearish signal. The carry trade is a global macro leverage barometer. Selling in the space is a tradewind level, risk off headwind. It is an "out of left field" indicator for most equity traders/investors who fail to take heed of intermarket relationships. The carry is in play given its technical deterioration.
I notice the dollar index has become unglued. It is back at nearly two and a half year lows and key technical support. This has added bullish fuel to the upward momentum in the leading commodity space. As I mentioned yesterday, there seems to be an immovable force meeting an irresistible object between the inflationary implications of dollar/commodities and the Treasury/rate space  Commodity/dollar inflation - at least for now - seems to be offset for Treasuries by expectations of more QE Fed bid and a flight to quality/slowdown tailwind.  Momentum has slowed recently in both BLS Spot and Foodstuffs indicies - maybe a sign of economic slowdown shorter term. As for equities, all of it smells a bit stagflationary. High momentum growth stocks have acted extremely bearish.


Suffice it to say, the environment remains easy to lose on the long side. The market acts bearishly on bad news - a hallmark characteristic of down trending price action. All the major indices have broken key support trend lines. Growth stocks collapsed during March with relentless selling continuing in April. Leading stocks are called leading for a reason. They have been the pink elephant in the room. When my space collapses, it suggests odds of higher market risk. So here we are. Tactically, I continue to protect capital.  I brought short exposure up a little to 24%.

Thursday, April 10, 2014

Yesterday's Rally Shows Declining Volume into Logical Resistance

The market learned the Fed has a strong jawbone but weaker spine when it comes to slowing liquidity after yesterday's FOMC minutes read dovish from members pulling levers behind the curtain. 

Wednesday's rally had characteristics of a larger down trend in play for the weakest averages.  The surge in the NASDAQ and Russell 2K came on declining volume which was lighter than their respective 50 day averages as well. Both averages have rallied back into and under new-found resistance at their 50 day SMA's This comes after both deeply penetrated below this key intermediate term, technical support level. The NASDAQ and RUT 2K remain in defined down trends with a series of lower highs and lows in force. This is the logical place for stalling action to occur if more selling is to come.

The SP 500 remains the value-driven institutional hiding place for fully invested capital. The future found resistance at the 61.8% retracement of its recent selloff I showed yesterday and remains the relative leading index. This retracement level coincides with resistance at the 1868 handle.


As for market internals the total market McClellan Oscillator of changes in advances to declines has hit the neutral zero level. The market has worked off its oversold condition. 

The market's weekly net new highs shows clear negative divergence as the market's rally over the past three months. It shows underlying weakness developing with less new high leadership fueling the trend higher.


The most bullish indicator on my screen is the NYSE advance decline and A/D volume line. It remains bullishly convergent with the SP 500. When I look at a broader measure, the total market A/D and A/D volume lines, there is a clear negative divergence developing between a stronger A/D line and weaker volume (conviction) line. It's not necessarily today's business, but I bring it to your technical attention.

Leading and lagging sectors over the past week show classic defensive action during the sell off with cyclicals and financials lagging as utilities and consumer staples lead.



On the intermarket front, the benchmark 10 year Treasury future surged above its 50 day SMA yesterday in an impulsively bullish continuation move from last Friday's payrolls thrust off support at the 200 day SMA. Price currently is running into resistance at the down trend from the contracts' March highs. In light of the DJP commodity ETN's and the BLS Spot Index (economically sensitive industrual commodities) surging rallies, the lack of breakdown (and current upsurge) in the 10yr is impressive. I wonder who will blink?

The dollar/yen carry trade undercut trendline support of its February/March lows overnight. It has since rebounded. This overnight low of 101.415 is a key level. A break sets the stage for a market that wants to test (and quickly) very long term support at the 100.75/101.10 level. A confluence of critical support rests here - the 200 day SMA, a trendline dating from early 2013, and intermediate term low from the beginning of February. Should that fail, it will send a strong bearish signal. The carry trade is a global macro leverage barometer. Selling in the space is a tradewind level, risk off headwind. It is an "out of left field" indicator for most equity traders/investors who fail to take heed of intermarket relationships. The carry is in play given its technical deterioration.

Tomorrow is the first day the NASDAQ and Russell 2K can trigger a Trend Change Day up. This window opens Friday for the leading SP 500. Until this trigger, the potential for abortive, failed rallies remains high. I do note the strength in TTM, MGA, and MTDR. As I stated yesterday, I remain unexposed on the long side and 15% net short. So far we have a bargain hunting rally on lower and declining volume into logical resistance with defined down trends in place for the weakest market averages. The carry trade wildcard looks vulnerable once again as Treasuries surge. This defines a poor environment for the application of long growth risk to my book.

Wednesday, April 9, 2014

Bounce Attempt Day Two

The market is bouncing from an oversold condition near term. Longer term both the daily and weekly technical charts for the SP 500 read bearish on RSI and MACD. The weekly RSI for the SP 500 has a very long term support trendline coming into play (not there yet) as well as negative divergences with price over the past four months that are in play.

Short term I provide the intraday 55 minute SP 500 future chart below showing support and resistance/retracement levels. I make note of two very strong intraday thrust bars at the 1830/35 zone. The last one occurred yesterday, and the momentum has helped the contract work its way higher.


Yesterday I posted intraday on the large slide lower in the dollar/yen carry trade. It remains in a trading range, though yesterday's bearish belt hold candle leaves it vulnerable given the sharp momentum selling. This bears watching as a trade-wind level, looming headwind.

Tactically in equites, the earliest a Trend Change Day up can occur is Thursday for the NASDAQ and Friday for the SP 500. TCD ups -a 1.2% or greater move on the major averages on increasing relative volume from the prior session and absolute volume - tend to create a favorable market condition for general market up trend and growth stock outperformance.

Growth is certainly ripe to bounce, but there is a qualitative component as well - all time new high (and in general new high) leadership. There are a paltry few. This lack of leadership is problematic for a sustainable rally.

Until a TCD up triggers, risk remains high that the current rally is corrective and abortive in nature with the nascent down trend in force. Both the NASDAQ and RUT 2K have a clear series of lower highs and lows in place from their recent tops. Both have 50 day SMA that have flattened or are rolling over and the NASDAQ has broken a key longer term trendline. Cash remains king in this very sub-optimal environment for growth and my system.

Tuesday, April 8, 2014

Intraday Update: Dollar/Yen Under Heavy Pressure

I smell a whiff of global macro carry trade deleveraging wafting from the sharp move lower in the dollar/yen cross. Note the severity of today's collapse onto first trendline support after undercutting the 50 day SMA.

 

If the dollar can hold at the current level against the yen, odds favor it as a non-event. If today's negative momentum has legs, then global macro machinations are once again in play. This is an "out of left field" type event for an already vulnerable equity market should the carry trade's decline continue.




An Oversold Condition with Clear Technical Deterioration


Given the last two days of selling pressure, the market churned up technicals. Key trendlines have been broken, former lynchpin sectors have begun showing erosion, and growth stocks have been crushed to such a fast magnitude that many former leaders are at their 200 day SMA's. Volatility coils.
  • The NASDAQ broke a 10 month trendline. It took force of selling will to do it. Note the volume.
  • The Credit Suisse High Momentum Index itself broke a similar trendline and the spread between the CS Index and SP 500 has collapsed. Qualitatively, it feels climaxy and overdone. However, there is still room to fall to longer term trendline support.


  •  The SP 500 future has undergone a full breakout failure under very heavy volume. Price moved back under two levels of prior support that had been amazingly strong at stopping declines. Those level are 1868 and 1840/44. Given how utterly stubborn they were to resisting declines before, the market sliced through both breathlessly quickly. Hot knife meet butter easy. This is a change in character. Both are now resistance. I would be surprised to see the price touch the higher 1868 level. 
 
The venerable Spoo has been the relative leader in the majors and the institutional hiding place from the damage to growth/small caps. I suggest that those hiding may be exposed from a larger ebbing tide.
  •  I continue to believe the market is going to go after this hiding space and that higher odds remain for a short term rotational shift to more intense SP 500 selling as the bearishness works its way through the system.
  •  Note the BKX banking index has undergone its own breakout failure and series of near term lower highs and lows. Citigroup is the clear laggard. BAC is underperforming its peers and has sharply broken the 50 day SMA to its Jan/Feb chart support lows. Continued/worsening losses in the banks leaves bulls nowhere to hang their hat other than a very temporary oversold bounce.
  • The VIX is once again above its 50 day exponential average which is volatility bullish. It has room to move to prior highs at 18 and 20/21 given its current 15 handle. 
  • The NASDAQ VXN has really coiled on a weekly chart with very tight Bollenger Bands - compression prior to directional trend expansion. The key level is a break above 22.80-ish for a new and roughly 14 month high. Note this is a weekly chart and acts with more delay.
  • TICK, a measure of the net intraday up and down trades on the NYSE, has shown no selling spikes. TRIN, which measures advances to declines with the volume flowing into each, shows no selling spikes. I note these classic indicators fail to show capitulation. While there is no rule saying they must at a bottom, they frequently coincide as the market washes out selling pressure for a more sustainable low. 
  • The CSFB Fear Barometer actually rallied yesterday to extremely complacent (read bearish)  three year high level. This action is completely inconsistent with bottoms historically. It shows buy the dip complacency. Buying the dip works until you get to experience selling the collapse. Here is a description of the indicator:
The CSFB is an indicator specifically designed to measure investor sentiment, and the number represented by the index prices zero-premium collars that expire in three months. The collar is implemented by the selling of a three-month, 10 percent out-of-the-money SPX call option and using the proceeds to buy a three-month out-of-the-money SPX put option.  The premium on both sides will be equal, resulting in a term commonly known as a zero cost collar. The CSFB level represents how far out-of-the-money that SPX put option is, or in insurance terms it represents the deductible one would have to pay before the put kicks in.
  • Damage occurred to more all-time new high names in my left margin list with removals of GLOG, CAR, STZ and DAL.
  • Tactically, I remain slightly short with zero long side risk protecting capital.

Monday, April 7, 2014

Large Equity Distribution Session Friday

In the left margin, I culled the all time new high leadership list and updated the summary.

The market created a Trend Change Day up on April 1 (1.2% gain in NASDAQ/RUT2K on higher volume) while Dow Theory confirmed itself Thursday.  Friday's whipsaw lower did real damage to the broader equity picture. It came on  enormous volume across all the majors. Here is a weekly log chart of the NDX pre-open:


The selling in prior leading growth stocks has been relentless and something I have not seen in at least a year. Some have hit their 200 day SMAs from the intensity. This under the surface erosion remains problematic. They have been - far and away - the quickest and most profitable shorts in the market. On Friday, the leading semiconductor index created a large bearish belt hold candle lower mirroring the action in FSL and NXPI. The NDX VIX picked up steam and approaches a breakout at the 20 handle. Note the compression of the VIX on a weekly chart with tight Bollenger Bands. This suggests when the breakout occurs, it has higher odds a violent move.

Friday's action in the SP 500 future was a sharp breakout failure. Support lies at the key 1840-43 level then 1829/34 where the 50 day converges. Clear resistance lies at 1868. Despite the large losses, the SP 500 showed no TRIN spike or climactic volume selling - not even close. The VIX remains sluggish as well showing complacency with the hard drop Friday.

The venerable Spoo has been the relative leader in the majors and the institutional hiding place from the damage to growth/small caps. I suggest that those hiding may be exposed from a larger ebbing tide. Note the stalling BKX price action with nine day resistance at 72.80/73.08.

Tactically, my book is long flat and slightly short. I purged recent, very lightly positioned longs midday Friday as losses began to accelerate on the major averages with volume intensifying. When Trend Change Day up failures occur, it is an intraday trigger to protect capital. 

The earliest that a Trend Change Day up can occur for long risk is this Wednesday. I would be quite surprised to see one. When TCDs up fail so quickly (especially on huge volume), they tend to presage either very choppy sideways action (more of the prior three weeks) or new down trends that have legs. Either way is a poor risk reward for growth. My expectation is for the NDX's to work its way lower to target its prior low at 4000 given the internal damage to growth and its McClellan Oscillator's room to fall to past extremes.

Today is three weeks from the prior CBOE Skew spike. It takes three weeks incubation from my research for this spike to coincide with a market stall or fall. Friday was close enough.

I leave you with a nice piece from Ned Davis Research on equity downtrends. While there is no rule stating there must be a correction (-10% decline) in the major averages in any year, I note that it has been two years since the last  one. 
 According to Ned Davis Research, from January 1928 through April 2012, there were 294 instances where the S&P 500 corrected 5% or more.  Of those 294, the market dropped 10% or more 94 times.  And the market has dropped 20% or more 25 times.  So, there has been an average of 3.5 pullbacks of 5% or more each year.  And there have been corrections of 10% or more about once per year.  That gives a sense of what to expect in terms of the normal ebb and flow of the market. 

Friday, April 4, 2014

Friday Payrolls Update: Trend Change Day Up Failure for NDX/RUT 2K

The action in the NASDAQ and Russell 2K has negated the Trend Change Day up of April 1 - quite the delayed April Fools joke. Growth continues to undergo relentless selling.  It's a dangerous environment. Fast failures like this leave the market vulnerable to further declines. This is a system trigger for a full long side cash position. It's breathlessly easy to lose on long growth. Nascent leaders are failing quickly.

Here is an update of the CSFB High Price Momentum Index and the SP 500. Note the speed of this decline looks similar to the selloff of July 2011.


The SP 500 future is having problems maintaining 1868 support intraday. The McClellan Oscillator (NYSE) has just broken under the zero line. It has plenty of room to fall to oversold. Unlike prior declines, the point loss for the SP 500 is aggressive for the level of oscillator decline.

 The SOX is in process of failing in its rally. Intraday, price has made a belt hold candle down. It's big and likely raises odds of trend change. The BKX bank index is putting in a bearish engulfing candle today and has been repelled at clear resistance of 73.20. This level is a clear risk management stop for shorts and longs. There is nowhere to hide today. Note C and the trendline support shelf from which it precariously dangles.


TRIN remains within normal levels - no spike in selling pressure. Be careful. The current selling is sharp but clearly not climactic.


Treasuries have found a strong bid and rallied strongly from key support of the 200 day SMA for the 10yr. It remains below the 50 day SMA.

The carry trades are solidly in the red: USD/JPY and EUR/JPY.

Today's stock hammering, carry selling, and Treasury buying is a strong risk off trade. It's also a strong whipsaw from the macro trends coming into today's session. This whipsaw likely has legs lower.

Tactically, I have 14% short exposure and I am sidelined on the long side for a bit here. I need to see another Trend Change Day up occur before risking long capital. As I have mentioned in the past, not all TCD ups precede sustained rallies. Sometimes they fail. This is one of them. When they do, it is a clear warning.


Leading SP 500 Kneejerks Higher on Payrolls

Highlights:

  • Dow Theory confirmed this rally with new highs concurrently occurring in both the Transports (leading) and the Industrials. 
  • The Trend Change Days up in both the lagging NASDAQ NDX and Russell 2K remain intact. There still is no TCD up in the SP 500 which is the leading index. Interesting.
  • Payrolls will set tone and direction. Sometimes it takes until the close of the following session for volatility to shake itself out and the trend to tip its hand. The Employment Report carries weight and can start new trends for finish established ones. 
  • Prior all time new high growth leaders heavily lag the SP 500. Here is a chart showing the spread between the Credit Suisse High Price Momentum index and the SP 500. Down shows growth lagging and the SP 500 leading. Note the head and shoulders developing, a 10 month broken uptrend, and the March sell off ferocity in growth I've been mentioning.
 
  • Late stage market leadership continues to emerge
  •  So we have a pushme/pullyou between the Industrials/SP 500 and Tech/Small Cap. The latter are obviously weak with their lower highs put in place yesterday. Daily technicals on the QQQ have the MACD still on a sell signal but the trigger line has narrowed sharply to the MACD line. RSI is right at a key inflection point. Failure here reinforces a bearish range on the indicator. Weekly technicals show a strengthening MACD sell signal on the histogram while RSI has bounced at a previous low, points up, and remains well above 50 in bullish territory. On the monthly, MACD remains on a buy signal while RSI has tested a key long term support trendline. That long term support trendline is really important. It reads bullish and is a long term momentum positive. 
  • If these early post-release gains hold by the close for the NDX, it will create a fourth session above the 50 day SMA. A fourth day adds conviction to the 50 day as support for hesistant bulls. It squeezes shorts with a lack of downside breakdown.
  • Banks remain strong. The BKX holds tight. A break above 73.20, the high of the past eight sessions, will add a tailwind to a broader market rally. 
  • This weekend I will post some numbers showing that banks do well in a rising rate environment (eventually rates crimp). Strong banks and credit conditions support stocks. Banks are a leading indicator. The current sector leadership are late stage leaders. This is an interesting juxtaposition of sector strength.
  • My feel for the lagging Russell and NDX is that strength in the DJI, Transports, and SP 500 will drag them higher. The monthly RSI technicals above show an intact up channel with a current pause while the monthly RSI remains Very bullish.
  • Tactically, my book is roughly 40% exposed in leading all-time new high names that have rotated into favor. My position size has been half normal given the market bifurcation and last month's destruction of growth. We participate with more controlled risk.  Depending on price action in the lagging indices, I will normalize on their continued strength. I think there is a high chance that beat up growth can find a strong oversold bid given the strength in the leading indices.