Health of the Market  (7/22/2017)

The charts will be updated by every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or to go to the Charlottesville Senior Center Investors' Forum. Note: To get tabs to other pages, Javascript (not Java) must be enabled for this site.

[NC]  Some say the stock market is overvalued. This table shows fundamental data for the S&P 500 and its sectors. This from the Real Investment Report by Lance Roberts. The Price/Earnings Ratio shown is the trailing twelve-month ratio. The CAPE (Cyclically Adjusted Price Earnings Ratio) is calculated over 10 years and has been a better predictor of the stock market valuation. An article on this can be found here.

[NC]  "Bear markets come when we have a recession" stated Brad McMillan, chief investment officer at Commonwealth Financial Network. "That means focusing on news related to earnings, interest rate decisions and the health of Main Street workers." 

The indicators for the longer term equity market show a strong up market. On Friday all major indexes hit record highs, and 77.0% of S&P 500 stocks were above their 200-day exponential moving averages, up from 74.0% the week before. 73.0% of these stocks are above their 50-day EMAs, up from 70.2% the week before.  

[NC]  The market in the typical month of July is usually good until the second half, and during the first year of the Presidential Cycle positive for the whole month. The charts for the first year of the presidential cycle compared to all years show this. We are no longer in the Power Zone, the favorable time of the year. Access more data on the best six months here. A Bull Equity Cycle was confirmed as of 3/18/2016. The long-term BullHeal System went to a SELL on 5/19/2017. 

Health Buy Alert occurred on Wednesday 5/24 after a week on a sell alert. This is based on small-cap action. A VIX Buy Alert, based on large-cap action, occurred on Wednesday 5/24, based on a new method to determine this. The insiders went extremely bearish (data from last Wednesday). The equity market tends to move on margin debtSee chart here.

[NC]  Sector investing via exchange traded funds (ETFs) is popular. The traders rotate between sectors. To see how some popular sector ETFs are doing, click here for the Candle Glance

[NC]  Since December of 2016, the dollar ($USD) has dropped as long-term rates have gone down. The driving force between currencies is the relationship between global interest rates. The 10-Year Treasury yield remains higher than other developed-country yields. The problem is that the difference between them is narrowing. The 10-year Treasury yield ($TNX /10) is shown with the price of oil ($WTIC). The 2017 low on the yield of the benchmark U.S. 10-year Treasury note was on June 26 when it was 2.135%.

[NC]  The international bond market is provided by the WSJ. See the Income tab for a chart of U.S. Treasury yields.

[NC]  The markets in other countries are quite well correlated to the U.S. market. To participate in these markets, the U.S. dollar can be hedged out, however, this has not been productive as the dollar has been dropping. Click to check out the country hedged ETFs and the un-hedged ETFs.

[NC]  If the small-cap stocks do better than the large-caps, it indicates that the traders are willing to take on more risk. The chart shows the relative strength of the Russell 2000 IWM vs the S&P 500 SPY. The 20/50-day EMA crossovers are marked by a pole. Watch this video to see how small caps may impact the market in 2017.

The S&P 500 large-cap index, represented by the SPY exchange-traded fund (ETF) in the chart, had been in a 1.9% range for the seven weeks, and then it broke out to a record high based on Janet Yellen's implication that the easy money policy will continue. The ETF is up 5.6% in the five months since 2/14/2017 shown below. It is up 10.5% year-to-date. The Dow Jones Industrials is up 5.1% during the five months. 

The Russell 2000 small-cap index, represented by the IWM ETF in the chart, is up 2.7% during the time shown. It broke through the resistance of its previous highs. The strong support zone in purple has been holding since December 2016 and the index is above its 50-day MA. This consolidation should be a base for another advance. 

The technology-heavy Nasdaq composite index is represented by its 100 largest stocks in QQQ. The traders (trading programs) are now buying tech stocks and selling financials -- although not so much last week. The QQQ is up 12.1% since 2/14/2017 as shown.

[NC]  The S&P 500 is shown with its Bollinger Bands below. When the price goes above or near the upper Bollinger Band a downswing in price is likely as the market is overbought. Similarly, when the price goes below the lower band, an upswing is likely.

[NC]  Also shown is the 21-day Money Flow Index. This is an oscillator that uses both price and volume to measure buying and selling pressure. It is similar to a volume-weighted version of RSI. A green pole is marked when the MFI moves above 50 indicating a good time to buy. If the MFI hits the oversold level at 20 (green dashed pole), it might be a better time to buy. A solid red pole when MFI goes below 50 indicates selling might protect from a downswing. A red dashed pole when the MFI goes near 80 might be good time to lock in profit. 

Health Alert

[NC]  Below is the Russell 2000 small-cap index that tends to lead the overall market both up and down -- as the small-cap stocks are generally more risky than large cap stocks. This index is shown with high-low-close bars. It's 50 and 200-day simple moving averages are included. The 200-day moving average often acts as support or resistance to price movement as many traders watch it.   

[NC]  The Health Alert is based on the momentum of the small-cap Russell 2000 index, the Nasdaq breadth data, and the Nasdaq 52-week new highs and new lows. The thresholds are described below.  The green buy and red sell 'alert' poles on the chart show when these alerts have occurred.

[NC]  A Health Buy Alert occurred on Wednesday 5/24, only a week after the sell alert caused by the 2.7% drop on Wednesday 5/17. This buy alert is shown by the green pole. The small cap stocks tend to lead the market. They did pretty well in June, but they are not typically favored in July.  

[NC]  The second pane is the Relative Strength Indicator (RSI) for the Russell index, a measure of momentum of the market. This is the relative strength of the Russell 2000 itself -- it's not relative to any other index. Above 50 shows positive momentum over the last 21 days. The latest plot can be seen by clicking here. The green arrows indicate a positive change in momentum as the RSI crosses above 50; red arrows indicate downward momentum when the RSI crosses 49. The threshold of 49 is used to give a more definite indication of the start of a down-swing.  

[NC]  The third pane is the Nasdaq McClellan Summation Index, $NASI, (red) and it's 5-day exponential MA (blue). This is a running sum of the difference of two moving averages of the number of advancing issues minus the number of declining issues. A 19-day and a 39-day exponential moving average (EMA) are used. This shows whether a market move is broad based. As the trend changes, the red index will cross the blue EMA and an arrow will be drawn. This indicator must be consistent with the RSI before an alert pole is drawn on the price chart. When this index is below the 5-day EMA, and a 'sell alert' has not occurred, this is a warning not to purchase new positions, but to HOLD those that were bought earlier on the 'buy alert'.

[NC]  Dr. Alexander Elder in his book Trading for a Living says that the 52-week New Highs minus New Lows Index is "probably the best leading indicator of the stock market". This display for the Nasdaq market shows the this index in pink. The 3-day MA of the NH-NL index is shown in blue. A green arrow is placed if the 3-day MA of the NH-NL index goes positive for three consecutive days, or a red arrow is placed if the MA goes negative for three consecutive days. To see a summation of the NH-NL numbers, click here. When a green buy arrow is put on the price chart, it indicates a Health 'buy alert', if the other indicators concur. The red sell arrows here are not used in the determination to place a sell pole on the price chart, due to the lag.

[NC]  The Health Alert acts as a confirmation and does not do well as a stand-alone signal for buying and selling. After a long trend, it works well to signal the end of the trend.

Long-Term Overview

[NC]  This chart gives an overview of the situation. The market had done well since the termination of the QE3 Fed bond buying, until the last half of 2015. The 10-year Treasury rates moved down even when the Fed raised the over-night Federal Funds Rate in December 2015. There have been four 1/4 point rate increases, the last two in March and June of 2017. Now there is an expectation of another this year. See more here. A chart of various Treasurys yields since 1962 are shown on the Income tab.

AmiBroker software with Yahoo data is used for the charts with black background. The source of the other charts is located on the upper right of the chart. This page is for amusement only, and should not be taken as advice to buy or sell anything.