Health of the Market
(6/16/2018)
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.
The
indicators for the longer term equity
market show an up market within a bull cycle (check
the Observations
tab for definition of cycle). The S&P 500 closed
-3.25% below the record close in January; +3.10% year-to-date. 69.5% of
S&P 500 stocks were above their
200-day exponential
moving averages, up from 69.0% the week before. 67.5% of
these stocks are above their 50-day EMAs, down from 72.0% the week
before.
[NC]
A Health Buy Alert
occurred on Friday 4/13. This is based on small-cap action. A VIX Buy Alert,
based on large-cap action, occurred on Friday 4/13 also. The insiders were bullish
(data from last Wednesday).
[NC] See the Income
tab for a discussion of the business cycle and the impact of credit
(interest rates). The
equity market tends to move on margin debt. See chart here.
[NC] A measure to determine if the
price is too high relative to the underlying earnings is the
Shiller price to earning ratio. This is the current price divided by
the 10-year average of "real" (inflation-adjusted) earnings. This
ratio corresponds quite well to the peaks of price as shown by charts on this site.
The market in the typical June
is good in the current year of the presidential cycle. The charts for the second
year of the presidential cycle compared to all years show
the second presidential year has had big drops in June. The Power
Zone,
the favorable time of the year, typically ends toward the end of
May. This year it has not ended yet. The end will occur when the Health
Sell Alert occurs. Access more data on the best six months here. The Bull
Cycle continues as the S&P 500 did not drop
below its
200-day SMA. The long-term BullHeal
System went to a buy on
9/27/2017. It will go to a sell when a Health Sell Alert occurs.
[NC]
Since December of 2016, the dollar ($USD) has decreased in
value with respect to a basket of other currencies as long-term
interest rates have gone down. Now the rates are going up, and the
10-year Treasury bond hit a peak of 3.12%. This is a level
not seen since July 2011. Recently the dollar has grown
stronger, which generally happens when interest rates rise.
The 10-year Treasury yield ($TNX
/10) and the inflation index is shown in this 5-year
chart with weekly closing prices.
[NC] But
the most important reason we will see higher yields is simple supply
and demand. The US will need to borrow $400B more in 2018 then it
did in 2017 through the sale of more Treasuries. At the same
time, the Fed will curtail its reinvestment in Treasuries and Mortgage
Bonds by an increasing and significant amount this year. They
will buy $252B less this year in Treasuries, at the same time that
$400B more supply will be issued. That's about $650B that will
need to be absorbed by the open market. ---
Barry Habib 2/27/2018
[NC] The driving force between currencies is the relationship
between global interest rates. The 10-Year Treasury yield remains
higher than other developed-country yields. One of the
side-effects of a weak dollar is that it tends to drive global funds
into foreign markets which has been the case recently. The falling
dollar, however, has had positive influences on the U.S. market as
well, especially large cap multinationals that derive nearly half of
their revenues from foreign markets.
[NC] The international bond market is provided
by the WSJ. See the Income tab for a chart of U.S.
Treasury yields.
[NC] The stock 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] 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]
The theory is that if the small-cap stocks do better
than the large-caps, it indicates that the traders are willing to
take on more risk and the market will go up. The chart shows the relative strength of the
Russell 2000 IWM with respect to the S&P 500 SPY. The
20/40-day EMA crossovers are marked by a pole. The U.S. Dollar
is also shown. Note that when the dollar goes up, small cap stocks do
better than large cap stocks -- and the relative strength chart goes up
to indicate this.
The
S&P 500 large-cap index broke out of a symmetrical compression
triangle. Typically the breakout is in the direction of
the previous move, which it did. The shaded area is the Bollinger
Band. A rise to the top of the band indicates a
very overbought market -- and it typically corrects down from here.
Volume on Friday was 62% above its 50-day MA, and a hammer candle
indicates a possible turn-around to a continuation of the up move. A
potential trade war was worrying the market on Friday. Retail sales
were up 0.83% (0.62% after inflation) and that was a good sign.
[NC] The
Russell 2000 small-cap index broke out of
the symmetrical triangle and has shot through the resistance of the
January
highs. It has been much stronger than
the large-cap S&P 500 index. Small capitalization companies are not
dependent on international trade, and thus money is being shifted from
the large-cap companies.
The technology-heavy Nasdaq composite
index has now made a new high. 69.9% of Nasdaq stocks are above
their
50-day moving averages (better than 69.4% last Friday) as shown in
the chart on the Status page. The fact that the number of new Nasdaq highs has failed to confirm the index high is concerning.
[NC] The S&P 500 exchange-traded fund
closing price 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 not on chart),
it might
be a better time to buy. A red dashed pole when
the MFI comes down from around 80 might be good time
to lock in some profit. A solid red pole when
MFI goes below 50 indicates selling might protect from a
downswing.
[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 Friday 4/13. No sell alert has occurred as the RSI stayed above 49. This buy alert is shown by the green pole. The small cap stock index is used here as small-caps have tended to lead the market both down and up -- but no so much lately!
[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 five 1/4 point rate increases, the
last three in March, June and December of 2017. Now
there is an expectation of three more in 2018. See more here. A chart of various
Treasury yields since 1962 are shown on the Income
tab.
Click here to go back to the top.
The source of the 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.