Health of the Market  (12/9/2017)

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]  There are basic investment rules all great investors follow:

  1. Sell positions that simply are not working. If they are not working in a strongly rising market, they will hurt you more when the market falls. Investment Rule: Cut losers short.
  2. Trim winning positions back to original portfolio weightings. This allows you to harvest profits but remain invested in positions that are working. Investment Rule: Let winners run.
  3. Retain cash raised from sales for opportunities to purchase investments later at a better price. Investment Rule: Sell High, Buy Low

The indicators for the longer term equity market show an up market within a bull cycle. The S&P 500 hit another record high last Friday. The momentum of the large-cap stocks is driving the market higher. 80.2% of S&P 500 stocks were above their 200-day exponential moving averages, down from 81.4% the week before. 78.6% of these stocks are above their 50-day EMAs, down from 80.6% the week before.

[NC]  Earnings drive the stock market, and the good GDP numbers reflect this. The second revision of third quarter GDP came in at 3.3%.

[NC]  The market in the typical month of December is usually very good, after a drop around the second week. The charts for the first year of the presidential cycle compared to all years show the Nasdaq lags behind the other markets. We are 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 buy on 9/27/2017. The equity market tends to move on margin debtSee chart here.

Health Buy Alert occurred on Tuesday 11/21. This is based on small-cap action. A VIX Buy Alert, based on large-cap action, occurred on Tuesday 11/21. The insiders were bullish (data from last Wednesday). The insiders have jumped to bearish for one or two days about seven times this year. Then its back to bullish or neural. 

[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 ($USD) has decreased in value with respect to a basket of other currencies as long-term interest rates have gone down. The 10-year Treasury yield ($TNX /10) and the price of oil ($WTIC) is also shown in this 4-year chart with weekly closing prices. 

[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 this year. 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 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 with respect to the S&P 500 SPY. The 20/50-day EMA crossovers are marked by a pole. 

The S&P 500 large-cap index, represented by the SPY exchange-traded fund (ETF) in the chart, is still strong. The ETF is up 10.4% in the five months since 7/6/2017 shown below. The Dow Jones Industrials was up 13.5% during that time. 

The Russell 2000 small-cap index, represented by the IWM ETF in the chart, broke above the resistance level shown on 11/21, and this level is now acting as support. It is up 8.8% during the time shown. The purple support zone has held since December 2016.

The technology-heavy Nasdaq composite index is represented by its 100 largest stocks in QQQ. This ETF is up 13.5% since 7/6/2017 as shown. 50.3% of Nasdaq stocks are now above their 50-day moving averages.

[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 Tuesday 11/21. This buy alert is shown by the green pole. The small cap stocks tend to lead the market.  

[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.