|
Stock Market Success Begins With Knowing the Trend
Comment, May 12, 2012: The AFG Stock Index Average, our trend benchmark and proxy for the stock market, lost 0.7% for the week ending May 11. That’s four losses in six weeks, for a total of -3.9%. The off-peak damage, (the peak being the March 26 close as reflected in the Equity Markets Index in tab 9), is -4.98%. Over half of the price attrition (-3.1%) occurred in the last two weeks. May ushers in the fallow season for the stock market. Stocks fell 1.7% for the same period last year. In 2010 is was -2.6%. Since 1950, May is the fourth worst performing month for the S&P 500, with an average gain of around 0.3%.If history in any guide market losses in May are neither surprising nor steep. But history – while providing perspective – tells us very little about the here and now. Technical analysis can aid us in determining where we are in the market cycle, regardless of historical factors, or “seasonality”. Technical trends are operative in all seasons. They are not mysterious. Daily market activity generates precisely the information we need to make stock market decisions appropriate for our individual risk tolerance. That said, current conditions look worse than last year. Since we’re in the mood for annual comparisons, we find that, for example, Market Score, (tab 7) is at 14 – out of a possible 50 – compared to a score of 30 last year. Back then, the Down-Trend Watch grid, posted at the top of this page, had only a single negative signal. As of last Friday we have four. This year we have both Long-Term charts, (tabs 1 and 8) in B-7 patterns compared to “A” patterns in 2011. A “B” pattern has a least one moving average below the zero line – an indication of stalling market gains. As regular readers know, if the 100-day MA joins the 50-day in negative territory an automatic unfavorable rating is triggered. Like last year, the Equity High-Close Index, (4) is unfavorable for trend. In 2011, by the time May rolled around, the signal was several months off of the previous market peak. Then, it proved to be a very reliable warning of the steep correction that ensued from August through September. This year, Risk Tolerance, (10) is similarly unfavorable, although it is a full 49 points lower than last year and 16 points below the mean. Likewise, the 52-Week New Hi-New Low signal, (3) reads negative for trend, but is in worse shape than the 2011 comparison. It’s a full 145 points below the year ago level. We could go on, but, after all, it’s Mother’s Day and mothers require attention. Sometimes lots of it. The take-home point is that market action in early May of 2011 was showing typical seasonal weakness on a scale that was superior to current conditions. After the first two weeks in May the market gave up 6.3% through the end of July. That was just the warm-up. In Sept. and Oct. the stock market swooned another 14.3%.Will history offer a repeat of the summer and fall of 2011? We think not. This year – we are quite certain – things will be different. Not better, mind you … Just different.Have a good week! Comment, May 6, 2012: The trend benchmark fell 3.1% for the week ending May 4; that’s the most significant five-day loss in six months. Monday was April’s swan song - and a weak one at that. For the month the AFG Index Average logged the first negative return, (-0.8%) since Sept. of last year. Tuesday and Wednesday recorded slight gains in the 0.2% range. Wednesday was, in fact, mixed, with the blue-chip indexes actually posting a tiny loss. Small and mid-caps managed to yank it into the plus column with a +0.4% return. Thursday and Friday undid all of the earlier progress – and then some. Both days involved distribution, defined as significant price attrition combined with higher day-over-day and average volume. One isolated distribution day might peak our interest a bit. This year, apart from last week, there were two such occurrences: one in April, and another in March). Two distributions in a row, however, calls for added attention. The investor would be wise to hold off on additional equity buys (especially growth stocks); perhaps take some profits, if any, and strictly enforce stop-loss rules. What you don’t do is hit the Panic Button. Let the stock market trend reveal itself through technical changes in our Trend-View signals. Read the daily comments and regularly check out the Down-Trend Watch grid above. The presence of a pair of distribution days, by itself, signifies nothing. The last time we saw two consecutive days of serious high-volume selling was in mid-December. That event – contrary to summoning Armageddon – ushered in a three-month market gain of more than 13%. So much for the prognostic value of distribution. Thursday’s selloff provided no evidence of panic among institutional money-managers; block trades, for instance, were only slightly higher than normal. Investment advisors, according to the latest survey, are moderately bullish at 43%, with a bull-bear spread slightly above the mean at +22.6. That’s well below the tremor-inducing threshold value of +40. Recall that the investment advisors survey is a contrarian signal. Advisors, collectively, are often wrong at major turning points in the stock market. Currently, there is no evidence that they’re overly bullish.In our opinion, the primary reason for last week’s market nervousness was due to seasonal effects; (stocks typically decline in the months from May through October). The negative seasonal bias makes traders more attentive to negative economic news. They over-react; market consolidations regress into market corrections and stocks trend downward in response to self-perpetuating ‘expectations.” Friday’s jobs report is a case in point. Investors have known for months that much, (not all) of the improving employment numbers are an artifact of a contracting labor force. The headline unemployment rate drops in lockstep with a decline in the number of people actively looking for a job. NOT because jobs are plentiful and easy to obtain. But the market didn’t effectively notice this until last week. Likewise, the EU nations – and the UK – have been struggling with near-recession conditions since last fall. Only now are US investors starting to take note. Our advice is to forget about “reasons and expectations.” Listen only to what the market is telling you through daily price movements as reflected in our technical signals. The “whys and wherefores” are not required. Have a good week!Comment, April 29, 2012: Stocks began the week on a negative note, sliding over one-percent on an overdose of euro-angst. That was the extent the market’s consolidation effort; The remainder of the week consisted of highly constructive technical action, including an accumulation day (Wednesday) that offered a nice price jump on better-than average volume. For the final full week of April the AFG Stock Index Average rose 2.2%, the strongest weekly gain since early February. Market internals – using the Trend-View charts as a guide – are substantially improved over the previous week. For example, the long-term signals, (tabs 1 and 8) are both back in A-2 patterns after repairing some significant weakness in the Small & Mid-Cap Index. Typically, this group takes the initial brunt of the damage during market contractions. In fact, the economically sensitive 200-day MA (8) fell below the zero line on Monday. It has since recovered. Prolonged excursions of three or four weeks in negative territory often indicate recessionary prerequisites. Elsewhere in the Trend-View lineup, the AFG Market Range, (2) returned to favorable with three steadily rising numbers in as many days. Our measure of stocks making new annual highs compared to new lows, (3) has crossed over the downward sloping short moving average after recording a single day beneath the zero mark on April 18. The Hi-Low is demonstrating a near-vertical assent in response to this week’s price action. It is approaching a theoretical area of resistance anticipated by a down-ward sloping regression line extending from Feb. through early April. There’s nothing theoretical about the improvement in the breadth indicators, (5 and 6). Although both are technically unfavorable for trend, they have sharply ascended from below-the-line (zero) territory. The Stocks A-D indicator has even breached the downward-sloping 19-day MA. Equity Markets Index, (9) returned to favorable on the same day that the market was celebrating AAPL’s blockbuster earnings report. It’s a mere three ticks away from overhead resistance at the 61-mark. The Equity High-Close Index, (4), and Current Market Score, (7), though still unfavorable, have improved markedly in recent days, while Risk Track, (10) has made a “V” shaped rebound off the neutral line. Last week’s stock market illustrates why we incorporate long-term signals into our Down-Trend Watch group, (see above). Without those, we would have been prematurely compelled to announce a new down-trend during the week of April 16. Our opinion is that without real evidence of longer-term deterioration in stock prices, (on the order of fifty to one-hundred days), investors are best served by being at least partially committed to growth stocks in a manner consistent with their risk tolerance. As a reminder, Tuesday ushers in the market’s fallow season, traditionally the months between April and November. If history is any guide, we can look forward to a market that personifies the proverbial “Bachelor Uncle”, (i.e., irritable and stingy).Have a good week!Comment, April 22, 2012: For the first time in three weeks the stock market managed to cobble together a gain, (+0.8%). Equities reached a long-term top on March 26. Over the next 18 sessions through Friday the six major stock indexes have lost, on average, 3.4%.That’s hardly a speed bump considering the thirty-percent price surge since October. What we’ve been witnessing up to this point are the beginnings of a period of consolidation, which is associated with low volume, mild profit-taking and a general sense of indecision, or caution, among active traders. In a consolidation traders suffer a loss of confidence in the ability of the market to regularly establish new, higher, price thresholds. The attitude shifts from ‘gung-ho’ to ‘wait and see.’ The lack of confidence is apparent in all of the Trend-View indicators which, for the moment, are carrying a favorable/unfavorable ratio of 3 to 7. The High-Close Index, (tab 4) offers a crystal-clear perspective on how the optimism present since late Oct. has eroded dramatically since late March. As regular readers know, the tab 4 chart is a representation of the difference between the stock index highs and index closing prices. The index value is computed daily, becoming the latest data point in a slow moving average. As with all MAs, the last value in the series is dropped. After an unrelenting six-month climb the High-Close simply ran out of gas, falling into the unfavorable category on April 10. Market players no longer see ever-higher stock prices as a foregone conclusion. Another probe into investor psychology is provided by the Risk Tolerance indicator, (10). The Risk Track uses a broad array of short-term price inputs from the AFG Stock Index Average, combined with sentiment indicators. We think of it as a sort of market “mood ring.” Risk tolerance, (i.e., the willingness of equity investors to assume non-diversifiable risk) peaked in mid-February, declined steadily from there until April 9, then fell abruptly to current levels around the zero line. Interestingly, the aforementioned market top occurred as investors were signaling a significantly lower level of risk tolerance. [The recent RiskTrack peak was +113.0 on Feb. 8. The RiskTrack value at the market peak, March 26, was +72.5. That’s a 36% drop in risk tolerance over a period of about six weeks just as the stock market was achieving new heights! A nasty omen, but, still, a short-term one.] From here, it becomes a question of whether or not the current consolidation of stock prices regresses into a full-blown correction which, historically, rakes about 8% or more off market tops. We will be keeping a wary eye on the Equity Markets Index (9). We see support at the 59 level; a violation of which would open the hatchway to correction territory. Have a good week!Comment, April 15, 2012: Domestic equities sustained a second weekly loss of -2.1%. The past six weeks have been evenly split between loses and gains as the stock market treads sideways. April, so far, is another story; the AFG Stock Index value is off-3.1%.We’ve referred to April as a transition month that bridges the “good” investment season, (November through April) with the “bad” season, (May through October). Usually, the ‘transitioning’ begins in the final half of April, or the first two weeks in May. This year, summer came early. Dates for market seasons are only rough guidelines. Cyclical uptrends, (i.e., the tradable type that can be identified through technical analysis) can be identified with pinpoint precision only in hindsight. We can be, for example, completely certain that the latest cycle began on Oct. 4, ’11 and ended on March 26. The resulting trough-to-top rate-of-change was a massive 30.2%.For a good place to spot where the market is in the current cycle use the Current Market Score (tab 7). We define the entire cycle range as containing values between 0 and 50. A 41-day moving average of daily Score numbers etches out the cycle progress. On Oct. 4 the 41-day MA hit 5.5, the lowest value since December 9 of 2008. That was, you recall, three months before the absolute bottom of the last secular bear market. (Remember: you’re trading the cyclical arm of an upswing, selling as close to the top as possible. You ignore the broad, secular market trend which can span years or decades). NEVER passively buy and hold stocks. Stock traders with a bent for speculation and a high risk tolerance can profit from investing at low points marked by the Market Score’s 41-day MA. As a practical matter, the 41-day never hits absolute zero, and most ultra-low troughs are between 4 – 10. Of course, many troughs are higher, thus increasing ambiguity. That’s why we prefer to rely on a consensus among Trend-View signals before committing money to the market. Have a good week!Comment, April 8, 2012: Random musings on an Easter weekend: The Down-Trend Watch group of Trend-View indicators is unchanged from last week. The only differences are qualitative. For example, the New Hi-New Low signal, (3) has declined to a one-month low point. It made a long-term high in early Feb., became unfavorable for trend on March 5., and has since endured an ongoing, but moderate, decline. The AFG Current Market Score, (7) has been in the trend-unfriendly column for eight consecutive days and now sits six points below the make-or-break 41-day moving average. The moving average itself peaked at a near eight-year high of 46 on March 22, virtually assuring that daily values will fall under the MA, triggering an unfavorable designation. Thursday’s reading was a still-strong 38 (out of a possible 50). Although the Market Score has deemed that the current stock market cycle has topped-out, strong, lower-than-average values could persist for weeks, or months. The Investor Risk Tolerance indicator, (10) is another hair-trigger signal which depends upon daily changes relative to the previous day. We like to see long stretches of higher daily numbers and, of course, positive numbers. As we mentioned in the Risk Track’s last update, (April 4): “The Investor Risk Tolerance indicator … slid back into the favorable column yesterday [April 3] in response to [Monday’s] late buying spree. But the last time the Risk signal sustained a multi-week up-trend was back in Feb.” Some forebodings: We’re concerned with the technical weakness apparent in the High-Close Index, (4) which has slipped to mid-way between its two moving averages. The signal has led the market higher since October. Current readings could be deemed a “change in character.” And, April is a transition month where stocks often give early warnings of the impending “bad investing season” that extends from May through October. Case in point: In each of the previous two years the stock market lost an average of -15.9% during the period from May 1 to August 20. By contrast, the same interval in 2009 saw a gain of roughly the same amount. But, in ’09, of course, we were rebounding off the enormous lows created by the Great Sub-Prime Meltdown of 2007 – 2008. Have a good week!Comment, April 1, 2012: The US equities market ended the first quarter with a 12% gain compared to +7.0% for the same period last year. The last time the major stock indexes lost money in Q1 was 2009. End-of-Quarter summaries are as good a time as any for a brief history lesson. As the saying goes, “That which makes you wiser makes you stronger” – with the added benefit of prolonging your REM sleep. Mid-March of ’09 represented the absolute trough in the Sub-Prime Financial Meltdown of ’07 –‘ 08. From mid-May of ’08 through March 9, 2009 the S&P 500 had 53% shaved off its index value. Now, because investment math is insidious and often counter-intuitive, a loss in the stock market requires higher gains in order to reach equilibrium. Specifically, in order to make whole a loss of 53% an investor requires a gain of more than twice the percentage of the loss! In this case, the required gain comes to a monumental 110.9%. If you’re thinking that that is impossible to accomplish in a single lifetime, you would be wrong. In fact, we’ve already nearly done it – and in less time than it takes to pay off a new car. Let’s continue the narrative: If that period mentioned in paragraph 3 represented Stock Market Hell, the last half of March ‘09 represented the beginnings of The Great Ascension. The data clearly indicate that recovery from the Financial Meltdown began on March 10, ’09. Our Trend-View signal, (which had been persistently negative since August 2007), went favorable on April 9, 2009. Using, again, the S&P 500 as a market proxy we have, as of Friday, a 108.2% gain in the index value; (676.53 vs. 1408.47). In other words, the stock market – using the S&P as the benchmark – has recouped all but 2.7% of the loss suffered from the most recent cyclical bear. That represents the view of those who use the S&P 500 as a de-facto benchmark. On this site we use the more comprehensive AFG Stock Index Average, which averages the daily percent changes among six major stock indexes. The recovery-to-date return, using our benchmark, is 94.3%. [Side note: stock-market-decisions concentrates on market cycles within the broad up-trend, with the primary goal of preserving capital during a down-trend. There have been no less than nine of these cyclical trend reversals since the secular bull began in March, ’09. The net gain from our trend-following system is +66.3%. History rarely repeats itself; past performance is indicative of … past performance].The foregoing comprises the “Glass is half-full” exposition. Another way to view the period from March, ’09 through March, ’12 is to refer to it as a (still incomplete) recovery. This is where the Jedi Mind Trick transforms the glass into “half-empty.” Think about it. From May of 2008 to April 1, 2012, a period of 46 months, the US stock market has done nothing but reclaim losses that, in our view, could have easily been avoided. Have a good week!Comment, March 25, 2012: The stock market pulled ahead twice last week for a total 1.1 points, but lost ground Tuesday through Thursday leaving investors with a net 0.4% (rounded) loss. That’s only the third loss in the twelve weeks year-to-date. Meanwhile, the AFG Stock Index Average – our trend proxy – had advanced +11.5% since Jan. 3 with virtually no meaningful correction. The three blue chip indexes backed off multi-year highs. The Dow and the S&P 500 are both at levels last seen in April – May of 2008. The Nasdaq is roughly where it was in Nov. 2000 at the early bursting stage of the dot-com bubble. The Nasdaq’s out-sized performance is due to its 100 large-capitalization stocks, which reads like a who’s-who of name brand medical and technology companies. Of the 100, Apple has done the heavy lifting with a cap-weighting of half a trillion and a Y-T-D performance of 45%.The small and mid-cap components of the trend benchmark (the Russell 2000, S&P 600 and S&P 400) are slightly under peaks set in the spring of 2011. As stated, there has been no genuine market correction since the October trough. Yet, judging by the increase in negative signals contained in the Down-Trend Watch grid, (above) there may be some pressure building. For instance, the 52-Week New Hi-New Low signal, (3) has been unfavorable, that is, unable to break above both moving averages for 15 consecutive days. Last week, the average daily spread, (the difference between new highs and new lows) was 136, the second-lowest point in 12 weeks. That’s certainly not a trend killer, but it does speak of market fatigue. It’s important to recall that ANY number above zero indicates price expansion. Fatigue, (of sorts), can be seen in the Current Market Score (tab 7), which, because of its construction, has the 41-day moving average ‘pinching’ the daily value. That’s a situation that can occur only when the average approaches the top end of the scale. The Score is saying, rightly or wrongly, that the stock market has maxed-out; there are only two directions available: sideways or down. Here’s some quick stats on the Market Score: Its eight-year average is 27, while the current value is 45. The mode, (i.e., the most frequently observed daily number) is 31. The top score of 50 has been witnessed only 14 times in the last 2,000 market sessions. Values of 45 or greater represent less than 10-percent of all values, meaning that that number operates as a ‘threshold’. Thresholds, as regular readers know, foreshadow impending reversion to the mean. In the case of the Market Score history has shown that threshold values can be maintained for many weeks. But sometimes not. The last peak in late 2010 lasted until late February before the market finally began losing steam. Most of the time the peaks are shorter, and note that the average value never goes all the way to 50. The bottom line: as we approach the final month of the “easy season” for growth stock investment, we have some evidence that the market itself is undergoing structural changes typical of the late-stage secular up-trend. Have a good week!Comment, March 18, 2012: The stock market ended the second full week of March constructively, despite three days of fractional losses totaling -0.6%. The counterweight was two days' worth of advances totaling +2.7%. The result is a gain in the AFG Stock Index Average (the trend benchmark), of +2.0%, (rounded). The icing on the cake was Tuesday’s action, where we observed the first true accumulation day since February 3. As long-time readers know, accumulation in the stock market means a significant benchmark gain associated with high volume. Financial exchanges exist primarily to grease the skids of big players like mutual and pension funds. The ‘retail trade,’ (i.e., you and me), serve as high-margin surplus capacity. (When was the last time your on-line brokerage offered you a 30% discount off the ‘ask’ price when you purchased 10 shares of AAPL?) Institutions deal in “block trades” of 10,000 shares or more. Tuesday’s accumulation statistics included a 47% surge in exchange-processed blocks; a huge day-over-day increase.This means that – despite historically low average volume – institutions, (a.k.a. the ‘smart money’) are active, even dominant, participants in the current up-trend. (The Smart Money designation is, more-or-less, honorific; there is no evidence that institutional portfolio managers consistently achieve better investment results than a monkey throwing darts at the Wall Street Journal. In fact, there’s lots of evidence demonstrating the opposite!)For the average retail investor it is infinitely better to have the big players with you as opposed to against you. That’s essentially the entire logic behind volume breadth analysis.Let’s quickly review where the stock market stands as of Friday:Tab 1. The AFG Big Cap Long-Term Index is in the A-1 pattern, the best possible. The 50MA has approached, or hit – and retreated from – the upper threshold line four times since late October. The current level suggests high confidence in stocks and the ever-present threat of self-limiting bouts of profit-taking. Tab 3. The 52-Week New High-Low is 93 points above is long-term mean and 350 points below the threshold. Currently, it’s below both moving averages, making it the only unfavorable signal in the Down-Trend Watch group. Daily values have been steadily inching up. Tab 4. The Equity High-Close Index is at a 12-month high, with widely-spaced fast and slow moving averages, indicating the extremely positive mindset of traders. Tab 7. The AFG Current Market Score has spent 42 days above its moving average, and is steadily flirting with the max-out level of 50. A glance at the chart shows that the MA is at the peak of previous market cycles. As secular bull-markets cycles go, this one is already pretty long in the tooth. Tab 8. The AFG Small/Mid Cap Long-Term Index is solidly entrenched in the A-1 pattern, nearly identical to tab 1, but with higher values indicating relative out-performance compared to its Big-Cap cohort. Tab 10. Investor Risk Tolerance is 28 points above the long-term mean and 157 points below the threshold value indicating complete absence of ‘panic-buying’. After a rocky month where the signal was mostly pointing down it is, for the moment, favorable. And, it’s ‘above-zero’ status shows that investors are quite comfortable with acquiring and keeping growth stocks in anticipation of higher prices. Have a good week!Comment, March 11, 2012: The US stock market resumed its sideways pace last week. The Stock Index Average rose +0.8% after Wednesday-through-Friday wins edged out the damage done on Monday and Tuesday. In fact, Tuesday was a full-blown distribution day. The distribution, defined as a significant price drop associated with a volume spike, was a year-to-date first. The last time we saw a distribution event was in mid-December, when the market sustained two back-to-back selloffs. Far from heralding the Doom usually associated with distribution, the event proved to be the catapult that launched the stock market higher by seven-percent over the following month. It also led to changes in the method by which we identify a new down-trend, (see chart above). The addition of the Equity High-Close Index (tab 4) will give us an insight into (averaged) intraday bidding activity. Distribution, (or accumulation, for that matter), doesn’t figure quantitatively into market signals. Yet, the presence or absence of distribution can sometimes provide useful, albeit anecdotal, information concerning the secular trend. For example, consider the period from May 2, 2008 – Sept. 2, 2008, during which the market lost -4.3%. This interval comprised the final run up to the Great Financial Meltdown of ’07 – ’08. From Sept. 3 through the end of 2008 stocks lost a massive -29.0%.Were there warning signs? Yes; foremost among them was our down-trend call on Aug. 8, 2007, which kept us entirely out of growth stocks until April of ’09. (We weren’t in the web publishing business then, so we kept the information to ourselves). But, simply keeping track of distribution during the summer before the Crash would have given us a foretaste of what was to come. In the four months prior to Sept. 2. there were 14 distribution days, each with an average loss of -2.0%, (rounded). During the same period there were 10 accumulation days, with an average gain of +1.8%. So, the summer saw more days of high-volume selling and greater price attrition compared to days of high-volume buying. Forewarned. Forearmed. All it takes is a computer, a spreadsheet, the internet. Add a little patience – and attention to detail, and you’ve got what it takes to see the storm clouds before the market makes a hash out of you. Of course, you'll still need your crystal ball and rabbit's foot. The magic wand wouldn't hurt...Have a good week!Comment, March 4, 2012: The stock market lost -1.0% last week, the second 5-day loss since the year began nine weeks ago. Equities have charged ahead nine-percent year-to-date. Beginning the second week of February the market rally began to ease into a leveling-off phase as some of our signals reached upper threshold levels and individual blue-chip indexes hit multi-year highs. For instance, the Nasdaq Composite, which is front-loaded with mega-caps like AAPL, reached the highest point in ten years. The S&P 500 and the Dow Industrials are both at levels not seen since the Great Financial Meltdown of 2008. Equities have climbed far and fast. A look at the Markets Index chart in tab 9 will give you a concise overview. The market bottomed in early October, (which, despite its scary reputation, is often a turnaround month for stocks), then shot skyward passing both moving averages on Oct. 11. It made successively higher retests of the low on Nov. 25 and again on Dec. 19. The third pass above the MAs on Dec. 21 led to a nearly non-stop two-month price surge that hauled equities up over 13%.Measuring from the October bottom, the stock market has surged 26%.There has been no significant market movement, up or down, since Feb.6, a period where market volatility has settled into an 8-month low. On the Long-Term charts, (tabs 1 and 8) both the 50MA and the 100MA are currently locked into a tight space between BOTH ascending thresholds; (the exception is the 100MA on the Large-Cap chart). We’ve searched our database of AFG Big-Cap Long-Term charts dating back to the early 1970s and found precious few instances where the 50/100 MAs were locked in at such close proximity to threshold levels. When we found them, the usual result was what we’d expect from any encounter with a threshold: a sharp breakdown of stock prices within one-to-three weeks. In most cases, (not all), the up-trend resumed after another period of stasis, albeit from a lower level. Translation: Stocks have equilibrated at a very high level relative to historical values. The proximity to the ascending threshold – where stock prices are subject to an abrupt course reversal – means that the current lull is not likely to persist. Yesterday, we talked about the “Bollinger Squeeze, ” a technical pattern characterized by low volatility resulting in ultra-narrow band patterns. Traders who use Bollinger Bands like to see band compressions of six-months or longer. We think the principle behind the “Squeeze” is sound because markets abhor periods of price stasis and low volatility. But the market is unlikely to tread water at current levels for six months. Something will happen; and it will happen sooner as opposed to later. It might be that a breakout will occur on the up-side, confounding our expectations. The true purpose of the market is to confuse as many investors as possible for the longest period of time. To the market we ask, “Quo vadis? ” To the investor we warn, “Caveat emptor.”Have a good week!Comment, February 26, 2012: A holiday-shortened week yielded three fractional losses against Thursday’s relatively robust 0.9% gain. So, technically, the stock market ‘progressed’ last week. And, because market-watchers are always waiting for the next shoe to drop, we’re still left with an ‘uncorrected’ 19.3% bonus since November 28, or ten-percent year-to-date. Portfolio gains, (‘paper’ gains, if you will), are like un-cashed checks drawn against a bank that is perennially teetering on the edge of insolvency; the unasked, (and unanswerable), question is: should I convert this worthless paper into cash before the bank-run starts? The answer boils down to the investor’s two primary sources of information about the future. The first, what we sometimes call the I’m feeling lucky syndrome, involves a blind extrapolation of the present trend – “The stock market will continue to advance because the market has already advanced. I have a good feeling about my stocks. My friends are all bullish. Smart people on the TV are saying the same thing and they all wear expensive suits.” (If the reader finds himself in this category, he or she is in good company: The latest Investor’s Intelligence Survey of Financial Advisors finds more than half of investment professional are bullish; only 27% have a bearish outlook. Remember, the Advisor Survey is a contrarian signal).The second option is to check your emotions at the door and collect data supplied directly from the market itself. Make an objective study. Ferret out trending information that is invariably typical of advancing (or declining) markets. That’s what we do here. So, with an eye on the Down-Trend Watch grid above, let’s walk through our key signals: Tab 1. The AFG Big Cap Long-Term Index is in an A-1 pattern, the best possible. The 50MA is, yet again, encroaching upon the upper threshold line. Tab 3. The 52-Week New High-Low is 135 points above is long-term mean and 308 points below the threshold. Currently, it’s a hair above it’s “slow” moving average, so, if ultra-mild consolidation continues this week, the signal could easily switch to unfavorable. By itself, this will have no effect on the trend. Tab 4. The Equity High-Close Index is a proxy for the ‘bidding war’ that goes on every market day. It’s at a 7-month high, and has been relentlessly bullish since October. Tab 7. The AFG Current Market Score has spent thirty days above the 41-day MA, which is energetically climbing toward the max-out level of 50. A glance at the chart shows that it’s nearing the peak of previous market cycles. It could take its time: the last topping phase lasted 5-months. Tab 8. The AFG Small/Mid Cap Long-Term Index is perched on the A-2 pattern; otherwise, it’s identical to tab 1. Tab 10. Investor Risk Tolerance is 42 points above the long-term mean and 112 points below the threshold value. It’s ‘above-zero’ status shows that investors are comfortable with riskier assets like growth stocks, but aren’t ready for a buying stampede. The prudent investor will use these market signals to make judicious growth investments in a stock market that is trending higher, but, by some measures, edging toward overbought conditions. That investor might also wish to follow the lead of other traders who are taking profits and trimming risk exposure, yet maintaining a comfortable bias toward growth. Have a good week!Comment, February 19, 2012: The trend benchmark advanced 1.7% for the week ending Friday, Feb. 17. Strong advances on Monday and Thursday overwhelmed three fractional losses. Last week’s gain nullifies the loss from the prior week. In the seven weeks since 2012 began, stocks have advanced six times – for a year-to-date return of 10%. The S&P is at a nine-month high; the Nasdaq rivals the top set in Oct. 2007. Both of the small-cap indexes are within a few points of the April market peak. Last week displayed more turbulence than distribution, though the “fear index” (VIX), which spiked on Wednesday, washed out to an eleven-day low by Friday. There has not been a real distribution day (significantly lower prices along with high volume) since Dec. 14. By the same token, it has been two-weeks since we’ve had an accumulation day. Last year at about this time we groused about how lack of trade portended a catastrophe; whereas, this year we see chronically low volume as the new normal. There are two issues here. The first, that the stock market is, more or less, the domain of equity mutual funds. As we’ve observed, the retail trader is largely a thing of the past. Second, when you do find individuals involved in the stock market it is usually through passive intermediaries like the mutual funds, single-stock DRIPs, or employer-subsidized stock purchase plans. Third, (I know we said there were “two” issues, but, like the sportin’ woman said in Unforgiven, we’re going to give you a “free one”): Even among passive mutual fund investors there exists a slow exodus out of equities into bond and other varieties of fixed income. So, for now, the small investor has seemingly capitulated, being unimpressed with huge market gains since October. It seems that they don’t want just low-risk assets; they want NO risk; yet, as investors flee from stocks into ultra-low yielding assets they unwittingly expose themselves to the inverse relationship between bond prices and yields. As yields rise, (up 10% in Feb. alone), the market price for bonds and bond funds drops. That’s as close as we can get to an invariable law of investing. We have a theory that low volume makes trend identification easier. Indeed, there is currently no ambiguity about the direction of the current stock trend. The equity indexes have eased off of threshold levels; all but one of our Down-Trend Watch group of signals are in the favorable range. And, while some additional backing and filling would be welcome, professional traders seem content with the current level of market risk and are poised to bid stock prices higher. So, Caveat emptor, baby.As an addendum to last weeks’ discussion on changes to the Down-Trend Watch grid, the “or” qualifier has been removed from the Long-Term charts. Our position has always been that equity index values are closely correlated. It would be highly unusual if two or more indexes – say, the Nasdaq and the S&P 400 – would diverge for more than two or three days. As the rules exist now, both Large-Cap and Small/Mid-Cap Indexes (tabs 1 and 8) must BOTH be in a B-2 (or worse) pattern. To illustrate, the B-2 pattern is one in which the 100MA is above the 50MA and both are below zero. The 200MA is positive. An example of a worse pattern would be C-1, (or any “C” pattern) which resembles B-2, but has the 200MA below the zero line. In plain English, this pattern means that there has been no positive price momentum for at least 200 market days. Have a good week!Comment, February 12, 2012: The AFG Stock Index Average, (the trend benchmark) returned a negative 1.0% for the week ending Feb. 10, 2012. It was the first weekly Index loss since December 30. Stocks advanced a fraction on Tuesday and Wednesday; losses for the remaining days totaled -1.2%. None of the losing days were of the distribution variety; that is, the sessions lacked high volume and significant price attrition. In fact, total volume declined by seven-percent compared to the previous week, which contained two accumulation days. In simple terms, the market is rising on higher volume, and falling (fractionally) on lower volume. For the bulls, it would be difficult to find a better real-life example of how the stock market should behave during a secular up-trend. As we remarked earlier, stocks collided with the “overbought” threshold faster that we had anticipated. The Long-Term signals (tabs 1 & 8) and the AFG Market Range (tab 2) were over the bar by Tuesday. If you take the daily values of a trend indicator – the more values the better – and do an ascending sort the result will be a smoothly rising line. Smooth, that is, except for a sharply downward-bending area on the left, and an upward bending area on the right. The place where those bending areas begin are called “thresholds.” The remarkable thing about those bending areas is that they are short. The data at and above the thresholds are outliers that signify instability. When a market signal reaches that point it’s a ‘heads-up’ that the market is overdue for a reversal toward the mean value. But it’s not like an on/off switch; markets can persist in a threshold area for days, or even weeks. The point is, a stock market flashing two or more threshold signals is NOT a place where you should increase risk exposure, even if stocks are in an up-trend. When an up-trend progresses beyond an ascending threshold the temptation to dive heavily into growth equities is often irresistible. Gains on existing holdings are high and media pundits blab non-stop about the virtues of and prospects for the stock market. But, in fact, this is precisely the place where you should step back, or even take some profits. A threshold marks a high probability of a whipsaw – a lightning-fast loss on a recent purchase. Alert readers will note that our Down-Trend Watch grid (above) has been modified by the addition of the Equity High-Close Index which appears in tab 4. By adding the Hi-Close we broaden and deepen the criteria by which we determine a technical reversal in the stock indexes. The High-Close brings several advantages; not the least of which is a low correlation with the other signals in the Watch group. This means that the indicator is measuring something fundamentally different, yet still intimately associated, with measurable investor behavior. The High-Close measures the difference, (spread) between the highest average index price reached during the session, and the average index price at the close. History shows that the closer the approximation of the closing price to the intraday high, the more optimistic traders are about tomorrow's price. The other indicators on the Down-Trend Watch grid are strongly affiliated with closing Index values measured over time, thus are skewed toward price momentum. The inclusion of the Hi-Close introduces an ‘anticipatory’ element, which, as we’ve seen, often becomes a self-fulfilling prophecy associated with durable trend reversals. Durability is the key here. For instance, if the Hi-Close had been included in the Down-Trend Watch group prior to Nov. 22, 2011, there would not have been a down-trend call on Nov. 23. Indeed, we would still be in an uptrend that began on Oct. 27, extending to the present. The Hi-Close has historically demonstrated strong correlation to actual market trends. It can also reveal anticipatory behavior that can often be misinterpreted as aberrancy. For example, the signal was unfavorable from Feb. 22, ’11 to June 6, ’11 when stocks were moving up and most of the other Trend-View charts were favorable. In hindsight, the Hi-Close was broadcasting a slowly increasing aversion to risk, ultimately resulting in the mini-bear that plagued investors last summer through late October. Anyway, our corporate goal is three-pronged: investment, research and education. The research tells us that the Equity High-Close signal will compliment the already strong lineup of down-trend indicators. Have a good week!Comment, February 5, 2012: The stock market delivered a +3.0% return for the five days ending Friday, Feb. 3. That marks four straight weekly gains, and the strongest since Dec. 23. The AFG Stock Index Average, (a.k.a. the trend benchmark) has advanced in 24 of the past 32 days showing the effects of the seasonal bias and an accelerating investor preference for riskier assets. Market participation, measured by total average market volume, has increased 17% from the start of 2012. Nothing succeeds like success, and the average investor – not being indifferent to what he considers an opportunity – has been returning to growth-oriented equities in recent weeks. But still, it is a rather timid return. Volume remains about 14% lower than last year for the same period. And it’s worth recalling that, at the height of the May – October mini bear, volume soared almost forty-percent from the current level. Under the unwritten rules established post-Financial Crash of 2008, excellent investment environments merit only raised eyebrows, while the market correction instills abject panic and a rush for the exits. And what about the, so-called, “smart money” that comes from the deep pockets of pension and mutual funds? This investor segment leaves tracks in the form of block transactions of 10,000 shares or more. It seems that the professional class share the timidity of the amateurs: block trades peaked in August and are now running slightly below the seven-month average. The numbers from Friday’s big move aren’t available yet, but we’re betting they will be only slightly higher than the post-August mean. What does this imply for the rest of us, the “Joe Six-Pack” investor who buys growth stocks out of an envelope marked “Risk Only”? On an ultra short-term basis stock are nearing overbought. The 10-day average NYSE ratio of declining stocks to advancing stocks is currently 0.76, or just slightly above the point associated with a price reversal. It’s worth noting that the signal has been in this range continuously since mid-January. Everybody knows the stock market will equilibrate; nobody knows when.A second thing worth knowing about current conditions is that the Trend-View indicators featured at Stock-Market-Decisions.com are still below ascending threshold lines where an immanent selloff is anticipated. Two of them – the 52-Week High-Low (tab 3), and the Risk Track (tab 10) – are well below threshold extremes. The point is that none of us want to be whipsawed by the market. Under the current technical scenario stocks are set up to endure very short-term profit-taking, which, in our opinion, represents buying opportunities. Caveat emptor. And keep an eye out for the Black Swan. Have a good week!Comment, January 29, 2012: The major stock indexes rose in three out of five sessions last week, handing investors a 0.9% gain in the final full week of January. That’s four straight five-session wins bringing the results for a newly-minted year to +6.3%. With two sessions remaining for the month, bears would have to do a heap of damage on Monday and Tuesday to dampen a positive “January Effect” for 2012. Hot markets tend to cool in the waning days of January, yet we haven’t seen any concerted selling efforts since mid-December. Even better, this month has delivered three accumulation days, (higher than average price gain combined with higher volume). The most recent accumulation session was last Wednesday, where the trend index jumped nearly 1% on volume that was 7% above average. By Thursday, block trades – which usually underpin outsized volume – had surged 18% over Monday’s level. In an environment where safe-havens, (i.e., cash, CDs, short-term U.S. Treasuries) are providing returns of zero to a fraction of a percent, the natural course (outside of a full-blown financial crisis) is to migrate toward riskier securities. According to Thompson/Reuters, the current “blended” earnings growth rate for the S&P 500 for Q4 2011 has increased to 7.9% from 7.6%. Blended earnings combine actual reported EPS results with analyst estimates for those yet to report. Even with Europe acting as a drag, large U.S. corporations are expected to produce earnings of about 3.6% in the first quarter of 2012. Stock prices will follow earnings, and, if history is any guide, this year we will witness market prices repeatedly overshoot, then undercut, the ‘correct’ valuation. In the process the charts will hit extreme levels marked by thresholds. At this point, the 10 Trend-View signals are all favorable, including the key Down-Trend Watch group listed above. Barring a Black Swan event, which could derail the current up-trend, the stock market is poised for continued strength in the weeks ahead. The ride won’t be smooth. Although none of the Trend-View indicators are in proximity of the upper threshold, another widely-used gauge, (the NYSE Decline/Advance line, 10-day average) is registering “overbought.” A proprietary signal we call the “Super ARMS Index,” which combines price data with volume, went unfavorable on Friday. And don’t forget our favorite contrarian indicator, the Investors Intelligence Survey of Investment Advisors, fifty-percent of whom admit to being bullish. Our sense is that this gauge works best when you use the spread (difference) between bulls and bears. In recent years a spread of 35 – 40 is about where extreme levels of bullishness reign among the Advisor kingdom. Twice in the last two years values in this range set the stage for nasty market corrections. Currently, the spread is 21.3. But the trend is still your friend. Aiming for higher returns in the stock market entails knowing the trend and sticking with it. Just make sue you have a handle on your tolerance for risk.Have a good week!Comment, January 22, 2012: The U.S. stock market managed a respectable gain for a short work-week, contributing +2.5% to already surging growth in January. While no less accurate now than last week, our warnings below on the historically poor market performance of late January has thus far been unfounded. With the stock indexes already up an average 5.4%, and only seven trading sessions remaining, the full-month “January barometer” seems set to “predict” another positive annual return. On Wednesday, Jan. 18, the ten Trend-View signals were all aligned in the favorable column giving rise to an official stock market up-trend, the first since late October. An up-trend marks the all-clear signal to add growth stocks to that portion of your risk capital allocated for speculative investments. For the benefit of new readers, let’s take that last sentence and define some of the terms we used. Strictly speaking, Growth stocks are publicly traded shares of companies that have current growth rates in the top third of the equities universe. Generally, management will reinvest earnings (if any) into capital projects instead of paying a dividend to shareholders. Many growth stocks have price/earnings ratios that are much higher than the average within their industry group. Some have P/Es that are NIL, because they have zero earnings, but are expected – by financial analysts – to have astronomical earnings eventually.It’s that “eventually” word that bothers most sane investors. It conjures up the dot-com bust of the late Ninety’s that helped usher in the worst recession in a generation. For practical purposes, the small investor should not be taking positions in individual growth stocks, since each investment represents a significant slice of personal capital. A better strategy is to buy ETFs (Exchange Traded Funds), or mutual funds that specialize in certain growth categories. That entails broadening our definition of growth stocks to include index funds that passively follow popular market indexes like the six we use on this website. These are: the Dow Industrials, the NASDAQ Composite, S&P 500, S&P 400, S&P 600 and the Russell 2000. Now, if you’re buying an Index fund you are also passively acquiring “laggard” components within the index. That can’t be avoided, short of going the ‘buy the individual stock route,’ but uncertainty over the laggards within an index is more than outweighed by the uncertainty of a single growth stock floundering within the universe of a hostile market. Speaking of uncertainty, this brings us to the definition of Risk Capital. By way of analogy, risk capital is the wad of cash you carry in your wallet on a trip to Vegas, after the spouse has hidden your checkbook and all of your credit cards. Risk capital is what you can ‘afford’ to lose and still retain enough solvency to pay the rent and buy food for the babies and the cat. Like the casinos in Las Vegas, the ‘House Rules’ of the stock market ensure that the odds are stacked against you. Many novice investors are seeking the thrill that goes with a big win on Wall Street. That eagerly-sought thrill is no different than what the gambler feels just before the first spin at the table. Remember, a stock certificate – in paper or electronic form – has no intrinsic value. If you haven’t done so already, take the time to examine you motives and personal values before you spend a dime on the market. Keep that in mind as we leave you with the following: ”The poor plan for Saturday night; the rich plan for the next generation.”Have a good week!Comment, January 15, 2012: The six major stock indexes gained an average of 1.3% last week, the fourth positive move in six weeks. The market change for the first 2-weeks of the year is +2.8% - a near exact match to the same period last year. Santa Claus decided to stay late and spread some more cheer. Just to satisfy our zest for statistics of questionable value, we decided to look at how the second half of January fared over the last few years. If the recent past is prologue, what we found doesn’t bode well for the next couple of weeks. Since 2007, the stock market has lost an average of 1.3% in January’s second half. Starting in ’09 we’ve seen losses every year, (Average = -3.2%). The heaviest hit was in 2010 where it plunged -5.6% If the first half of January is the result of residual holiday cheer and pent-up optimism, the second half is a hangover and a confrontation with reality. Friday’s financial news may have given us a head’s-up on what’s to come. For instance, financial bellwether and largest U.S. bank, JPMorgan, announced its Q4 profit fell 23%, the first loss since Q2, 2009. Q4 revenue fell 17% to $22.2 billion, with heavy hits to trading and investment banking income. JPM pointed to European Union as the source of the greatest decline in investment banking revenue One could make a case that JPM, and now bankrupt MF Global, (headed by Obama-backer and former New Jersey governor, Jon Corzine), are a pair of coal mine canaries hit by the toxic debt fumes wafting out of Europe. Friday, the credit ratings arm of Standard & Poor’s striped France and Austria of their AAA status, while cutting the debt ratings of nine countries that use the euro currency. Spain and Italy were dropped two notches, while Portugal was cut to junk. We will get a referendum, of sorts, on the economic vitality of the eurozone as the pace of Q4 earnings announcements gather steam in the weeks ahead. Roughly one-third of earnings for companies in the S&P 500 come from outside the U.S., with about 15% coming directly from Europe. With the EU already in the neighborhood of a recession the market will be paying close attention to earnings estimates for Q1, as well as any ‘forward-looking’ commentary from CEOs that lean heavily on the Zone for trade. Keep in mind that – last time we looked – Europe is NOT the United States, which will likely have GDP growth in the range of 2% - 3% this year. The stock market has put a foundation under early January optimism by overcoming a few technical hurdles discussed in the Trend-View Comments last week. As can be seen in the Up-Trend grid above, only the market breadth signals refuse to cooperate.Comment, January 8, 2012: The U.S. stock market concluded a holiday-shortened week on a quietly positive note. The Index Average rose 1.5%, an auspicious start for January and one that gives hope to the six or seven people who believe in January-effect theories. To continue our – by now annoying – practice of harping on The Great Vanishing Volume issue, we note in passing that total average first-week volume is now in its third consecutive year of decline. The 14-day total volume average currently sits at 2.3 billion shares, a fifteen-percent decline since January 2010. At this rate, in a few years the New York Stock Exchange will become known as the Down-State Gentleman’s Club for Championship Chess and Stock Trading. Anyway, just a guess. A technical overview of the market yields the following observations, in no particular order of importance: Using the criteria set forth on this site, we are still in a stock market down-trend that began on Nov. 23. Only the persistently mediocre – but not bearish - breadth indicators prevent us from calling a fully-fledged up-trend. As described in the latest Comment for tab 9, the Equity Markets Index “currently sits at 57.8, a hairs-breadth away from the 58 level that represents long-term resistance dating back to early August. “If it breaks through that resistance any time soon then the previous highs set in April and July come within reach. The April 29, ’11 close at 60.8 represents a post-crash peak value.” If the Equity Markets Index is able to move past the 58 level and beyond, it demonstrates that investors have the resolve to repair the 5% price debit that remains from the April 29 market top. Recall that stock prices fell 23.7% from late April to Oct. 3. It is not hyperbole to state that growth stock investment during this time was an unrewarding endeavor. Nor would it be an exaggeration to state that, apart from the technically unfavorable breadth signals, ALL of the remaining indicators are in remarkably good shape. This includes the Long-Term charts in tabs 1 and 8, both of which demonstrate solidly bullish patterns. Moreover, there is no technical indication that the market is overbought, either by reference to upper thresholds, or other criteria such as the NYSE declines vs. advances ratio. Of course, the venerable Equity High-Close Index, (tab 4) has been bullish since Oct.21 – about the same time the Equity Markets Index made its first favorable reading after the October low. We’ve often said that our esteemed readers are free to pick and choose among our signals for use in their own trend-monitoring systems. In the current cycle an investor could have done worse than simply choosing a 2-chart strategy using tabs 3 and 9. You simply wait for tab 3, (the New Hi-New Low signal) to turn positive, and tab 9 (Hi-Close Index) to turn favorable before buying a small-cap growth surrogate like IWM. You ignore any negative numbers for tab 3. You wait for BOTH signals to fall below the two moving averages before you pull the trigger and sell. In this hypothetical scenario your efforts would have yielded a 5.3% return from Oct. 25 through Friday. Naturally, we don’t recommend this mix-and-match kind of approach to trend analysis. Risk capital is scarce and the stock market is complicated and unforgiving. We believe that a favorable rating for all of our Trend-View signals are necessary before we call a new up-trend. Who knows what shadows lurk in the heart of the market? The negative breadth indicators might be trying to tell us something. Have a good week!The SUMMARY Page Archive 2011
|
