We are working on client game plans; comments will be brief. Yesterday’s close above 1,325 put the daily DeMark combo count into a fragile state. There is some hope for it being a good signal if we remain below 1,331.91 on a closing basis. The outcome could be bullish since “bad signals tend to be really bad”, which is reflective of a strong market. Odds are good we will make some moves today, especially with a close above 1,331.91.
Other factors: German bonds weak, U.S. dollar weak, euro strong, Italian yields falling, European stocks firming.
Good news for the exhaustion/reversal case: S&P 500 made a high today that will most likely trigger another monthly DeMark exhaustion signal for the S&P 500; we would need to finish the month above 1,277, which was the November 2011 high. Monthly signals have a good track record; something we will respect.
Bad news for the exhaustion/reversal case: Three “stop-loss” or DeMark risk levels were violated in recent days: (a) 1,324 on a weekly chart, (b) 1,312 on a daily, and (c) 1,325 on a daily. As we noted last night, if the signals are “wrong”, they tend to be “really wrong”, meaning stocks could march higher in a rapid manner. Another close above 1,324/1,325 may prompt us to consider making some changes. We will prepare for more upside as well as more downside.
The Fed opened the door to more “easing” and “accommodative policy” through late 2014, which means they will continue to flood the financial system with printed money and they will continue to grow their balance sheet; both of which tend to be friendly for asset prices.
Relative to potentially bearish DeMark trend exhaustion signals, the most important S&P 500 level is 1,344. All things being equal, we would prefer to see the S&P 500 remain below 1,343. Similar, but less important levels include 1,326 and 1,313. Several conditions have to be met for a “violation” - it is more than just a close above. For example, the 1,313 level has not been negated yet (three more things need to happen).
Markets can peak on good news - remember when the “breakthrough” euro summit sparked a big rally? It marked an intermediate top. Therefore, an Apple and Fed-induced spike that remains below 1,344, then reverses intraday would be best case scenario for trend exhaustion. It is important to keep in mind if the signals are “wrong”, they tend to be “really wrong”, meaning stocks could march higher in a rapid manner. Thus, the need for an open mind and flexibility.
Market breadth (think advancing stocks vs. declining stocks) has been weakening in recent weeks, which is indicative of a tired market. The Summation Index, an intermediate-term measure of market breadth, closed below 100 on Thursday. In the chart below, the blue vertical lines show drops below 100 during the last five years. In the present market, point A1 is similar to point A and point B2 is similar to point B. The orange arrows show that “snap back” rallies can occur after a drop below 100, but with weak breadth the rallies tend to fail. The S&P 500 is shown at the bottom of the chart.
The current rally may turn out to be similar to the rally in July (see point A below). The green arrows near point A and A1 show momentum for an initial push higher. The orange arrows show a fairly tame move lower. The pink arrow below point A shows a very weak push higher that eventually failed. The Accumulation/Distribution line (bottom of chart) allows us to track the volume backing market moves, which is an indirect way of monitoring what big buyers are doing. Institutions (big buyers) did not support the July rally (see point B), which is similar to the present day (B2).
While it is far from a textbook pattern, the S&P 500 has traced out a “head-and-shoulders like” pattern (see S H S in chart above). The concept of the pattern still applies; the market is skeptical of the first push higher during the formation of the left shoulder, but there is enough interest to push stocks higher. When the head is formed more buyers have shifted to a bullish stance allowing for a higher high. The right shoulder is small relative to the left shoulder and price makes a lower high, which is indicative of waning interest from buyers. A head-and-shoulders pattern tends to be bearish. As noted yesterday, today is an expiration day, which slants the bias toward the bulls.
The Europeans have “agreed to” another stability pact during another summit. But like most of their recent summits, they were high on rhetoric and short on details; they hope to have the details in place by March of next year.
As we noted on December 2, the entire concept of a new fiscal union, budget constraints, and penalties addressing the pressing issues is somewhat misguided. Does it help an over-indebted rule breaker to be hit with more liabilities in the form of EU budget penalties? Will tacking on fines increase the confidence of bond investors? How many “exceptions” do you think will be granted in the next five years? How does a fiscal & stability pact impact Italy’s ability to refinance mountains of maturing debt in the next year? Many of these questions remain unanswered. A Reuters editorial does a good job summarizing what just took place in Europe.
The euro zone has agreed to take a big leap forward in economic integration, but failed to deliver a convincing answer to investors worried about its ability to tackle threatening debt crises in Italy and Spain.
One of the great things about looking at charts is “they are what they are and they show what they show.” When you examine the weekly chart below of the S&P 500 going back to 2007, ask yourself “does this look like a bull market or a bear market?” or “does this look like a strong market or a weak market?”.
The indicator (Williams %R) at the top of the chart measures momentum. Markets need momentum to continue to trend higher. The green arrow shows the thrust of momentum that occurred off the March 2009 low. Compare the area near the green arrow to the present day; they do not look similar. The blue arrow shows near market turning points, the slope of the 22-week moving average flattens out and then turns up, which does not appear to be happening in the present day. In fact, point A shows what can happen to market rallies that occur in the context of a downward-sloping 22-week moving average. Market action near point A and point B look similar; stocks did not perform well after point A.
Until (a) Williams %R shows an improvement in momentum, and (b) the slope of the 22-week begins to flatten out/turn up, the odds will continue to favor bearish outcomes. Could both (a) and (b) occur in the coming weeks? Sure, but presently they do not point to sustained gains in risk assets. As we mentioned earlier this week, the S&P 500 could make another push toward 1,285 to 1,340, but knowing what we know today, the gains will most likely be given back within a matter of weeks.
We continue to believe long-term investors face unfavorable odds owning stocks and commodities (DBC). The S&P 500 (SPY) and NASDAQ (QQQ) will most likely be lower in three months. Money printing by the Fed and/or ECB remains the most significant bullish wildcard for investors. If they print, it can change the market’s dynamics. The Fed releases a statement on December 13, which could be the push stocks need to make another run at the S&P 500’s 200-day moving average.
The video below, originally released on November 30, uses daily charts and moving averages to address the bull/bear debate. As outlined in the video, on a daily chart of the S&P 500 the following are in place:
Price is below the 200-day moving average, which is bearish.
The 50-day moving average is below the 200-day moving average, which is bearish.
The slope of the 200-day is negative, which is bearish.
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.
The CCM Bull Market Sustainability Index (BMSI) closed at 202 on Thursday. Further stock market weakness, in the coming ten days or so, could push the BMSI back into a range typically associated with bear markets.
As of Thursday’s close, the CCM 80-20 Correction Index closed at 522. The 80-20 Correction Index could also produce a bear market signal relatively soon if stocks cannot find their footing.
We agree with the comments below. Governments bailed out the system in 2008. Today, governments are the ones in trouble making solutions much harder to find. From Bloomberg:
Europe’s debt crisis is a “more serious” situation than the housing bubble three years ago that preceded a global recession, General Motors Co. (GM) Chief Executive Officer Dan Akerson said today.
“The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress,” Akerson told the Detroit Economic Club today. “The government took some insightful actions. This is much more serious.”
In terms of risk-reward, an excellent entry point for deflationary/bearish positions may surface should the S&P 500 climb back toward 1,266/1,267, 1,277/1,279, and/or 1,282/1,285. 1,201 to 1,209 is still logical on the downside, which may need to occur prior to an attempt at a push higher. Unless something changes in the bulls favor, either fundamentally (read Europe) or technically, any push higher should be viewed with a healthy dose of skepticism.
CCM’s market models, like many economic and technical indicators, are providing a mixed message as of Friday’s close (11/11/11). On the bullish side of the ledger, the CCM Bull Market Sustainability Index (BMSI) has moved back into a range associated historically with bull markets. However, as shown below, the risk-reward ratio for stocks looking out one to three months is unfavorable despite the BMSI being within a bullish range.
The CCM 80-20 Correction Index remains in an unfavorable zone relative to the historical risk-reward profile for the S&P 500 Index. However, with a close of 616 on 11/11/11, further strength in risk assets would most likely push the 80-20 Correction Index into a more bullish range.
The bulls have is significant feather in their cap in the form of conviction. While numerous fundamental and technical factors point toward negative outcomes for equities, the force with which stocks have rallied looks more like the early stages of a bull market, rather than a bear market. Having said that, numerous market ratios, including the gold:Treasury ratio, have not broken into bull market territory yet.
The video below explores the current ratio of gold (GLD) to Treasuries (TLT). The ratio helps us monitor the battle between:
Inflation via GLD and deflation via TLT.
The bulls via GLD and bears via TLT.
Like many markets, the GLD:TLT ratio is near a possible inflection point. However, the ratio was near a similar bullish inflection point in 2008 before stocks and gold took another leg down. The points below highlight similarities between 2008 and 2011:
A1 & A2: GLD:TLT ratio makes similar twin peaks.
B1 & B2: Ratio breaks inflation/bullish trend.
C1 & C2: When the indicator, Williams % R, remains weak, the bear market in stocks remained intact (left of C1, right of C2). When the indicator moved back above -20 (overbought), the bear market was nearing its end.
The video expands the commentary on the two charts above and also comments on Italian bond yields.
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode. If you want to skip the technicals, comments on Europe begin at the 10:33 mark.
World leaders meeting at the G-20 summit in Cannes, France, balked at spending more money to help bail out the euro-area, demanding the region’s own governments first do more to fix the two-year-old debt crisis. Governments are awaiting further details of Europe’s own week-old rescue package before they commit cash, German Chancellor Angela Merkel said on the final day of a Group of 20 summit in Cannes, France.
HIGHLIGHTS-Comments by policymakers at Cannes G20:
GERMAN CHANCELLOR ANGELA MERKEL
“There are hardly any countries here which said they were ready to go along with the EFSF (euro zone rescue fund).”
BRITISH PRIME MINISTER DAVID CAMERON
“Every day that the euro zone crisis continues is a day that has a chilling effect on the rest of the world economy.”
“Britain will not contribute to the euro zone bailout fund and we are clear that the IMF will not contribute to the euro bailout fund either.”
“Global action cannot be a substitute for concerted action by the euro zone to stand behind their currency.”
“The job of the IMF is to help countries in distress, not to support currency unions.”
“The world can’t wait for the euro zone to through endless questions and changes about this.”
“You can’t ask the IMF, nor should you, nor ever would I, ask the IMF to put its money into a euro zone bail out fund - that wouldn’t be right.”
“Britain will not invest in a euro zone bailout fund. Britain will not invest in the IMF, so the IMF can invest in a euro zone bailout fund. That is not going to happen.”
Italy’s planned budgetary reforms lack credibility, IMF chief Christine Lagarde warned after a G20 summit dominated by the eurozone debt crisis. “The main problem we have, which has been clearly identified as much by the Italian authorities as by their partners, is a lack of credibility in the measures that have been announced,” Lagarde told reporters according to AFP news agency.
Short Takes is a stock market blog updated regularly by Ciovacco Capital Management, LLC. This financial blog covers investing topics, such as economic cycles, stocks, commodities, currencies, and technical analysis.
