(…) Note then the chart this page of the NASDAQ which has rather clearly broken its upward sloping trend line that extends back into the
lows of last March. Note further that as prices have fallen in recent sessions, the volume has exploded to the upside. Volume waned as then market rose, but it
is rising as the market falls. This cannot… absolutely cannot… be viewed bullishly!
The equity indexes are extended relative to their underlying trend. The S&P; 500 moved 18.5% above its 200-day moving average in mid-November. Elevated readings such as this have historically been precursors to a more modest return environment in the subsequent 6-9 month performance
An increasing number of stocks are breaking down below their 50-day moving average. This shorter-term indicator warns of a rocky road immediately ahead. A more fully oversold market usually appears closer to
the time when the proportion of stocks above their 50-day moving average declines toward 20%. The current reading stands near 60%.
RBC Capital Markets
The technical backdrop for equities has turned challenging in the span of
just a few short weeks. Many broad-based equity benchmarks are breaking established multi-month uptrends, while internal market dynamics are weakening as evidenced by the downturn in breadth measures as well as the relative performance profiles of some key leadership areas including small caps, Financials, Semiconductors and Materials.
Deteriorating technicals are at odds with the recent wave of relatively
upbeat fundamental data. In the past few days, we have seen a strong batch of leading global, as well as domestic, manufacturing survey data. At the same time, the all-important US housing market is showing more signs of stabilization as prices have started to turn higher alongside demand indicators.
RBC Capital Markets
From Dennis Gartman:
Try as we might, we fail to see anything bullish in the action of the past three or four days, as one important trend line after another is broken; as the volume on the weakness is demonstrably larger than was the volume on the strength early last week; as inside selling continues to be high and is rising; as P/e multiples are stretched rather far, with hopes for continued increased earnings in jeopardy given that all of the earnings growth thus far has been predicated upon cost cutting rather than upon sales growth… and we could go on but our point is made we think.
The next several months carry better odds for positive equity returns. As Doug Short noted in his ultimate analysis of market seasonality:
November and December tend to end the year on a high note. Together with January, March and April, they’ve combined to inspire the "Sell in May, buy Halloween" strategy. February is the naughty winter month.
This is the simplified chart from RBC Capital Markets
Here is Doug Short’s:
However, be aware that the market is overbought by 2 standard deviations relative to trend:
But what does it really mean?
Note that stocks were higher in 6 of 9 prior
episodes after reaching a similar technical
See my Oct. 29 post: TIMBER?
From Scotia Capital:
? Although Q3 earnings are coming in well above estimates (the S&P; 500
"beat ratio" is at a 17-year high), equities haven’t been able to generate any momentum recently. This situation contrasts with the Q1 and Q2 earnings seasons, which added fuel to the March rebound. The Dow Jones briefly surpassed the 10,000 milestone (again), but the S&P; 500 wasn’t able to take its game above 1,100.
? Our view heading into October was that the cyclical sentiment would get an additional lift from stronger-than-expected earnings and positive revisions. It hasn’t been the case so far. Earnings have been beating consensus, thus sparking positive revisions. Still, the rally has stalled. Equity markets have looked overbought since August and we may get a pullback before the normalization phase resumes. The S&P; 500 is trading 18% above its 200- day moving average (914), a retest of the 200-day line could occur before the rally resumes later in Q4 and in Q1/10.
? Equity inflows have also been modest so far with money market
redemptions scrambling back into fixed income products and balanced
From RBC Capital Markets:
IS THE FAT LADY SINGING?
If she isn’t, then last week’s market action gave a quite passable impersonation. Indices retreated from higher ground on Friday in the wake of Microsoft’s blowout earnings: this was just one in a building series of mismatches which collectively suggest that the consensus
expectation for inexorably rising prices into yearend will not be fulfilled.
The steadily-rising list of divergences below suggests that the rise since March is now in its exhaustion stage and has begun to stall:
• Dow Transports began diverging from the Industrials back on September 17 at 4055. On Wednesday morning, the Transports finally broke above 4055 intraday, hit a high of 4066, and then closed down more than 2% on the day (see Chart of the Week p.2).
• “Outside reversal” weeks were registered by the Dow Transports and Value Line: this means that new highs for the entire move were set during the week, and then closed on Friday below the lows of the whole prior week.
• Smaller-cap indices have begun to lag the S&P;: performance highs vs. the S&P; were recorded by the Value Line and the S&P; Mid-Cap on October 1, and by the Small-Cap all the way back on September 23.
• Technology has begun to slow even in the face of rising earnings and guidance: the NDQ100 peaked vs. the S&P; on Oct.1, and the SOX all the way back on Sept. 23.
• New Highs on the NYSE reached their peak back on October 14.
DOW INDUSTRIALS & DOW TRANSPORTS
On Friday, the Dow Transports broke below its 50-day average, and is now threatening to break down from its big "rising wedge" pattern. This is the same pattern we can see in the Euro and the TSX since the March lows. A break of the uptrend line would be a big potential negative for the Commodity/Global growth trade, and for the broad market indices in general.
From Dennis Gartman:
Even David Rosenberg has noticed the double-top in the Transports and adds other troubling facts:
• In another sign of a possible investor move to lighten up on risk, the Russell 2000 also closed the week down 2.5%.
• The market, last Friday, continued to post declines on higher volume; and, a majority of the up days in market were on lower volume. We realize that some will guffaw at the technicals, but in a technical as opposed to fundamental market rally, the technicals need watching. As the Investor’s Business Daily correctly points out, “six distribution days on the Nasdaq and eight on the S&P; 500 would in most circumstances be enough to kill an uptrend.”
• Did you see the VIX index (a measure of volatility in the equity market) jump 7.0% last Friday, to 22.3 — a bit of the complacency (but not nearly all) may be coming out of the marketplace.
•The financials sagged 1.6% on Friday and have done squat now for 5½ weeks.
• Just as the economists are taking their housing numbers higher, in classic “sell the fact” mode, the S&P; Homebuilding index just closed down 18% from the mid-September high. That almost classifies, dare we say, as a … bear market!
• Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.
• We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).
? Although the news flow continues to steadily improve, the equity markets’ reaction has been muted in August with performances ranging from 4% in the U.S. to 1.7% in Canada to -16% in China. Nonetheless, the S&P; 500 closed near its YTD high of 1,030 last Thursday and the index is up 11.9% since the start of Q3. We believe the lack of momentum in August, and the potential for a pullback in September/October, have more to do with the current overbought situation and seasonality than overpriced equity markets.
? As illustrated in Exhibit 1, the S&P; 500 has been stuck in euphoria territory since late July based on our panic/euphoria indicator. Such overbought levels typically lead to flat-tonegative returns over a short term span. Exhibit 2 compares our panic/euphoria reading with the S&P; 500’s 10-week forward return. As we enter the back-to-school period with overbought conditions, investors should prepare for softer markets.
? Our panic-euphoria model should be viewed as a tactical/trading barometer since it captures the market’s near-term emotions. Any panic/euphoric reading also has to be interpreted in the market’s context, i.e., bear or bull cycle. Since we believe the S&P; 500 entered a new bull market in June when the index got its golden cross (50-day moving average crossing the 200-day on the upside), the current euphoric reading means the S&P; 500 is looking more like a near term hold. We are in higher high/higher lows environment and recommend
buying the dips, not selling the rallies.
While a lot of attention is being focused on the S&P; 500’s move above 1,000, most chartists are probably focused on 1,005. As shown below, the S&P; 500 failed twice to rally above this level back in October and November of last year. If the index manages to meaningfully break above 1,005, there is little in the way of resistance for the next 95 S&P; 500 points.
But where is the volume?