Baseline Analytics Blog

Market risk assessment tools and tactical investment opportunities driven by curated financial insight

While the TrendFlex signals remain bullish, the VIX extreme has reached a level that suggests a bounce is in order. See the blue circle on the right. Based on support levels, we would look for another dip in the S&P 500 of 15-20 points to encourage long positions.

VIC0517

 

While the TrendFlex signals remain bullish, the VIX extreme has reached a level that suggests a bounce is in order.  Based on support levels, we would look for another dip in the S&P 500 of 15-20 points to encourage wading back into long positions.

 

Note the divergence between the Dow Jones Industrial Average, reaching to new highs, and the lagging Transports. Another signal to hedge longs at this time.

dow

Two measures we follow to spot extremes in equities are flashing red, suggesting time to put on a hedge.

First, the VIX and Equity Put/Call Ratio are close to approaching extreme levels that in the past have presaged a decline in equities:

Vix

Secondly, the NYSE McClellan Oscillator is begining to shift to a negative moving average cross.  Note the dotted lines (green bullish red bearish) and the slower-to-confirm solid lines, below:

nymo

Market close update: The TrendFlex Classic CR signal has shifted to a BUY.

TrendFlex Classic CR is setting up for a potential buy at today's close.  See the chart below:

TFCCR03282017

The TrendFlex Credit Rick (CR) timing signal shifted to sell today.  Normally we wait for one day's confirmation so the jury is still out until the markets close.  Should the signal remain below its moving average at today's close, it will represent the first short-term sell signal on the S&P 500 since the November 8th buy signal.  TrendFlex Allegiance CR, the longer-term signal, remains a buy.

TFACR03092017

As the equity indices continue to forge new highs, our TrendFlex extreme indicators, utilized to identify a potential change in the market trend, hover around neutral to extreme readings.

Our Corporate Bond vs. S&P 500 index ratio as seen at the bottom half of this chart, pushed to a new low this week, and gapped widely below its moving average.  This is an extreme reading that bears watching for a trend shift.

LQD02242017

Our TED Spread indicator is neutral but on the verge of turning to a new extreme.  Note below how the CCI reading (bottom portion of chart), once it moves to the +100 level of the chart (blue sections), tends to precede a decline in equities.  Conversely, note the red zone (-100 reading) where the indicator foreshadowed a surge in the S&P 500.

ted02242017

Finally, our VIX and Put/Call indicators are mixed.  Although VIX has met up with its moving average (we look for large gaps from its moving average to confirm a pending trend change), it remains rather low at 11.47.

VIX02242017 

As the chart below depicts, VIX can remain low for a while before equities correct (see the blue vertical lines where VIX settled in the past near where it is today.

VXSPX

So perhaps equities are nearing the point where a consolidation or modest (5%?) correction is in the cards, which will hopefully dissipate some of the froth in the markets and introduce a new buying opportunity.  As the new administration moves further out of the honeymoon period, however, the challenge to pass business-friendly tax and other economic policies may begin to cast a shadow on bullish sentiment. 

The TrendFlex Classic CR (“Credit Risk”) indicator is a short-term measure of the risk of a change in the trend of the S&P 500.  We follow this indicator versus a moving average line and note Buy and Sell signals as the indicator crossed up (Buy) or down (Sell) through its moving average. 

As the S&P 500 has seen increased volatility while consolidating its recent gains, the TrendFlex CR indicator is close to breaching its moving average to the downside, a bearish development.  The signal tends to lead equities price movement, so we take this development as another caution sign for equities. 

Although the intermediate-term trend clearly is up, the risk of a short-term trend change appears to have increased.  See the chart below:

TFC02062017

Taking a look at the CBOE VIX and Put/Call Ratios at today's close, it appears that one of our more consistent "Extremes" indicators has turned neutral.

Equities have traversed through fits and starts of volatility recently, and that behavior had manifested itself in an extreme reading in late January (see the blue arrows on the right side of the chart below. 

This extreme was highlighted in our recent Market Trend blog, introducing the potential for a short-term decline in equities (which happened).

The S&P 500 has since settled back to near its 34-day moving average (blue line) as recent gains are consolidated.

VIX02022017 

Our take is that with stock market settling back, it appears to be preparing for the next leg upward (resumption of the major trend).  Indeed, major indices have been pushing up against overbought levels and upside momentum has been waning.  

Although this neutral "extremes" indicator does not suggest any sharp downside risk, equities may need some more time to prepare for the resumption of the uptrend.  A firm consolidation to the 34 or 50-day moving average, as the S&P 500 appears to be attempting, may be what is needed to prepare for the next leg up.

Our Credit Risk Extreme indicator is no longer at an extreme reading (measured by the gap vs. its moving average in the chart below).  However, it is interesting to note that the indicator appears to be forming a double-bottom.  A breakout from that basing range could suggest a shift to the downside in equities (and begin to favor bonds).  

LQD02022016

We will watch this relationship carefully, as a shift above its moving average signifies risks to equity positions.  The good news (for equity bulls) is that the indicator is so low to begin with, that a shift above its moving average may not entail the meaningfulness as it had in the past.  The jury is still out on the significance of this indicator as we close out the trading week.

 

 

 

Two key indicators have reached extreme readings, which tend to precede shifts in the equity market trend.  

Both the CBOE VIX indicator and the CBOE Put/Call Ratio have gapped well below moving average measures that have been useful as contrarian signals for short-term downside shift in equities.  As can be seen in the chart below, a low reading in VIX vs. its moving average denotes short-term peaks in the S&P 500.  We may be seeing one of those peaks following Tuesday's (January 24th) market close.  Although this extreme reading indicator does not always pinpoint the day of a trend change, it is worth considering as a warning sign that the rally may be reaching its climax.

vix01242017

Another extreme indicator we follow is the TED Spread, or the spread between the 10-Year Treasury and Eurodollar futures.  Peaks (or rises) in the TED spread tend to be an indicator of credit risk.  While it does not appear evident that credit risk is seeping through the financial markets, the rise in the TED spread expresses expectations of risk that bears watching.  Note in the chart below how the peaks displayed in the lower portion of the chart (blue portions of the oscillator) tend to precede equity declines.

ted01242017

Although the equity market indices are clearly bullish, extreme readings as such are cause for pause and reinforce the importance to preserve capital (and refrain from getting caught up in new high euphoria).

The Absolute Return, LLC.

THE ABSOLUTE RETURN Logo

 

Investment News

Comerica Economic Blog


Warning: fopen(http://blog.comerica.com/feed/) [function.fopen]: failed to open stream: HTTP request failed! HTTP/1.1 403 Forbidden in /home/content/b/a/s/base1103/html/libraries/joomla/filesystem/file.php on line 335