Baseline Analytics Blog

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

Growth stocks, as represented by the Russell 2000 Growth Index, have generally outperformed value stocks since mid-2010 (see the chart below, denoted by the green boxes). Since the start of 2016, however, value has outperformed growth, as can be seen by the large red box on the right side of the chart.

A 50-day exponential moving average is employed to demonstrate the price activity in favor of one versus the other.  What is interesting on the chart is the top portion, which shows the RSI of the Growth/Value stock ratio.  That RSI was deeply oversold and has crossed above the 30 level, a bullish development.  This may be an indication of a shift in sentiment back toward growth stocks.

 

GV

Gold and the Gold Miner's ETF (GDX) have been despised for quite a while.  It is often when an investment is shunned and ignored, that it is ripe for a shift in sentiment and price.  

Looking at the VanEck Vectors Gold Miners ETF (GDX), it is interesting to note that price has bounced from a long-term support level near 20 (see the monthly chart below) 

 GDX Mon

Also noteworthy, on the daily chart, the GDX has closed above its 50-day exponential moving average. GDX rallied from its recent lows near 19 on decent volume.

GDX daily

So we could be looking at a profitable turning point in GDX (and gold in general). Perhaps volatility and uncertainty regarding the new administration or even some early signs of price growth in the inflation readings, are influencing this recent price behavior. 

 

As equities reach new highs, several market trend risk indicators as measured by our proprietary TrendFlex system are underscoring the risk to long positions at this stage of the rally.

Our flagship TrendFlex Classis CR (credit risk premium indicator) is about as bullish (for equities) as it can be, which can be interpreted as a contrarian signal.  We are firm believers in "reversion to the mean," and as the chart below suggests, the wide gap between the ratio of corporate vs. treasury debt versus its moving average (dotted line) calls for a possible pause in the equity uptrend.

TFCCR12232016

The weekly version of the TrendFlex CR similarly demonstrates today's extreme readings:

TFACR12232016

No doubt that the charts above are wildly bullish.  Although we are trend followers, we take very seriously the indicators that measure the risk of a trend change.  

Baseline Analytics Extremes highlights three key TrendFlex Indicators and their level of extremes.  The key indicators include the following:

  1. CBOE VIX and Put/Call Ratio
  2. TED Spread
  3. LQD vs. S&P 500 GAP reading

Here is what these indicators are telling us, following the market close of 12/23/16.

The Vix/Put Call Gap versus their respective moving averages measures complacency among traders and investors. Note the VIX (top portion of chart below) falling well below its moving average.  As can be seen on the chart, such gaps below (and above) its moving average tend to precede shifts in the S&P 500. VIX is hinting at a potential setback in equities.  Interestingly, the Put/Call ratio is neutral.

VIX12232016

The TED Spread is a measure of perceived credit risk in the US Economy.  Peaks in the spread (see blue areas in bottom of chart below).  This indicator has preceded shifts in the market trend rather consistently over the timeframe displayed below.  It may be hinting at a firming of Treasuries following their rather sharp selloff since peaking in July.

TED12232016 

Finally, the gap between our LQD/S&P 500 ratio (a derivative of the Trendflex CR indicator) is sitting at an extreme low (see bottom portion of chart below).  This large gap suggests that equities have moved too far too fast and are in needs of a consolidation of recent returns.  

LQD Gap 12232016

We have also previously noted the progress in the Dow Theory technical indicator.  The two indices  (Dow Jones Industrial Average and Dow Transportation Index) recently hit new highs, a traditional technical measure of a confirmed bull market.  Again, however, we harken to a cautious stance given the swiftness of this move upward and the extreme readings in our various indicators.

Dow122316

What to do? Think about wading into long positions in instruments that have swooned during this uptrend (perhaps small positions in bonds, gold, agricultural commodities) to diversify and dollar-cost average.  Europe and emerging markets are also beginning to look interesting (perhaps VGK and EEM will play catch-up to the US). Hedging long positions with e-Mini S&P 500 futures may be in order, as well as selling call options.  

Equities have tended to do well in the week before the holidays and afterward, but have consistently slipped as the new year dawns.  We would rather hedge our bets and look for prices to settle down before adding to long positions, as the major indices, although overbought, are clearly bullish.  

Best to your investing, and Happy New Year!

Overbought equities and extreme readings in several TrendFlex market trend indicator convinced us to add hedges to long positions. We will update the TrendFlex Score and charts this weekend.

dvdsBaseline Analytics has refined a series of stock and ETF-screening algorithms that pinpoint timely, high-probability trades and investment opportunities.

The results of Baseline Analytics' stock and ETF screens are delivered in a downloadable Excel file.  This file can be sorted to identify various performance and technical criteria to help provide a further edge to your trading and investments. Instructions are provided to guide you through your review. Our goal is to deliver such opportunities at your fingertips, with minimal research and analysis needed on your end.  We do provide a link to Yahoo Finance for each of our timely picks should you want to delve further into particular equities or ETF's.

Baseline Analytics has published its list of the stocks going Ex-Dividend in December that exhibit favorable technical trends. Perhaps a dividend-payer or two will emerge as a timely, attractive investment. 

This list is offered free of charge.  Please check out our Premium Services , at a price of only $79 per year!

Click here for the list.

Subscribers to Baseline Analytics receive our proprietary screens regularly, and this screen in particular will be honed even further for more targeted opportunities, including noteworthy fundamental and technical criteria.  Receive these updates as well as our TrendFlex family of market trend signals and risk assessment tools as a subscriber to Baseline Analytics.

Profitable investing!

Baseline Analytics

We look for peaks and troughs in the CBOE VIX indicator versus its moving average (see chart below).  Peaks tend to coincide with short-term market lows, and troughs with market highs (measured by the S&P 500 index).  

Note how VIX hit a trough before the S&P 500 settled back from its recent high.  Since then, VIX has turned neutral (closing in on its moving average).  We read this as a bullish sign, as recent consolidation in the S&P 500 may present a less risky opportunity to add to longs.

VIX12022016 

 

 

We look for peaks and troughs in the CBOE VIX indicator versus its moving average (see chart below).  Peaks tend to coincide with short-term market lows, and troughs with market highs (measured by the S&P 500 index).  

Note how VIX hit a trough before the S&P 500 settled back from its recent high.  Since then, VIX has turned neutral (closing in on its moving average).

 

 

Can't ignore the positive correlation of the Dow Jones Industrial Averages and the Dow Transportation Index.  Transports not far from hitting a new high to join the Industrials.  A bullish trend.  Watch out for extremes however (in sentiment and momentum indicators).  Our new TrendFlex Extremes readings are updated regularly as they develop.

 

DT112916

Check out the confirming uptrends in both the Dow Industrials and Transports.  Another sign of support for the uptrend.

 

DT1116

In April 2015 we saw a break in the SPDR Barclays High Yield Bond ETF as it fell to its early 2016 lows.  As that happened, the S&P 500 see-sawed, mildly correcting and then failing to resume an uptrend until the JNK ETF resumed its uptrend.

We have seen confirmation (both in uptrends) since early 2016.  Recently, however, divergence has appeared as the JNK ETF recently pulled back from its highs.  The S&P 500 has been fighting toward new highs but is beginning to feel the resistance.  

This relationship bears watching should JNK continue to pull back. 

 

junk diverges

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