Market Insight

Market Tour Update

Here's a quick synopsis of key sentiment technical indicators followed daily by Baseline Analytics.


Advance-decline activity as well as the summation index continue reinforce market weakness. Note how the advance-decline line for the NYSE failed to push to a high while the S&P 500 stretched toward its recent high. Breadth has certainly lagged index performance.


We contiue to be concerned about the "bear market" in the summation index, despite a modest bounce since the July lows, haven fallen below the bull-bear border of 400 in May and heading slowly toward the lows of past October.




The resumption of the uptrend from the July lows is on soft footing. My preference is to hedge long positions and refrain from adding to longs at this time. 

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Recent Thoughts On Trend Following And Long-Term Moving Averages

Written by David Fabian of FMD Capital Management

Technical analysis of the market price in relation to its long-term moving averages can be a helpful tool in deciphering trend direction and areas of potential support or resistance. These never turn out to be perfect inflection points, but can provide guideposts for those inclined to take a more active approach to portfolio management.

More recently, the sideways grind in the major averages has created a narrowing of the percentage difference between the current price and the long-term moving average. I think it’s important to point out this effect and its potential ramifications for trend followers.

Looking at a chart of the SPDR S&P 500 ETF (SPY), it’s easy to see that little forward progress has been made this year. Nevertheless, the 200-day simple moving average (smooth red line on the chart) has been steadily moving higher as it continually adjusts to the higher prices in the market.


The 200-DMA of SPY started the year near 193 and is now sitting at 204. That represents an increase of approximately 1.8 points per month and has now narrowed the spread to less than 3% below the current price of SPY.

TRANSLATION: Those that use the 200-day moving average as a buy and sell signal would be forced to liquidate their positions if the market fell just 3%.

That’s a very narrow margin of differential that will have to be evaluated in the context of your personal risk tolerance and long-term game plan.

There are three things that could happen from this point:

  1. Stocks blast off from here and give us some breathing room between the price of SPY and the 200-day moving average.
  2. Stocks continue to trade sideways for another 3-4 months until the price of SPY seemingly runs into the 200-day moving average.
  3. Stocks drop and cross below the 200-day moving average, which would ultimately force a decision on reducing exposure or not.

Obviously those that are fully invested would prefer option one. However, the other scenarios are also quite likely as well and must be evaluated accordingly.

The most dangerous situation for trend followers is a quick drop that culminates in a whipsaw back to the highs. This scenario unfolded back in October 2014, when SPY spent four trading days below the 200-day moving average and then quickly recovered. Those that sold likely found it difficult to put money back to work in stocks or were forced to add back at even higher prices.

Nevertheless, that this is trade off in risk that you assume when you implement stop losses to protect your capital. Risk management can be a double edged sword.

My personal preference at this stage is to give stocks more leeway for at least a modest pullback. A 5-6% dip would put SPY near its January lows and make for a more natural zone of support. This level would more than likely carry greater weight than the long-term moving average at this juncture.

Of course, your own personal game plan should be dependent on your current exposure, cost basis, and risk tolerance. Every pullback should be independently evaluated according to how you are positioned heading into it. Many times these are excellent opportunities to put new money to work in areas of the market that have been on your watch list as well.

Looking for new ETF ideas? Check out our library of free special reports on growth and income investing.

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Baseline Analytics Market Tour Update - June 16, 2015

Time to revisit some of the key technical indicators followed by Baseline Analytics to try to make some sense of current market activity.  

As can be seen in the chart below, the S&P 500 broke to the downside through an uptrend extending from December. Recent trading range activity can be broken with a close above 2120.  2080 marks next downside support, with the 2050 area to follow.

Pring's "Known Sure Thing" or KST dipped to negative (bearish) territory during these last few weeks, however, that does not differ much from a similar visit to negative readings in April.  VIX and Put/Call are rather neutral with some mild bouts of excitedness.


The breadth and internal strength charts (below) are rather neutral, coming off some impressive short term highs. The one concern in this chart is the NYSE Summation Index.  The "400 line" has market bull and bear ranges rather effectively, and this reading has dipped to an extreme (-200) not seen since the 10%+ correction last October.  This indicator bears watching, as it has generally diverged from the uptrend in the S&P 500 since mid-April. 


Finally, our economic chart contributes a rather neutral perspective on the bull market.  Our bond ratio chart (top portion of the chart below) has settled at support (we normally look for corporate debt to outperform Treasuries as a bullish signal).  Copper vs. Treasuries is also meandering in the doldrums (attempting to break through its 200-day moving average). Copper price is a proxy for economic strength, as the metal is utilized in a variety of industries.  Strength in copper vs. Treasuries again is a sign of positive economic conditions and stock market momentum.  The strong dolar however could be the major cause of copper's weakness.  

We also look at  a ratio of Small Caps vs. Large Caps to assess the broadness of participation in the market trend; a rising ratio suggests increased tolerance for risk and desire to own stocks.  This ratio is rising, a bullish sign. The XLY:XLP ratio tracks the relative performance of Consumer Discretionary stocks vs. Consumer Staples, the former expected to outpace the latter as the economy strengthens.  This ratio is also rising, favoring the risk-on trade.


In a nutshell, mixed signals underscoring the trading-range character of this market.  Although this recent setback has mirrored other dips along the uptrend, the flattening out of the S&P 500 feels like a potential seasonal topping pattern, one that should not be taken lightly.  It will be interesting to see how the indicators behave should the S&P 500 once again break out to new highs (will they follow the uptrend or diverge)?



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Mind the Gap - A Visually Compelling Market Timing Signal

At Baseline Analytics, we are on the lookout for profitable (and often unexplainable) technical relationships between peaks and troughs of various market indices and indicators.  Here's one worth mentioning:

One of our TrendFlex indicators is the ratio LQD, the iShares IBOXX Investment Grade Corporate Bond Index, vs. the S&P 500.  We compare the trendline of that ratio to its 34-day exponential moving average.  That comparison gives us our compelling "peak and trough" story."

Note the chart below.  The bottom portion of the chart displays the LDQ:SPX ratio (the top part is the S&P 500). Focusing on the LDQ:SPX ratio, green lines show where the ratio exceeded its moving average at various peak levels. Note that such a peak coincided with a bullish bounce in the S&P 500. Conversely, blue lines show a trough in the ratio, and correspond to a bearish trend change in the S&P 500.


Today's decline in the S&P 500 (.77% so far) was preceded by a trough in the ratio, as history would suggest.  I won't draw any rationales from this relationship, but just to point out that the consistent performance of this phenomenon can help hedge long or short positions as an overall portfolio management strategy.

Please take a moment to learn about  Baseline Analytics' Premium Services and its thought leadership offerings on Global, Regional and Sector trading and investing opportunities.

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3 Regional Bank Breakouts as Financials Rally

With the prospect of rising interest rates fueling bank profits, regional bank ETF's have broken out, as can be seen by the SPDR Regional Banking Index below:


After Friday's market close, Baseline Analytics scanned over 9,000 equities to find breakout (or breakdown) stocks.  The breakout results generated a list populated by several regional bank stocks. Here are three noteworthy breakouts.

Lincoln National

LNC, with a home base in Radnor, PA., sports a 1.35% yield and goes ex-dividend on July 8.  Lincoln National has beat earnings estimates 3 out of 4 recent quarters, sports a below-industry PEG Ratio of 1.04 and a PE of 9.6.


Midwest Financial Group

Based in Iowa City, MOFG sports a 2.0% yield and went ex-dividend on May 28 (so August 28 is the next estimated ex-dividend date). Midwest Financial Group has beat earnings estimates 4 out of 4 recent quarters, sports an above-industry PEG Ratio of 2.0 and a PE of 12.0.


Lakeland Financial

Based in Warsaw, IN., LKFN sports a 2.39 yield and went ex-dividend on April 22 (so July 22 is the next estimated ex-dividend date). Lakeland Financial has beat earnings estimates 3 out of 4 recent quarters, sports a below-industry PEG Ratio of 1.46 and a PE of 14.6.


The SPDR KBW Regional Banking Index ETF yields 1.41% ($0.62 annual payout) and went ex-dividend on March 20 (next estimated ex-dividend date is June 20). KRE has a PE of 15.  Spreading risk with a diversified regional bank ETF can help to dampen any negative region-specific outcomes while benefiting from bigger rate spreads in a growing interest rate environment.  

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Baseline Analytics Flash Update

Running our nightly scans of over 6,000 equities and ETF's, we discovered a MACD BUY signal on the Dow Jones Transportation Index.  Developed by Gerald Appel in the late seventies, the Moving Average Convergence/Divergence oscillator (MACD) is one of the simplest and most effective momentum indicators available.

Note first of all the divergence in our Dow Theory chart, as the Dow reached new highs while Transports headed lower.  Note the bounce in the Transport index, as it approaches resistance near 8,600.

Dow Theory06052015

The Transports, as seen in the chart below, flashed a MACD bullish cross yesterday.  Truth be told, it has done this before (see mid-April), and it could not hold its gains.


In Dow Theory, two particular scenarios (among others) can transpire: the Dow can follow the decline in the Transports, or the Transports can catch up with the Dow (while the Dow perhaps languishes in a trading range).  

On the other hand, weakness in the transports can simply be a sign of industry-specific issues, as noted in Barron's.  Underperformance of airlines could be blamed on concerns of industry over-capacity, while flailing rails suggests weakness in commodities markets.  So the divergence between the Dow and the Transports may simply continue.

Nevertheless, this short-term shift in the Transports is worth watching.


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Baseline Analytics Market Tour Update - 4/23/15

Time to revisit the Baseline Analytics Market Tour charts to gauge the status of the uptrend. Although the S&P 500 closed off its highs on Thursday, our technical market indicators continue to support the uptrend.


I can't complain about this uptrend.  The chart above looks bullishly delicious from a classic technician's point of view.  Note how RSI (top of chart) barely falls to 30 at its lows, a sign of pullbacks within a strong uptrend.  The S&P 500 is forming an obvious "continuation pattern" triangle, whereby technical traders will see a breakout above the triangle top as a sign of further gains and new highs.

Pring's "Known Sure Thing" shows a firm rebound as it moves into positive territory. On the risky side, VIX is moving a bit too low for comfort. Several times we have noted at Baseline Analytics that VIX moving decisively below its 50-day moving average tends to precede market setbacks.

Market breadth is "gorgeous." Can't complain about the NYSE Advance-Decline line heights or the New Highs vs. New Lows.  The summation index, which is more of a lagging momentum indicator, successfully recovered with a bout of bearishness below 400 as it waltzes higher.


We look at corporate bonds and their performance relative to Treasuries.  An uptrend is bullish for the "risk-on" trade, which the chart below confirms.  In addition, we see strength in small caps vs. large caps, as well as consumer discretionary stocks vs. consumer staples, all of which reinforce a firming uptrend.  The only downside on this chart is the performance of copper vs. bonds, not so much a sign of economic weakness as it is a sign of a strong dollar and weak commodities.


So no bearish flavor to make note of in today's Baseline Analytics Market Tour.  If anything, these technical indicators look almost too good, suggesting that, with time (how much time is the question), we could see a pullback as we ride the tail of the risk-on trade. Our TrendFlex Score will help us pinpoint that stage of the market, when it finally arrives.


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New Month, New Dividends

Each month, Baseline Analytics scans equities and ETF's to identify dividend-payers with favorable technical characteristics. It's time to scope through the crowd of dividend-paying stocks for the month of April.  

We ran several key technical scans and arrived at a few lists of timely investments.  These lists are captured in our "Wrapper" reports and presented to subscribers.  As a preview to April's dividend-payers, here are a few standouts.

Bullish Trend Wrapper.  Of the 217 stocks and ETF's in our screen, 119 made the cut for trading above their 200-day moving average. We honed the list further to 40 that are trading 10% or higher than their 200-day moving average, representing the strongest stocks in the bunch.

One standout is Darden Restaurants (DRI).  Darden sports a PE of 13, a yield of 3.2%, and increasing earnings estimates.

MACD Buy Signal Wrappers.  MACD stands for "Moving Average Convergence Divergence" and is a popular technical indicator developed by Gerald Appel. Fewer picks here, as 12 made the cut and those were sliced to 7 picks (we dropped 5 that were stuck in a bearish trend).  

Hormel Foods is a standout here.  Hormel (HRL) has a 1.8% yield and raised its full year earnings guidance in February.  

Volume Surge Wrapper.  This is our most popular wrapper, utilized in several Baseline Analytics ETF and stock scans. We seek out stocks that are trading impressively above their moving average of volume.  This could be the most recent 5-day trading volume as compared to a stock's 50-day and 200-day average trading volume, for example, suggesting professional buying.

A standout on this wrapper list is Shoe Carnival (SCVL).  On March 20, Shoe Carnival broke out of a trading range in the mid-20's on high volume, recently closing at 29.  Its most recent 5-day average daily volume was 46% above its 50-day average trading volume. 

You'll need a subscription to access the complete set of Baseline Analytics Wrapper Reports for April.  Access our TrendFlex Score and ETF Signals, StockStash and ETFZone trading and investments ideas, through our Monthly, Quarterly or Annual subscription plans.  You get the full set of Premium Services offered on Baseline Analytics, at one low price.

Wait no longer, click here to subscribe.


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Baseline Analytics Market Tour Week Ending 3/20/15 - A Breadth of Fresh Highs

Baseline Analytics TrendFlex Score includes several market indicators focused on internal market strength.  These breadth indicators exhibited rather lofty jolts on Friday 3/20, hitting extremes that not only reinforce the strength of equities, but that potentially point to some frothiness in the "risk-on" trade.  The charts below depicts several measure of market breadth (all of which are variably-weighted components in the TrendFlex Score).


The chart above is the NYSE Advance-Decline indicator. Note the strong uptrend maintained above its moving average, pushing to meet up with its high from the beginning of March. No internal weakness here.  As I was seeking published commentary on the NYSE Advance-Decline, I found a rather noteworthy analysis from Greg Schnell, particularly interesting for its chart of the 6-year cycle of the S&P 500. That cycle, which plots a market low in the mid-2015 timeframe, was drawn back in December 2013, and markets have admittedly behaved a bit more bullishly since.  Also note Greg's reference to the "80/90's period where we stay nice and strong." Something to keep in mind today.

The next chart is the High-Low Percent of the S&P 500.  This breadth indicator measures the percent of new highs of the S&P 500. It is based on a percent of net new highs (number of new highs minus number of new lows) divided by the total number (500) of stocks in the S&P 500. In all of these charts we plot the 63-day exponential moving average, essentially a three month average of the indicator. The $SPXHLP (which is a 5-day average to smooth out the variability), is reaching toward 12% (its recent high was at 14% prior to the market heights reached at the start of March).  A bearish reading of this breadth indicator is below 0 (a number of market technicians view -2 and lower as a truly cautious level for bulls).


Our final breadth chart is the NYSE Advance-Decline Volume line.  This breadth indicator is based on Net Advancing Volume, which is the volume of advancing stocks less the volume of declining stocks. So higher-volume stocks (i.e. Walmart) have a heavier weighting in this calculation, which basically favors the large-cap stocks (the Advance-Decline line in the first chart above favors small to mid-cap stocks). Click here for a primer on AD and AD Volume indicators by Arthur Hill. 


We look to market breadth for signals that the uptrend is losing steam.  As fewer stocks participate in a market rally, breadth will begin to flatten and decline.  Note the chart presented by Greg Morris below.  The Nasdaq Composite reached a new high in November 2007, while breadth peaked in March 2007.  


Looking at today's chart of the Nasdaq and its A-D Line (below), it appears that 2015 is moving in the right direction, but the trend in the A-D line prior to February 2015 is a bit non-committal.


We'll watch this one carefully to assess any continued divergence, as these market breadth indicators remain invaluable to gauging the internal strength of equities.  

Our TrendFlex Score includes four measures of market breadth.  Subscribers receive an update on the TrendFlex Score each week, as it measures the risk of a change in the market trend.




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Baseline Analytics Market Tour Week Ending 3/13/15

This week's 0.86% decline in the S&P 500 did modest damage to technical indicators.  A real positive on the week was the strength in small cap stocks, which have decisively outperformed the S&P 500 since early February:


As for the S&P 500, the index appears more short-term neutral than bearish, while the long term trend remains bullish. Support centers around the 2010 to 2030 area. KST remains positive but suffers from a negative cross at the beginning of March.  VIX appears neutral, however the Put/Call ratio is rather high at 1.21 (above its 50-day moving average of 1.01) and potentially representative of a continued bounce (if not resumption of the short-term uptrend) in the S&P 500. 


Besides small caps, outperformance has continued for other "risk-on" sectors such as technology and consumer discretionary stocks.  Visit our ETFZone page (subscription required) for our new sector relative strength studies. The next FOMC meeting in March 17-18; be prepared for more rocky activity in the markets. 




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Baseline Analytics Market Tour Week Ending 2/27/15

Steady going for the stock market this week, as the S&P 500 remains comfortably above its 2090 breakout area. "Known Sure Thing (KST)" remains solidly in positive territory. ITs most recent peak above 40 preceded a 5% pullback in December.  While the KST indicator sits near 30, we don't see an extreme in tis reading yet. 

Low levels of VIX tend to precede periods of complacence and risk of a setback in equities.  Vix is approaching that risky low level, falling to almost 20% below its 50-day moving average.  We'll need to watch this one: 


 As for market breadth and internal strength, advance-declines and new highs vs. new lows remain healthy, despite weakness recently in the S&P 500 high-low ratio. Another positive continues to be the summation index, which remains firmly in bullish territory above 400 and broke above its recent high near 600:


 Our final chart looks at macro-economic and sector relationships.  The first is the ratio of LQD (iBoxx Corporate Bond Index) vs. IEF (10-Year Treasury Bond). We have seen a recent bullish breakout in February, an impressive turn of events from the downtrend that stretched from October 2014. 

Blog02282015cAs for other economic indicators, we view copper and its ratio to Treasuries as a signal of economic strength.  This relationship has been in a bearish mode since October, but recently has seen some upside, albeit not very convincing. The major driver of this relationship is the strong dollar and its affect on commodity prices. Finally, small caps have outpaced large caps, and discretionaries are beating staples, further bullish ammunition for equities.

Bottom line, technical conditions continue to favor an emphasis on equities.



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Baseline Analytics Market Tour Week Ending 2/20/15

New highs and strong bullish indicators wrapped up this week's market activity.  There does not appear to be any noteworthy level of extreme complacence in the markets; we will view these new highs as continuing to be supportive of positive market activity.

The S&P 500 broke out of a consolidating pattern from the 2080 area and broke into the 2100's with a close at 2110. "Known Sure Thing" -KST is solidly positive, having printed a positive cross-over in late January when the S&P 500 was in the 2060 area.  VIX and Put Call, although at relatively low levels, are not quite at extreme lows that would suggest a high level of complacency and a shift to the downside in the short term trend.  See the chart below: 


Internal market strength is supportive of the uptrend.  Note that the advance-decline ratio and new highs are positive and stretching to new indicator highs.  In addition, the NYSE Summation Index has surpassed the 400 level, commonly viewed as a bullish development, as it too confirms the strength of this uptrend: 


Finally, our economic technical indicators are bullish.  We regularly review the price relationship between corporate bonds and intermediate Treasuries.  That relationshp is positive and has established a firm uptrend after a several-month hiatus of consolidations.  In addition, small cap stocks and consumer discretionary stocks have been outperforming large caps and consumer staples, respectively, further supporting the "risk-on" trade in equities. 


Although some trading-range activity in the indices would not be abnormal at this stage of the bull market, we would continue to seek opportunistic long positions as the character of the stock market likely will shift to a "stock-pickers" market as the rally moves forward.  We are inclined to support bullish trades for the next 4-8 weeks with sensible stops on long positions.  


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Introducing an Expanded Baseline Analytics Service and Website

Dear Subscribers and Investors:

Baseline Analytics has launched an expansion of its investment services through a new and improved website.

The new look and feel of Baseline Analytics incorporates a "funnel approach" to strategic investment management, gathering thought leadership from experts on global and macro-economic issues, regional and sector opportunities, timely stocks, and asset allocation. The new website was developed from user feedback and market research indicating that more targeted research, investment and trading opportunities would be helpful to "corral the daily market noise" that tends to distract investors and lead to sub-par investment performance over time.

Baseline Analytics will continue to regularly update its subscription-based Premium Services, including updates to its TrendFlex Score and TrendFlex Signals each weekend (or more frequently as market conditions warrant), as well as selections to its StockStash and ETFZone offerings. Additional stock and ETF screens, and new Premium Services, are planned to be introduced over the coming months. 

For current subscribers, the login is located in the upper right of each webpage. You will be taken to a separate screen where you can input your Username and Password. The subscription-based services, labeled "Premium Services," can be accessed at the top toolbar via a drop down menu, where you will see listings for the TrendFlex Score, Index & ETF Signals, StockStash, ETF Zone, and additional Premium Services as they are introduced.  

Thank you for your interest in Baseline Analytics, and click here to visit the new site.

All the best,

Bob Palmerton, CMT






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Market Trend Update - Originally Published on October 23, 2014

Time for an update of our Baseline Analytics Market Tour.

There is no doubt that technical damage has been done to the major indices.  Although we are cautiously optimistic for year-end strength, more technical proof is needed to embrace that possibility.

As for the S&P 500, as can be seen in the chart below, the Relative Strength Index (RSI) held near the 30 area for a low, which has tended to support corrective action within long term uptrends.

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Why I Sold Today - Originally Published on June 7, 2014

On Friday, I sold a portion of my long positions in stocks.  Not too much, mind you.  All I did was to make the market pay me for my efforts in successfully identifying opportunities to profit from the market uptrend.

When the market hands you profits, take them.  At least take some of them.

Complacency is a condition that evolves typically over a timeline of several months.  It tends to manifest itself in repeated, consecutive market highs or, minimally, in a multitude of up days sprinkled with an occasional, small pullback.  When your friends start discussing stocks at casual gatherings, when margin levels start to build, when the DOW hitting new highs populates the front page of your local newspaper, complacency is starting to set in.

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Why I Sold Today

On Friday, I sold a portion of my long positions in stocks.  Not too much, mind you.  All I did was to make the market pay me for my efforts in successfully identifying opportunities to profit from the market uptrend.

When the market hands you profits, take them.  At least take some of them.

Complacency is a condition that evolves typically over a timeline of several months.  It tends to manifest itself in repeated, consecutive market highs or, minimally, in a multitude of up days sprinkled with an occasional, small pullback.  When your friends start discussing stocks at casual gatherings, when margin levels start to build, when the DOW hitting new highs populates the front page of your local newspaper, complacency is starting to set in.

Earlier this week, as the Baseline Analytics TrendFlex Classic signal and the TrendFlex Score suggested a high risk to a trend change shift to "down," I added two S&P 500 e-Mini short contracts to hedge my portfolio, which was slightly on margin (invested long 103%, albeit in a blend of stocks, bonds, commodities).

I closed my e-Mini future positions with a loss.  When I sold some long stock positions on Friday, I added another e-Mini short contract (also under water).  I will set a stop loss on that short position. Or I may add another short contract early next week.  I am invested 100% long in my trading accounts, and a net 68% long in a variety of mutual funds, including retirement accounts.  Handing some cash back to the market in a losing short position is OK.  I know that a market rout to the downside will not be protected effectively with this modest short position. But with the strength of this bull market, I don't want to heavily bet against the rising tide.

Today I also reviewed all of my long trading positions, and I started to set stops.  The stops are set at technical base points, such as the 50-day moving average, or levels that secure some profit or minimized loss.  As the market moves higher, I will raise those stops.  Each day, another $0.10 or $0.30 raise in a stop will give me the confidence that I am managing my portfolio responsibly, and not succumbing to complacency and greed.  Will I add any new long positions? Perhaps I will establish partial positions in stocks representing reasonable value, that pay dividends, or that have lagged the indices but have reason to recover based on company fundamentals.

Analyst consensus is forming that the S&P 500 has another 5% to 10% upside in 2014 (including a possible correction before then, of course). Many of us have sold in the past (i.e. stops triggered in a correction), only to miss a portion of the eventual recovery and new highs.  But I would rather jump into a bull trend in the middle, rather than try to identify and participate at the bottom. So even if most of my positions are closed out in a market rout, I will be building my buy list and look to participate should the market recover and suggest another bullish run.

Would I ever go fully short in a market correction? Probably not. My preference would be to keep a modest (50%?) position in stocks in my trading account, the balance in cash, and to short the market partially only if any short-term bounces are technically considered as such.  I will start building a buy list.

Major bull runs correlate positively with key economic variables such as growth in corporate profits, increasing employment, manufacturing output, stronger consumer confidence and spending, and housing starts. The market is a leading indicator, suggesting that improvements eventually materializing in these indicators presaged the stock market's rise from the ashes of 2009.  As long as the economic data remain supportive of the market, I will be long in stocks.

So what prompted me to lighten up on my long positions?  I am not bearish, I just want to hedge my long exposure.

Below is a chart of the Baseline Analytics TrendFlex Score.  The TrendFlex Score is a measure comprising 12 indicators that are weighted weekly.  The indicators cover macro-economic data, stock market breadth and momentum, market sentiment, bond risk premiums and technical support and resistance levels in the market averages. The TrendFlex Score identifies market extremes, serving as a warning sign of a potential shift in the market trend.

The TrendFlex Score ranges between 1,0 (extreme bullishness) to 3.0 (extreme bearishness). When the TrendFlex Score descends to the 1.30 to 1.40 area, chances are ripe for a pullback in the market.  The dates in the chart start in April, 2011, and end as of this Friday.  Note extreme lows in May 2013 (score of 1.20) and November 2013 (score of 1.32), which preceded short-term market corrections.  Friday, the TrendFlex Score settled at 1.38, near its historic lows.

Conversely, high scores (around 2.0 and higher) tend to suggest that a market correction is about to end.  Note extreme scores in May 2012 (score of 2.64) and January 31, 2014 (score of 1.96), among other extreme highs, that preceded market rallies.

I use the TrendFlex Score in my personal money management as well as managing client funds at The Absolute Return. For example, as the TrendFlex Score descends toward extreme lows, I look for opportunities to go long in sector ETF's with low correlation to stocks (such as bonds at most times), I will set stops, sell calls on long positions (not much money in that business today with a low VIX) and take some money off the table by pruning back long positions.

As a long-term investor (but occasional trader), I will use the TrendFlex Score to monitor risk in my portfolio, and to calibrate my weightings across stocks, ETF's, bonds, and cash, accordingly.  I would like to remain ahead of the curve and not succumb to a sudden market meltdown by remaining complacent as the averages reach new highs.

Ignoring vigilant portfolio management can have disastrous consequences.  Witness the years 2000 and 2008.  But admittedly, being over-zealous in adjusting portfolio allocations can likewise cause under-performance as well as accumulating transaction costs. Those long-term investors fortunate (and prescient) enough to have built long positions in 2009 and 2010, and simply ignored their long holdings, have done quite well.

At the end of the day, however, maintaining a long-term perspective supported by positive macro-economic trends is a suitable recipe for successful investing.

Click here for a video overview of the TrendFlex Score.  Click on the following links for Product and Subscription details.

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Some Peace and Quiet with Low Beta Stocks

Every so often, the high-beta, growth-oriented momentum portfolio needs a little peace and quiet via a prudent diversification into lower-beta equities.  A mix of varying beta stocks can provide diversification within a 100% stock allocation, whether it consists of consumer staples, healthcare, energy, telecom, etc.

Baseline Analytics ran a stock screener selecting equities with the following characteristics:

  • Below market beta of 0.8 or lower
  • Return on equity of 10% or higher
  • Price Earnings Ratio under 15
  • Dividend yield of 1.5% or higher
The attached stock screen has not been combed for timely trades or other fundamental or technical indicators that might suggest a high reward-to-risk ratio.  We leave that work up to our StockStash service.  Click on the link below and it will open an Excel file with our low beta selections.
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Bringing Out the Defensive Line

As the stock market rally reaches to new highs, it may be time to re-allocate a portion of capital to a few top defensive equities to help manage risk should this uptrend  grow weary.

First, let’s take a long-term look at staples vs. discretionary stocks. Below is a weekly chart of staples vs. discretionaries and their relative performance vs. the S&P 500.  The indices are the S&P 500 Consumer Staples Sector Index (SPST) vs. the S&P 500 Consumer Discretionary Index (SPCC).  As is obvious and expected following the "Great Recession," Consumer Discretionary stocks (purple line) have outpaced defensive Staples (orange line) since the market bottom in 2009. Staples have graced a trading range since 2010, with a rather marked setback in relative performance this year, since April 2013.

As discretionary stocks have outperformed staples, so too has growth trounced value, generally spanning the period from the 2009 market bottom to today.  An interesting to note, however, is that the relative strength of growth vs. value has not participated recently in the new highs of the S&P 500.  In the chart below, we depict the Russell 2000 Growth index (RUO), vs. The Russell 2000 Value index (RUJ).  You can see the peak in the Growth/Value ratio achieved this October, corresponding with a peak in its Relative Strength Index (RSI) from an overbought condition.

How do we tactically respond to these signals in our portfolio allocation strategies? Considering the gains on the equity markets during 2013, taking profits or shifting out of high-beta growth equities into more defensive long positions may be in order, especially considering the age in this market uptrend, which will be five years old this March.

We ran a screen of equities that sported the following “defensive” characteristics but that represented companies with solid fundamentals.  Here is the screening  criteria:

- Beta 0.8 or under

- Return on Equity of 10% or higher

- Record of positive earnings surprises

- Price to cashflow of 10 or lower

- Dividend yield of 1.5% or higher (we omitted utilities due to interest rate risk).

We then pared the list to a mix of equities of companies representing a diversity of industries as well as stocks that were technical-attractive.  While there is no guarantee that discretionary stocks won’t continue their steadfast ascent, diversifying one’s portfolio with a handful of defensives such as those above, is a prudent approach to equity allocations.

Click here to learn more about our portfolio allocation strategies and market trend signals.


- Baseline Analytics

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Update to a Favorite Indicator

As an update to our August 12th blog, here is the current view of the NYSI indicator, one of our favorites.

The New York Stock Exchange summation index, NYSI, slipped into bearish territory in early August.  Since that warning signal noted here on Baseline Analytics, the S&P 500 has declined 3.4% from its high near 1710 to today's close.  Note on the chart below that our NYSI indicator has slipped below 0 and is nearing a potential support zone near -200.

The -200 area has acted as an area of support and a reversal of market corrections in November 2012 and June 2013.

An important measure that Baseline Analytics utilizes is the TrendFlex Score, a blend of technical, fundamental and macro-economic indicators that help identify the risk to the current trend.  We will watch the TrendFlex Score to help us assess when it is time to lighten up on our bearish bets and reconsider long positions consistent with the longer-term uptrend.

Baseline Analytics TrendFlex subscribers will receive updates to the trend signals and the TrendFlex Score to be informed of a likely change in trend.  If you haven't subscribed yet, click here and enjoy our weekly trend indicator updates as well as our StockStash and ETF Zone selections.

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Baseline Analytics

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Reliable Indicator Turns Bullish

As noted here in the past, a market breadth indicator that has proven reliable to assess the market trend is the New York Stock Exchange Summation Index.  Developed by Sherman and Marian McClellan, the McClellan Summation Index is a breadth indicator derived from the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues).

Baseline Analytics has used the "400" level on the NYSI to delineate between bullish and bearish trends.  On our last update, NYSI was at a -134 reading.  This week, the NYSI peaked above the 400 level, closing at 429 on Friday.

As can be seen in the chart above, the 400 level has marked trend changes rather reliably, although it tends to be a lagging, confirming indicator. To enhance the value of the NYSI indicator, we have applied a 20-day simple moving average.  An early trend-change signal is flashed when the NYSI crosses this moving average.  The moving average cross is denoted by the dotted green line, flashing a bullish signal, at about the 1630 level of the S&P500 (for a 3.8% gain so far).  The solid green line, denoting the point where the NYSI crossed above the 400 level, triggered near 1675 on the S&P500.

The summation index is typically used for medium-term and long-term timing (whereas the McClellan Oscillator is effective for more of a short-term horizon).  This is because the slower cumulative nature of the Summation Index requires more data points to support the current trend.  This indicator is not perfect, but represents another tool in the technical analysis arsenal worth tracking.

What is the NYSI telling us today?  Crossing the 400 level is a bullish confirmation.  Note that it took the S&P500 from its low of 1575 to ascend to 1675 before the NYSI flashed a buy when it crossed 400. Looking back, you will see, however, that such rallies in the S&P500 were necessary to move the NYSI to a buy signal. As a medium to long-term indicator, the NYSI is an effective tool to gauge the overall trend and to position your portfolio for best advantage. As short-term readings get overbought, as long as the 400-level support remains intact, we will look to selectively add to long positions.

Subscribe to Baseline Analytics TrendFlex for the latest market trend signal and risk-assessment indicators. Add alpha to your portfolio with StockStash and ETF Zone selections.

- Baseline Analytics

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