The TrendFlex Classic CR remains in sell mode. Next support for the S&P500 is 2425 with 2400 as major support.
Subcategories from this category:Technical Analysis
The TrendFlex Classic CR remains in sell mode. Next support for the S&P500 is 2425 with 2400 as major support.
There was no change to the TrendFlex Classic and Allegiance signals this week.
S&P 500 Return
|S&P 500 timing signals based on credit risk (CR) premiums (corporate vs.Treasury debt).|
|TrendFlex Classic CR||Short||8/7/17||+1.6%||-1.6%|
|TrendFlex Allegiance CR||Long||4/13/16||+20.9%||+20.9%|
The TrendFlex Score increased from 1.41 to 1.62 and is aboveits three-week moving average, a bearish development.
TrendFlex Trend Following Signals (TF)
The TrendFlex Classic TF and Allegiance signals remain in Uptrend.
S&P 500 Return
S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term). Score: Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0
|TrendFlex Classic TF||Cash||8/7/17||
|TrendFlex Allegiance TF||Uptrend||5/31/16||+17.7%||+17.7%||1.375|
Baseline Analytics Extremes highlights four key TrendFlex Indicators and their level of extreme readings. The key indicators include the following:
When one or more of these indicators has reached an extreme reading, chart and commentary will follow. The VIX reading is at an extreme.
The Portfolio Strategies chart remains bullish, with an edge toward risk-aversion.
|Set Stops on Longs|
|Short Overbought Equities|
|Add to Longs|
|Hedge or Reduce Shorts|
|Long Futures and Options|
*Red highlighted items are recommended strategies
At Baseline Analyitcs, we review about 30 key charts per day. Two charts recently have flashed negative (bearish) indicators.
We track the momentum activity printed by the NYSE McClellan Oscillator. Note on the chart below, the vertical lines: green being bullish, red being bearish. Note on our NYMO chart below, the solid red line on the right, which corresponded quite well with a "near peak" in the S&P 500 (pink line). Other bullish and bearish signals can be compared to recent levels of the S&P 500.
Our next chart is the % of stocks in the S&P 500 trading over their 50-day moving average. We have recently seen a shift of that indicator below its 34-day exponential moving average. Note the grren and red vertical lines and how they correspond with short-term peaks and troughs in the S&P 500.
We utilize indicators such as these in order to decide whether to hedge equities in a positive or negative fashion.
Looking at the intra-day TRIN reading, note the sharp drop into extreme territory. Extreme dips in the past have led to short-term recoveries in the S&P 500.
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.
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.
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:
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:
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:
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.
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.
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.
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.
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.
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:
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.
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).
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.
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.
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).
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.
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)
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.
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.
The weekly version of the TrendFlex CR similarly demonstrates today's extreme readings:
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:
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.
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.
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.
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.
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.
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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.
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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.