Baseline Analytics Blog

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

Checking in on the Trend Extremes - 2/26/17

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. 

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Trend Change Risk Assessment: February 6, 2016

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

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A Neutral Reading in our "Extremes" Indicators

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.

 

 

 

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State of the Extremes as Equities Challenge their Highs

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).

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Growth vs. Value: Trend Shift in the Works?

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

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Gold Miner's Technicals - An Interesting Setup?

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. 

 

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TrendFlex Market Trend Risk Assessment - 12/27/2016

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!

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Hedging Our Bets - 12/8/16 Midday Update

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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New Month, New Dividends: Welcome December!

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

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Extreme Reading Turning Neutral - Buying Opportunity?

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 

 

 

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Extreme reading turning neutral

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).

 

 

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Dow Theory Bullish

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

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Dow Theory Buy Signals Looking Promising

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

 

DT1116

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Junk Bond Divergence - Implications for Equities?

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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Spotting Extremes as Clues to a Market Rally (or Sell-Off)

Baseline Analytics was founded in 2005 with a vision to assemble a variety of indicators that could identify extremes in the stock market, and to profit from the shifts in market trend following the occurence of an extreme indicator reading.

Our TrendFlex subscribers now receive timely indicator extreme alerts.  We have categorized our key indicator extremes as follows:

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

When one or more of these indicators has reached an extreme reading, chart and commentary will follow.  Here are examples of charts depicting these extreme indicators and what they suggest will happen to the market trend.

CBOE VIX and CBOE 

Look for extreme readings in VIX and Put/Call versus a moving average of each indicator. Peaks and troughs in VIX and Put/Call offer strong indications of a short-term shift in the trend of the S&P 500.

CBOE11132016

TED Spread

Shifts in the TED Spread also help to spot extremes.  As can be seen in the chart below, an oscillator indicator at the bottom of the chart spots potential buy and sell opportunities in the S&P 500.

TED11132016 

LQD:S&P 500 Ratio GAP vs. Moving Average

Here is our basic Bond vs. Stock Market Indicator.  A large GAP in the ratio (see bottom portion of chart below) provides the extreme reading and opportunity to go long or short equities.

LQD Gap

Baseline Analytics subscribers receive updates on these indicators when they have reached extreme readings. These indicators also play a role in the TrendFlex Score, which represents a weighting of 12 key market trend indicators. Subscribers include Registered Investment Advisors, individual investors, and portfolio managers.

Subscribers most often use our indicators to hedge portfolios (one popular strategy is to short S&P 500 e-Mini futures when the CBOE VIX reading is at a trough compared to its moving average).

Visit our Premium Services page for information on our services.  Baseline Analytics is currently OPEN ACCESS, however our modest $79 annual fee will be re-introduced in the coming days (A 4-week Free Trial will be available).

 

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A Bullish TED Spread Signal

We've shown this chart before, highlighting the Buy and Sell signals for the S&P 500.  Just when I thought the post-election rally was getting a bit extended, the TED Spread signal flashed a convincing Buy.

 

TED1110

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Monday 11/7 Market Rally Recap

A powerful 2.2% rally in the S&P 500 propelled the index off its 200-day moving average.  Volume was on the lighter side.  VIX settled back from its extreme fear reading and the Put/Call ratio remains at a high 1.22,

We hedged longs a bit in the mid-afternoon, considering the possibility that equities moved a bit too fast for our liking going into Election Day.  Let's see what transpires tomorrow.  Trading enthusiasts might want to daytrade S&P 500 e-Mini futures while election results are posted in the evening. 

BLA11072016

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Monday 11/7 Market Rally Recap

A powerful 2.2% rally in the S&P 500 propelled the index off its 200-day moving average.  Volume was on the lighter side.  VIX settled back from its extreme fear reading and the Put/Call ratio remains at a high 1.22,

We hedged longs a bit in the mid-afternoon, considering the possibility that equities moved a bit too fast for our liking going into Election Day.  Let's see what transpires tomorrow.

BLA11072016

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Encouraging Support and Contrarian Extremes

An update to yesterday's report:

The S&P 500 bounced perfectly off its 200-day moving average support, an encouraging sign for resumption of the uptrend.  VIX extreme hints at potential rebound in equities.  Stochastics are now oversold.

tf1104

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Trend Change Watch - Extremes Singing Their Tune

A quick update on several technical indicators suggests that a rally may be near.  See chart and commentary below.

tf1103

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