Baseline Analytics Blog

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

Following the market close of 7/28/16, several Index and Sector ETF's have signaled shifts to a potential trend change, based on Baseline Analytics trend-following criteria.  Those ETF's include DIA, XLE, TLT, GLD, XLI and XLP. Click here to see the trend signal changes on our Index and ETF Signals page.

One of Baseline Analytics' key sentiment indicators in the behavior of VIX versus several of its moving average measures.  When VIX gaps well below its moving average, as seen in the chart below (note the blue circles), equity market conditions are ripe for a short-term setback. 

It should be no surprise as equities stretch to new highs, growing participation on the long side has sent VIX to sharply-lower levels.  We are maintaining our hedges to long positions based on this (and other) technical indicators that comprise our TrendFlex products.

VIX07222016

DOW Theory looks for consistent trend performance between the DOW Industrials and the DOW Transports.

In a strongly-bullish environment, both move consistently with positive trendlines.  When one diverges from the other, a caution signal is flashed.  As you can see by the chart below, the DOW recently hit a new high, while the Transports are stuggling to form a base and have not yet achieved a high.

We consider this behavior as indicative of the risk level in today's equity markets.

 

DowTheory07202016

Two key technical indicators utilized by Baseline Analytics suggest that it may be time to hedge long positions.

VIX has drawn well below its moving average, and the CBOE Put/Call Ratio has likewise fallen to an extreme low.  Both of these technical indicators are considered contrarian and typically flash at least a short-term pullback in equities.

 

VIX071516

As for the longer-term picture, indicators remain positive based on our TrendFlex Allegiance Score of 1.25 (1.0 bullish extreme; 3.0 bearish extreme).  Any short-term setback may settle the S&P 500 near the 2100 area.

TFA071516

Likewise, our TrendFlex Allegiance credit risk spread indicator is also bullish, and has gone sharply higher following the settling down of the Brexit news.

TFA071516 2

Strategy?  Hedge long positions in the short-term, but don't underestimate the strength of this market.  Valuations need consideration and with earnings looking so-so, the market may be edging toward an overvalued stance.  However, keep in mind the historically low interest rates when gauging equity valuations.

 

Despite the S&P 500's robust recovery from this morning's lows, TrendFlex Classic II (our bond risk premium measure) has flashed a SELL signal. This underscores a higher risk profile in equities.  Preserving capital is key.

 

TFC Sell

TrendFlex Classic II is a short/immediate term signal, and is based on a credit risk-premium indicator utilizing a ratio of the iShares iBoxx Investment Grade Corporate bond Fund (LQD) and the 7-10 Year Treasury Bond ETF (IEF), compared to a moving average of the same ratio.  A cross above (bullish) or below (bearish) the moving average establishes the signal for the S&P 500.

Note in the chart below, the signal is nearing a "Sell" trigger for the S&P 500.  We will watch this indicator carefully over the next few days.

Trendflex 051116 

When stocks are risky, bonds tend to outperform.  Within that outperformance, “risk-free” U.S. Government debt tends to outperform corporate debt.  TrendFlex assesses this relative performance of government and corporate bond markets and has arrived at Classic II and Allegiance II (longer-term) timing indicators. 

Baseline Analytics and its TrendFlex Signals is currently OPEN ACCESS.  Visit our Premium Services (for FREE) on a regular basis!

Markets can change fast.  Just as the major indices attempted to meet their recent highs, earnings and growth jitters led to a setback.

Baseline Analytics updates its Index and Sector ETF signal page daily as shifts in the technical character of the market emerge.  Click here to see the trend changes from the May 3, 2016 market close.

Baseline Analytics is currently OPEN ACCESS.  Visit our TrendFlex Score and Signals as well as our Index and Sector ETF page regularly!

Gold is getting interesting.  Perhaps it is due to a smidgen of inflationary signals and a firming commodities market, as well as a contrary play amidst the prospect of an overbought market ripe for a correction.

Tehnicals are in gold's favor.  Note on the monthly chart below, gold has retraced 50% of its gain from the 2001 low to its 2011 high.

 GLD04292016

On a weekly basis, the breakout looks reasonably firm, albeit a modest retracement of recent gains may be in order.  

GLD04292016b

Gold's price behavior suggests that a little bit of the yellow metal may not be such a bad addition to one's portfolio.  Yesterday, on our Index and ETF Signals page, we cited the "low" risk of a trend change from gold's bullish character.  Our TrendFlex Signals as well as our Index and ETF signals are currently OPEN ACCESS, so please visit frequently.

Best to your investing!

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Pushing toward new highs is typically a back-and-forth struggle, and this time is no different.  As the S&P 500 meanders toward the 2120 area, a few technical signals suggest that some form of capital preservation (or avoiding new longs) is in order.  Most particularly, as can be seen at the bottom of the chart below, VIX has found a footing near a recent low versus its 50-day moving average which, in the past, has preceded market setbacks. 

 MTa

Stochastics are also correcting from an overbought basis, and KST, although strong and positive, highlights the waining momentum.  In the chart below, note the extreme hights of both the NYSE Advance-Decline ratio and the Summation Index.  It is market conditions like this that convince us to take a "reality check" and hedge long portfolios.  One such option is to short S&P 500 e-Mini futures to try at least to maintain stability in our portfolios.  Any blast of negative market news can lead to an unraveling of this push upward. 

MTd

One of the positive indicators supporting the uptrend has been our "bond risk premium" indicator (a component of the Trendflex Score).  this flashed a long signal for equities on March 1st.  Small caps and discretionary stocks also show strength, helping to support the "risk-on" trade.

MTc

In summary, it appears to be "make or break" time for equities.  Recent pullbacks early in the day have mustered strength to recover by day's end. Earnings jitters as well as today's Fed announcement have added an aire of caution.  We'll see if the waning momentum shifts to a new downtrend or simply continues to consolidate in a trading-range pattern. A convincing gain in the S&P 500 to the 2130-2140 area would be key to shift the consensus back to a firm uptrend.

It is OPEN ACCESS time for Baseline Analytics.  That means FREE access to our weekly TrendFlex Signals and TrendFlex Score, as well as our Index and Sector ETF technical signals.  Grasp the risk to a change in trend by following Baseline Analytics regularly. Go to our Premium Services menu tab above and select the content from the drop-down menu.

Best to your investing!

Longs beware. When TRIN (red line) breaches horizontal green or red lines, a potential trend change is likely.  Note how TRIN dipped below the horizontal red line, suggesting a bearish trend change shift, consistent with this indicator's past behavior.

trin 04192016

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