Baseline Analytics Blog

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

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.

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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.

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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.

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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

One of our favorite technical indicators at Baseline Analytics is a bond "risk-premium" indicator and how its behavior foreshadows shifts in the quity markets.  The chart below shows the ratio between of iShares iBoxx Investment Grade Corporate bond Fund (LQD) and the iShares Barclays 7-10 Year Treasury Bond Fund.

 sc040816

Note that movement in this ratio versus its moving average line tends to mark shifts in the S&P 500 reasonably well.  In fact, when we add Martin Pring's "Known Sure Thing" indicator (KST) to the ratio, as seen in the lower portion of the chart, you can visualize how bearish and bullish crosses within a KST of the bond risk-premium indicator also mark turning points in the S&P 500. 

The bond risk premium ratio crossed above its moving average in March, a bullish development as the S&P 500 gained.  Even though the indicator remains above its moving average (purple line), the KST has flashed a warning sign with its bearish cross.

We interpret this development as an increase in the risk of a trend change in equities to the downside, and would take this opportunitiy to hedge long positions with instruments such as e-Mini S&P 500 futures.

Learn more about Baseline Analytics and our family of market trend risk-assessment indicators

One of our market trend risk indicators is the TED Spread. Per Wikipedia,  the TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt ("T-bills"). TEDis an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.

Note that an increasing TED Spread tends to foreshadow a decline in the S&P 500 (and vice-versa).  This inverse relationship has recently shifted in favor of bears, a potential indicator that stocks have move too high too quickly.

We view this as an opportunity to hedge long positions and hold off adding to longs in the current market.

 

ted

Time to do nothing, if not to hedge longs a bit.

Here's the technical take.  The S&P 500 has broached the next resistance level near 2060.  Per the chart below, KST (a moving average momentum system) is close to a bearish moving average cross (note the impact of the prior cross in November 2015).

VIX is at another low versus its moving average (a contrarian's bearish signal) while stochastics remain overbought.

 

BlogA

It's exciting to see the Advance-Decline line peak near the May 2015 highs. Such a gap versus its moving average, however, is a cause for concern.  The summation index, likewise, has shot to the moon.

BlogB

 

Based on these technical indicators, I would not jump aggressively into stocks but would prefer to hedge a largely long portfolio with e-Mini futures or VXX. 

Here's a short "TechniTweet."  Couldn't help noticing this extreme reading in the percentage of stocks in the S&P 500 above their 50-day moving average (SPXA50R).  Note the peaks corresponding to short term highs in the index (the blue line is a 5-day smoothed version of the SPXA50R).

50a

The S&P 500 deflected off resistance near 2000 today.  Fortunately (for the bulls) volume was lighter on today's setback.  As noted in the chart below, bullish momentum has pushed the KST indicator (Pring's "Known Sure Thing") to positive territory.  Our sentiment indicators of VIX and the CBOE Put/Call Ratio are neutral (neither overbought or oversold).  Stochastics show the overbought short-term character of the market, but this overbought state is no different from a similar condition that can be seen in the rally off the September lows.

Our take: a modest and overdue setback as the market digests gains.  Some backing and filling can be expected at this juncture.

 

MTU0308

Tuesday's furious 46 point (2.39% gain) in the S&P 500 was impressive.  Volume was "OK" but higher than recent activity.  Now the S&P 500 sits at a major resistance zone between 1975 and 2000.  Some profit-taking would be expected at this juncture, especially as stochastics suggest an overbought environment.  In addition, both VIX and the Put/Call ratio are beginning to exert some complacency, which can be a contrarian signal. 

MT0302

In the chart below, the NYSE Advance-Decline ratio suggests that the market has moved a bit too fast, with the short-term risk-reward favoring a decline.  Our viewpoint is based on recent patterns showing the extent of the A/D line climbing above its moving average line.  Note that the recent surge has extended to the point where, in the past, declines have set in.   

MT0302b

In the chart below, small caps and discretionary stocks have rebounded recently along with the risk-on trade.  Our bond risk premium measure (LQD:IEF) looks a bit overbought as it surges to its moving average.

MT0302c

In summary, nice short-term action however technical challenges lay ahead if this market is to establish a meaningful and sustained reversal to the upside.

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