Baseline Analytics Blog

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

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.


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.

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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.



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.



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.



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).


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.



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. 


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.   


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.


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.

Written by Marc Chandler.     Investors have become unhinged. The increased volatility and dramatic market moves challenge even the most robust investment strategies. This sets off a chain reaction of money and risk management that further amplifies the price action, like an echo chamber. Then a cottage industry of reporters, analysts and bloggers offer explanations often without distinguishing the initial sound from the echo.
At the same time, that which we have come to think of as terra firma has turned into quicksand. Interest rates are bounded by zero.Of course, there had been a few exceptions, like when Germany and Switzerland in the 1970s discouraged speculative foreign inflows, but it was not a generalized phenomenon.  Now it is widespread.  German and Japanese yields are negative out eight to nine years while Switzerland has negative rates through 15 years. All told more than $8 trillion of debt has a negative yield.

A ratio of high yield debt to investment grade corporate debt, using the ETFs HYG vs. LQD, peaked in October 2014 as the S&P 500 continued to move toward new highs.  

As seen in the chart below, at the highs of the S&P 500 this past summer, the debt ratio reached a lower high, then proceeded to decline to new lows.  During this timeframe, the S&P 500 attempted a new high in late 2015, only to struggle to its recent lows.  The debt ratio's "leading indicator" of stock market activity turned out to be rather prescient.

What's noteworthy in this relationship is that the debt ratio has reached the 50% retracement level from its uptrend that started in March, 2009. Should these levels hold in the debt ratio, a firming of equities can also be expected. A resumption in the uptrend for the ratio (as well as the S&P 500) would help to support the scenario that today we are seeing a correction in a bull market, rather than an emerging bear market structure.



Baseline Analytics published weekly market trend "risk assessment" indicators to help identify a change in trend.  Click here for a FREE TRIAL.

Leran more about our Premium Services and our TrendFlex family of market trend risk assessment tools.

Written by David Fabian of FMD Capital Management.    The unprecedented volatility to start the year has brought out nearly every type of expert opinion on the best way to ride out the storm. I have heard arguments ranging from “stay the course” to “this is just the start of the crash”.

Let me be clear by saying that absolutely no one knows what is going to happen over the next three to six months. We could be another 20% lower, 20% higher, or virtually anywhere in between. Anything can happen and to have 100% conviction in just one outcome is the sign of someone who is completely unhinged from reality.

Weekly chart shows (at today's bottom) a 38.2% Fibonacci retracement from the 2012 lows.



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