Baseline Analytics Blog

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

TED Spread Flashes a Caution Signal

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

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Time to Buy or Sell? Market Tour Update: 3/30/2016

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. 

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Percent of Stocks Above 50-Day Moving Average at an Extreme

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

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Market Tour Update - 3/8/16

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

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Market Tour Update - 3/2/2016

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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The World is not Ending (Yet), Panic To Subside

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.
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A High Yield Debt (and Stock Market) Signal?

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.

 

junk

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

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Why Trying To Avoid Every Dip Is A Fool’s Errand

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.

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Fibonacci Retracement Achieved: Time for that Bounce?

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

 

spxfib

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Gap Trade and Shifts in the Market Trend - Bounce Opportunity Update

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), compare the points of the blue arrows to the sames points on the green S&P 500 line.

The relationship here is the iShares iBoxx Investment Grade Bond Fund vs. its moving average as well as compared to a ratio of the ETF to the S&P 500.

Interesting comparisons that point toward additional evidence of the oversold equity markets. 

Here is the updated chart as of 12:10 pm 1/15/16: 

GAP2

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Great Graphic: S&P and Oil--Conjoined Twins or Distant Cousins that Sometimes Look Alike?

Written by Marc Chandler.   The US stock market and the oil market appear joined at the hip. TheGreat Graphichere, created on Bloomberg, shows the correlation of the two markets. It is near 0.77, which is the highest since September 2013.  
 
 
The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures contract. It tells us that the two markets have been moving in the same direction nearly eight of ten sessions over the past 60 sessions.  
As the chart shows (on the left is the correlation and on the right is the frequency distribution), the correlation is not stable, and presently it is at an extreme. Although it is a descriptive statistic, I read it as a warning that such a tight fit is not sustainable and will break down. Although the correlation holds, it is a salutary caution to short-term traders that while knowing the direction of oil has been a good tell of the direction of the S&P 500, one ought not bank on it for much longer.  
Investors are more interested in the correlation of returns rather than levels. Here the correlation (percent change) is about 0.33 over the last 60 sessions.  This is thelowerend of four-month range. The peak since 2013 was set this past November a little above 0.50.  
Over the past 30-days, the correlation of returns is near 0.25. Yesterday it was nearer 0.20, which is lowest since last June.  

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Great Graphic: S&P and Oil--Conjoined Twins or Distant Cousins that Sometimes Look Alike?

Written by Marc Chandler.   The US stock market and the oil market appear joined at the hip. The great graphic here, created on Bloomberg, shows the correlation of the two markets. It is near 0.77, which is the highest since September 2013.  
 
 sP and oil
The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures contract. It tells us that the two markets have been moving in the same direction nearly eight of ten sessions over the past 60 sessions.  
As the chart shows (on the left is the correlation and on the right is the frequency distribution), the correlation is not stable, and presently it is at an extreme. Although it is a descriptive statistic, I read it as a warning that such a tight fit is not sustainable and will break down. Although the correlation holds, it is a salutary caution to short-term traders that while knowing the direction of oil has been a good tell of the direction of the S&P 500, one ought not bank on it for much longer.  
Investors are more interested in the correlation of returns rather than levels. Here the correlation (percent change) is about 0.33 over the last 60 sessions.  This is thelowerend of four-month range. The peak since 2013 was set this past November a little above 0.50.  
Over the past 30-days, the correlation of returns is near 0.25. Yesterday it was nearer 0.20, which is lowest since last June.  

 

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Strong Drop Expected in S&P 500 w/ 10-Year Slightly Manic

The Williams Analytics LLC Blog has just posted a new article on the state of the US macroeconomy and what could be in store for the S&P 500 E-mini and 10-Year US Treasury Note.

As a brief preview, the macroeconomy is growing, especially on the real personal income and real retail sales front. Still, while both of these measures have been outpacing inflation on a year-over-year basis, slow-downs and volatility in each may be on the horizon.

The big news is with the S&P: despite the strong drop as of late, our forecasting models are predicting even further declines, especially in February. Whether a reversal to this strong drop materializes is a matter where only time will tell.

The 10-Year is expected to follow a long-established "W"-shaped trend in the year ahead. Much of this shape may be due to an anticipated manic-like reaction in the 10-Year with respect to new macroeconomic news.

Gain more detailed insights today by visiting the Williams Analytics Blog and by downloading Williams Analytics' many FREE Indicator Reports!

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"Gap Trade" and Shifts in the Market Trend - Bounce Opportunity?

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), 

 

 

 

GAP

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"Gap Trade" and Shifts in the Market Trend - Bounce Opportunity?

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), compare the points of the blue arrows to the sames points on the green S&P 500 line.

The relationship here is the iShares iBoxx Investment Grade Bond Fund vs. its moving average as well as compared to a ratio of the ETF to the S&P 500.

Interesting comparisons that point toward additional evidence of the oversold equity markets. 

 

GAP

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Baseline Analytics Market Tour Update - 1/8/16

The technical overview is bearish and approaching an extreme at which a bounce is likely.  

Per the chart below, the S&P 500 breached major support from the December/January lows on higher volume. Rally attempts (i.e. last night's futures) are met with selling as the market looks to establish a new foundation.

Extremes in bearish readings, denoted by a high VIX reading as well as the Put/Call Ratio, suggest an impending bounce. In addition, stochastics (bottom of the first chart) are reaching oversold levels and reinforce the potential for a rally.

BLAMT1

Market breadth as seen by the NYSE Advance-Decline line held up reasonably well, but is not a convincing positive.  Note today (chart at 10:58 am) that the high/low ratio is trying to bounce, but early positives appear to be taking a backseat to the risk-off trade. 

BLAMT2

Our technical indicators below underscore the defensive nature of the markets, as bonds and defensive equities (staples vs. discretionaries) outperform.

 BLAMT3

So from a purely technical perspective, the edge has to be given to the bears.  Tradeable rallies will ensue, and we will be on the lookout for an impending recovery. Stability in China and a cessation of oil's price decline are potential positives that can sustain a resumption of the uptrend as we move further into the new year.  The economy is holding up reasonably well, as a bear market-induced recession is not a likely event.  Bear markets happen due to recession, an inverted yield curve, or a liquidity crisis, none of which are on the immediate horizon.

We view this as a correction in a "consolidating" to slightly bullish market.  Given the age of this bull market, modest annual gains (if not flat performance) may be in store.

 

 

 

 

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Labor Market Recovery Still Has Legs but w/ S&P Hindered by Declining Momentum

The Williams Analytics LLC Blog has just posted a new article on the state of the US labor market and what could be in store for the S&P 500 E-mini and 10-Year US Treasury Note.

As a brief preview, the US labor market is still improving but with declining momentum (finally) being seen consistently in both the forecasts and the actual data. U3 is very near the labor market's long-run unemployment rate meaning that the recovery was, in terms of numbers employed, a success. However, future labor market growth is not likely sustainable (at least not at the pace as in prior years).

The S&P has, is, and is anticipated to be positively correlated with labor market fundamentals. This, on the one hand, brings market participants a degree of comfort that the market still acts as a discounting mechanism for fundamentals. On the other hand, lower labor market momentum may prove to be a drag on future S&P returns. The 10-Year is still negatively related to labor market moves although this relationship is forecasted to ease, particularly after mid-2016.

Gain more detailed insights today by visiting the Williams Analytics Blog and by downloading Williams Analytics' many FREE Indicator Reports!

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Housing Prices Unsustainably Rocketing Past Fundamentals w/ S&P 500 Bubbly

The Williams Analytics LLC Blog has just posted a new article on the state of the US single-family housing and what could be in store for the S&P 500 E-mini and 10-Year US Treasury Note.

As a brief preview, US single-family fundamentals (e.g. Units Started, Units Under Constructions, etc.) continue to grow slowly. Conversely, inflation-adjusted median and average housing prices remain completely inflated; disconnected from reality and the underlying single-family fundamentals.

With respect to asset prices, the S&P 500 E-mini is still "enjoying" a 75% premium over general asset prices (the Williams Analytics Broad Asset Index) while the 10-Year is much less inflated (only 16%). For the 10-Year, its premium could be a slight bout of overpricing or a reflection of the fact that general asset prices have been in bear territory since 2014. For the S&P, however, it's clearly WAY overpriced and unsustainable.

With a tightening in the credit markets almost assured, be prepared in the year ahead for sharp reversals in inflated single-family housing prices and general equity prices.

Gain more detailed insights today by visiting the Williams Analytics Blog and by downloading Williams Analytics' many FREE Indicator Reports!

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TrendFlex Signal Returns Updated through 12/11/15 - Up To 3X Outperformance vs. the S&P 500

The returns are in!  Baseline Analytics is pleased to announce the continued outperformance of its TrendFlex signals vs. the S&P 500 benchmark!      Learn more about Baseline Analytics, its Premium Services and very reasonable annual subscription offering.   

 

                           TrendFlex Returns vs. the S&P 500 

TFR12112015

        TFR12112015Trad

            ClassicDesc2      TradDesc

                                            Cumulative returns are through 12/11/2015.

TrendFlex Allegiance performance tracking began in May, 2006. Cumulative performance is compared to a "buy and hold" strategy for the S&P500 (excluding dividends and transaction costs). Trades do not use leverage.  TrendFlex Allegiance is the longer-term signal and has averaged 2 signal changes per year.  

TFAline12112015        TFALineTrad12112015

 TrendFlex Classic performance tracking began in May, 2011. Cumulative performance is compared to a "buy and hold" strategy for the S&P 500 (excluding dividends and transaction costs). Trades do not use leverage.  TrendFlex Classic is the shorter-term signal andhas averaged 8 signal changes per year.    

TFCLine12112015         TFCTradline12112015

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Market Tour Update from Baseline Analytics

Topsy-turvy trading activity continues as volatility shakes up the recent highs established in November and December.

The S&P 500 sits at major support near 2050; as seen in the chart below, that level has held declines in March, April and July, with next support levels at 2020 and 2000.

Martin Pring's "Known Sure Thing," or KST, clearly supported the recent rallies but has now settle back near the bull-bear dividing line near 0.

 

MTU 12112015

 

VIX has seen a recent jump (above its 50-day moving average) but remains at a modestly elevated level, not an extreme high that would precede a resumption of a firm uptrend (we have written often here at Baseline Analytics that extreme readings in VIX versus its 50-day moving average tend to precede trend shifts).

But it is interesting to note that the Put/Call ratio is displaying an extreme with its close at 1.25.  Note the green line in the $CPC portion of the chart: although less reliable that the VIX indicator, the Put/Call reading speaks of a potential move up in stocks.

Finally, stochastics (which come in handy during trading range markets like this) are moving toward oversold levels but have not quite yet arrived at that point.

The market is nervous and volatility as seen in rallies and sell-offs is the character of the day.  As David Fabian has written recently (see our Asset Allocation blog), it may be better to sit on our hands during December.

 

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