In our daily chart reviews we came across a rather disturbing chart on the "Ted Spread," a price spread of Treasury debt vs. the Eurodollar.
As seen in the chart below, peaks and spikes in the TED Spread have tended to precede declines in the S&P 500. Looking at yesterday's close (7/28/16), a spike in the TED Spread may be a warning that the equity indices may be peaking out.
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.
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.
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.
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.
Likewise, our TrendFlex Allegiance credit risk spread indicator is also bullish, and has gone sharply higher following the settling down of the Brexit news.
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.
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.
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.
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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.
On a weekly basis, the breakout looks reasonably firm, albeit a modest retracement of recent gains may be in order.
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.
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.
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.
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.
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.
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.
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.
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