Baseline Analytics Blog

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

Dow Theory Divergence - 7/20/16 Market Close

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

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Short-Term Overbought Indicators in the S&P 500 - 7/15/16

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.

 

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TrendFlex Classic "Sell" Signal Alert - 6/16/16

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

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"Risk-Off" Trade Coming Soon?

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!

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Index and Sector ETF Signal Changes - 5/3/16 Market Close

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!

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Gold's Glittering Technicals

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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Market Tour Update - 4/26/16

Special Notice: It is OPEN ACCESS time for Baseline Analytics Premium Services.  Enjoy at NO CHARGE!

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!

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Mind the TRIN Extreme

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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Time to Hedge Long Positions

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

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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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