Mr. Palmerton is the Founder of Baseline Analytics, and has 30 years of experience spanning corporate finance, asset management and financial markets research. He has held positions as CFO, Director of Finance, and Financial Management and Analysis roles for Fortune 500 and multi-national firms (ADP, Honeywell, Linde Group) as well as for early-stage and emerging growth ventures). Bob founded Baseline Analytics in 2005. With the objective to utilize technical analysis of the financial markets, coupled with macro-economic trends, Baseline Analytics strives to keep investors on the right side of the market at all times. Bob developed the TrendFlex indicator, comprised of a blend of financial indicators that assess the risk of a change in market trend. Baseline Analytics’ TrendFlex models are utilized as the basis for asset allocation strategies of The Absolute Return Market Trend Portfolio. Mr. Palmerton’s articles and blogs can be found on Seeking Alpha, Finding Technicals and Baseline Analytics.

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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TrendFlex Score & TrendFlex Signals for 4/15/2016

The TrendFlex signals remain unchanged for the week, improving slightly following this week's 1.6% gain in the S&P 500.     

Performance is through market close on 4/15/16.

TrendFlex Signal Trend  Date  Return

S&P 500  Return

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).  Score:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +5.3% +5.3% 1.500
TrendFlex Allegiance 1 Uptrend 3/31/16 +0.8% +0.8% 1.875
S&P 500 timing signals based on credit risk premiums (corporate vs.Treasury debt). 
TrendFlex Classic II Uptrend  3/1/16 +7.4% +7.4%  
TrendFlex Allegiance II Uptrend  3/14/16 +3.0% +3.0%  

The TrendFlex Score increased from 1.55 to 1.59 and remains even with its three-week moving average. As evident in the chart below, this level may indicate a shift in equities to a downtrend. We would not be buyers in this market at present.

 TFS04152016

The Portfolio Strategies chart continues to recommend protecting capital.      

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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TrendFlex Score & TrendFlex Signals for 4/08/2016

The TrendFlex signals remain unchanged for the week, although Allegiance I has been waffling between neutral and long, and Classic I slipped markedly but remains long.    

Performance is through market close on 4/08/16.

TrendFlex Signal Trend  Date  Return

S&P 500  Return

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).  Score:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +3.6% +3.6% 1.700
TrendFlex Allegiance 1 Uptrend 3/31/16 -0.8% -0.8% 1.875
S&P 500 timing signals based on credit risk premiums (corporate vs.Treasury debt). 
TrendFlex Classic II Uptrend  3/1/16 +5.7 +5.7%  
TrendFlex Allegiance II Uptrend  3/14/16 +1.4% +1.4%  

The TrendFlex Score declined from 1.60 to 1.55, and remains below its three-week moving average. Based on performance during the essentially flat market since May 2015, this level may indicate a shift in equities to a downtrend. Considering the reading in the Classis I and Allegiance I scores, hedging longs may now be in order.

 TFS04082016

The Portfolio Strategies chart continues to recommend protecting capital.  We have removed the "add to longs" suggestion, added "sell calls"  and removed "hedge or reduce shorts."    

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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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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TrendFlex Score & TrendFlex Signals for 4/01/2016

The TrendFlex signals remain unchanged for the week.    

Performance is through market close on 4/01/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current

Trend

Score

Prior

Trend

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).  Trend Score:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +4.9% +4.9% 1.100 1.100
TrendFlex Allegiance 1 Uptrend 3/31/16 0..4% +0.4% 1.625 1.875
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Uptrend  3/1/16 +7.10 +7.0%    
TrendFlex Allegiance II Uptrend  3/14/16 +2.6% +2.6%    

The TrendFlex Score increased from 1.57 to 1.60, and remains slightly below its three-week moving average.   

 TFS04012016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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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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TrendFlex Score & TrendFlex Signals for 3/25/2016

Intra-Week Update

The TrendFlex Allegiance 1 Signal shifted to Uptrend, effective with the market open on 3/31.  The S&P 500 High/Low Percentage indicator shifted strongly (bullishly) to the upside, causing the Trend Score to decrease from 1.875 to 1.625.

 

3/25/16 Update:

The TrendFlex signals remain unchanged for the week.    

Performance is through market close on 3/25/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current

Trend

Score

Prior

Trend

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).  Trend Score:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +3.0% +3.0% 1.300 1.100
TrendFlex Allegiance 1  Neutral (Cash) 3/10/16 0.0% +2.3% 1.875 1.875
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Uptrend  3/1/16 +5.1% +5.1%    
TrendFlex Allegiance II Uptrend  3/14/16 +0.8% +0.8%    

The TrendFlex Score decreased from 1.66 to 1.57, and remains below its three-week moving average.   

TFS03252016 

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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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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TrendFlex Score & TrendFlex Signals for 3/18/2016

The TrendFlex signals remain unchanged for the week.    

Performance is through market close on 3/18/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current

Trend

Score

Prior

Trend

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).  Trend Score:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +3.7% +3.7% 1.100 1.300
TrendFlex Allegiance 1  Neutral (Cash) 3/10/16 0.0% +2.9% 1.875 2.125
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Uptrend  3/1/16 +5.8% +5.8%    
TrendFlex Allegiance II Uptrend  3/14/16 +1.5% +1.5%    

The TrendFlex Score decreased from 1.72 to 1.66, and remains below its three-week moving average.   

TFS03182016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

Continue reading

TrendFlex Score & TrendFlex Signals for 3/11/2016

TrendFlex Allegiance I shifted to Neutral (Cash) this week, while Allegiance II shifted to Uptrend. Classic signals remain in Uptrend.   

Performance is through market close on 3/11/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current

Trend

Score

Prior

Trend

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).

Trend Score Guide:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +2.3% +2.3% 1.300 1.400
TrendFlex Allegiance 1  Neutral (Cash) 3/10/16 0.0% +1.6% 2.125 2.375
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Uptrend  3/1/16 +4.4% +4.4%    
TrendFlex Allegiance II Uptrend (3/14 open) 4/6/15 +2.1% -2.1%    

The TrendFlex Score decreased slightly from 1.73 to 1.72, and remains below its three-week moving average, a bullish development.   

TFS03112016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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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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TrendFlex Score & TrendFlex Signals for 3/04/2016

Both TrendFlex Classic signals shifted to uptrends this week.  The longer-term Allegiance signals remain in downtrends (although Allegiance 1 is closing on to a neutral signal).  

Performance is through market close on 3/04/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current

Trend

Score

Prior

Trend

Score

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term).

Trend Score Guide:  Bullish = 1.0-1.75; Neutral = 1.75-2.25; Bearish = 2.25-3.0

TrendFlex Classic 1  Uptrend   3/2/16 +1.2% +1.2% 1.400 2.300
TrendFlex Allegiance 1  Downtrend  2/8/16 -5.2% +5.5% 2.375 2.625
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Uptrend  3/1/16 +3.2% +3.2%    
TrendFlex Allegiance II Downtrend 4/6/15 +3.2% -3.1%    

The TrendFlex Score decreased from 2.08 to 1.73, and remains below its three-week moving average, a bullish development.   

TFS03042016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

Continue reading

Intra-Week Update: TrendFlex Score & TrendFlex Signals for 3/2/2016

The TrendFlex Classic signals both shift to Uptrends following the Monday, 2/29 activity in the S&P 500.  More charts and updates coming this weekend.

 

Last Week's Update:

The TrendFlex Classic I signal will shift to Neutral (Cash) from Downtrend at the open on 2/29. All other signals remain unchanged, although they improved on the week.   In fact, the TrendFlex Classic II signal saw a marked improvement (as noted in its chart, see link below), nearing a buy signal.  

Performance is through market close on 2/26/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current Score Prior Score
S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term). Bullish=1.0-1.75; Neutral=1.75-2.25; Bearish=2.25-3.0
TrendFlex Classic 1  Downtrend, shift to Cash 2/29   2/8/16 -3.8% +4.0% 2.00 2.30
TrendFlex Allegiance 1  Downtrend  2/8/16 -3.8% +4.0% 2.50 2.625
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Downtrend  12/10/15 +5.1% -4.9%    
TrendFlex Allegiance II Downtrend 4/6/15 +6.0% -5.7%    

The TrendFlex Score decreased from 2.52 to 2.08, and remains below its three-week moving average, a bullish development.   

TFS02262016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

Continue reading

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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TrendFlex Score & TrendFlex Signals for 2/26/2016

The TrendFlex Classic I signal will shift to Neutral (Cash) from Downtrend at the open on 2/29. All other signals remain unchanged, although they improved on the week.   In fact, the TrendFlex Classic II signal saw a marked improvement (as noted in its chart, see link below), nearing a buy signal.  

Performance is through market close on 2/26/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

Current Score Prior Score
S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term). Bullish=1.0-1.75; Neutral=1.75-2.25; Bearish=2.25-3.0
TrendFlex Classic 1  Downtrend, shift to Cash 2/29   2/8/16 -3.8% +4.0% 2.00 2.30
TrendFlex Allegiance 1  Downtrend  2/8/16 -3.8% +4.0% 2.50 2.625
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Downtrend  12/10/15 +5.1% -4.9%    
TrendFlex Allegiance II Downtrend 4/6/15 +6.0% -5.7%    

The TrendFlex Score decreased from 2.52 to 2.08, and remains below its three-week moving average, a bullish development.   

TFS02262016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

Continue reading

A Macro Economic and Technical Take on the Aging Bull Market - Re-post from March 2015 - 2/23/16

Barron's recently featured a talk with Doug Ramsey, Chief Investment Officer of Leuthold Group.  After six years of gains, Doug believes the the bull market is "tracing out a top."  "Valuations are high, yields are low, and areas like small caps, junk bonds and emerging markets have dipped in and out of bear territory - all worrisome signs for broad U.S. stock returns."  I admire Doug's work (Doug was one of my sponsors of my CMT designation at the Market Technician's Association). So this week I will take Doug's comments in mind while we view a longer-term perspective on the markets. Here are a few indicators of market bullishness and their current state of technical affairs: 

Small Cap vs. Large Cap Stocks

Small Cap strength and outperformance typically confirms the "risk-on" trade in equities. In the chart below, note how small caps underperformed the S&P 500 in 2014 (the brown line is a ratio of the Dow Jones Small Cap Index vs. the S&P 500). Small Caps recently bottomed out in October, and have since been recovering. Recently, however, small caps blazed against volatile general market indices, a potential sign of improvement in market internals.  

smallcapsoutperform03312015

 As seen in the chart below, small caps have continued to outperform the S&P 500:

iwmspx03312015

 

Dow Theory Confirmation (or lack thereof)

Dow Theory non-confirmation is another interesting, recent indication that a topping pattern in equities may be emerging. See this article in MarketWatch. Note that the Dow hit a new high in February, but the Transports lagged.  This is resolved either with the laggard index (in this case the Transports) catching up with the leader Dow, or the laggard pulling the leader down.  What's funky about this technical indicator is that it may be a 50/50 chance of either transports catching up or the Dow "catching down." For additional insight into the current view of Dow Theory, see this report by Matthew Kerkhoff.

dowtheory03312015

Growth vs. Value 

Growth has outperformed value as noted in the relationship between the Russell 2000 Growth Index and the Russell 2000 Value Index in the chart below (see the green boxes).  Those timeframes tend to be positive for the S&P 500. Recently, this relationship has looked a bit toppy with RSI again breaking above 70, a point at which past outperformance has reversed toward a more "risk-off" trade (denoted by the red boxes).

growthvalue03312015

 

Left unsaid in the above charts has been impressive market breadth in the major indices.  For more on this, visit "A Breadth of Fresh Highs" from the Baseline Analytics Market Tour Blog.

To respect the longer-term view, I visited Doug short at Advisor Perspectives. Doug's current assessment and outlook, as published in his March 16, 2015 analysis of economic indicators (click here for Doug's detailed report) is that

"The overall picture of the US economy had been one of slow recovery from the Great Recession with a clearly documented contraction during the winter of2013-2014, as reflected in last year's GDP for Q1 of last year. In April we'll get our first peak at Q1 2015 GDP. Preliminary data suggests that we'll see renewed finger pointing at the weather. The Big Four average in recent months suggests that the economy remains near stall speed."

In my opinion, to harken back to Doug Ramsey's perspective, a stalled stock market is consistent with a "stalled speed" economy, economic fundamentals catch up to valuations (and the financial juice injected by the Fed through last fall).

 

Marco-Economic Perspective

A few economic indicators point to a potential inflection in the markets, based on past performance.  Below is a chart of Initial Claims for Unemployment and the Wilshire 5000 Index. Note that initial claims have tended to find a bottom in the 250,000 to 300,000 level consistently since the mid-1970's.   Also note that there is a fairly consistent penchant for troughs in initial claims to precede tops in the Wilshire 5000.  The noteworthy exception can be seen in the "roaring 1990's" in the stock market, as the trough in initial claims in 1988 was not followed by any meaningful market setback. Even if economic growth opportunities today mirror in part the growth of the 1990's, visually the sharp ascent of the Wilshire 5000 is pronounced (as can be seen at the right of the chart in the orange line) and worthy of a bit of vertigo.

unemp clains wilshire 03272015

On a high level valuation perspective, the market has been tracking the growth in corporate profits rather steadily.  As expected, corporate profit growth tends to do a fair job of leading the market, as can be seen by the peak in profits in 2007 leading the topping action in the S&P 500, and similarly in 2011.  Note the timeframe of 2013 and later; there is a rather steady wide gap between the percentage change (from the prior year) in corporate profits vs. the percentage change in the S&P 500, the latter of which has settled toward the 15% level while the former is closer to single digits. Could this be suggestive of a slowing in the S&P 500 growth rate to a level more consistent with the slowing growth in profits?

spxprofitsfred

Our next view is a monthly chart of the S&P 500.  Although forecasting a market peak is a mix of technical analysis and black magic, it is interesting to note that a cyclical overlay, showing peaks and troughs over the last 20 years, reinforces the age of this bull market:

SPXcycle03092015

So should this be the peak year, where might the bottom be?  One approach is to apply Fibonacci Retracement levels to the current bull market, starting with the lows of March, 2009. A "modest" 38.2% retracement in a secular bull market would put the S&P 500 at the 1600 area. Using our two year spread between peak and trough would suggest 2017 as a bottom.  See below the monthly chart of the S&P 500 with a fibonacci retracement overlay:

SPXfib03092015 

In periods of rising economic growth, falling bond prices (rising rates) does not mean stocks need to decline too.  In the chart below, I have circled (see red ovals) the periods in which bonds have dropped (the 30-year Treasury) but equities (S&P 500 shown by the green line) have climbed. Despite a variety of technical relationships we can identify to support (or deny) the direction of the stock market, the main factor to keep in mind, in my opinion, is the age of this bull as referenced above by Doug Ramsey.

 bondsstocks03112015

So what's the strategy?  Yes the bull is aging, but even flat to single-digit returns over the course of an upcoming two-year period, marred by a correction (perhaps when rates finally do climb) may not be all that bad. Beware that at some point the inevitable recession will surface, and the aforementioned correction may be the leading indicator to such an event. As a tactical approach to this market environment, long term investors should maintain a responsible blend of equities, bonds, cash and alternatives, commensurate with their risk profile.

 

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TrendFlex Score & TrendFlex Signals for 2/19/2016

All TrendFlex signals remain unchanged for the week, albeit with modest improvements following this week's 2.84% gain in the S&P 500.   

Performance is through market close on 2/19/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term)
TrendFlex Classic 1  Downtrend   2/8/16 -2.3% +2.4%
TrendFlex Allegiance 1  Downtrend  2/8/16 -2.3% 2.4%
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Downtrend  12/10/15 +6.8% -6.4%
TrendFlex Allegiance II Downtrend 4/6/15 +7.7% -7.1%

The TrendFlex Score decreased from 2.67 to 2.52 , and closed below its three-week moving average, a bullish development.   

TFS02192016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the improved reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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TrendFlex Score & TrendFlex Signals for 2/12/2016

The TrendFlex Classic I and TrendFlex Allegiance I signals shifted to Downtrend at the opening on Monday, February 8.  All other signals remain unchanged for the wee,   

Performance is through market close on 2/12/16.

TrendFlex Signal Trend Signal Date Signal  % Return

S&P 500   % Return

S&P 500 timing signals based on a weighted score of US Market technical indicators. Classic (short-term) and Allegiance (intermediate to long term)
TrendFlex Classic 1  Downtrend   2/8/16 0.5% -0.5%
TrendFlex Allegiance 1  Downtrend  2/8/16 0.5% -0.5%
S&P 500 timing signals based on credit risk premiums (corporate vs. Treasury debt) correlated with performance of the S&P 500
TrendFlex Classic II Downtrend  12/10/15 +9.8% -8.9%
TrendFlex Allegiance II Downtrend 4/6/15 +10.7% -9.7%

The TrendFlex Score increased from 2.52 to 2.67, and remains above its three-week moving average. The score is at an extreme that in the past has preceded rallies in the S&P 500.   

TFS02122016

The Portfolio Strategies chart continues to recommend protecting capital, however we suggest selectively adding to long positions given the extreme reading in the TrendFlex Score.     

Portfolio Strategies*
Reduce Longs
 Sell Calls
 Hedge Longs
Set Stops on Longs
Short Overbought Equities
 Add to Longs
Sell Puts
Hedge or Reduce Shorts
 Long Futures and Options

 *Red highlighted items are recommended strategies

Click here  for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades

 

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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.

 

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

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