Another warning sign for the markets

I’ll start this blog off with a reference to Jason Goepfert’ s comments from his daily update to subscribers (www.sentimentrader.com).

“Every day for the past week, more than 2% of stocks on the NYSE have reached a 52-week high, and more than 2% have sunk to a 52-week low.

It’s rare to see so many stocks at both new highs and new lows, which is one of the conditions for the ridiculed Hindenburg Omen. When we see many stocks at both extremes, it highlights a split market and has been considered a warning sign among market watchers for decades (see Norman Fosback’s Stock Market Logic). The S&P’s performance going forward was not good. Only once, March 2000, did it manage to skate through mostly unharmed during the next several months. That also happened to coincide with the final blow-off of the bull market, and the gains were subsequently erased and then some.”

 

Keith’s trading system signals “sell”
sell

I’ve noted in past blogs that the S&P500 (and DJIA, for that matter) has been trading range-bound. I’ve referenced a simple to follow short termed trading strategy using momentum oscillators and Bollinger Bands. This system has been, and continues to be, quite  accurate in picking peaks and troughs lately. Using the trading system, I covered the last peak and last trough in the market on my blog. Click here to read the last blog covering the last “buy” signal.

S&P timing

 

This week, the system signalled “sell”. Note that we’re also seeing expansion of the Bollinger Bands, which denotes a potential trend change—in other words, this sideways trading range may be coming to an end – and it doesn’t look like it’s going to break out to the upside!!!

 

Gosh, your market breadth smells terrible!

bad-smell
In a couple of blogs in the past, I’ve referenced a Dow Divergence. My earlier blog this week covered that bearish breadth-orientated signal –here is the link.

 

Right now, we’re also seeing a few of the more common market breadth indicators decline –these indicators tell us the extent of rising vs. falling stocks on the broad markets. I look at lots of them, but my old standby is the Advance/Decline cumulative line. I smooth that line with a 10 day MA—as seen on the chart below, courtesy of www.freestockcharts.com. Note how the A/D line (blue line) moved sideways between May and June while the S&P500 (red line) rose. This divergence added another clue to a potential pending problem for the markets. It’s now declining.

AD LINE short

Overall, I am cautious about the near termed prospects for the markets. However, I remain convinced that a correction during this summer or fall will result in a marvellous buying opportunity within the secular bull market. At ValueTrend, we’re up to 50% cash in our equity model right now. While we expect to deploy 5-10% of that if our short termed system (above) signals a “buy”—either way, we intend to hold at least 40% cash for a few more months. You might want to consider doing the same.

14 Comments

  • “A correction during this summer or fall will result in a marvelous buying opportunity within the secular bull market”

    If a true correction (10-15%) occurs in that time-frame, would you be looking at all the sectors as buying opportunities or are their specific areas you would likely prefer/avoid? :

    Financials
    Utilities
    Manufacturing
    Consumer products
    Resources

    Reply
    • I would say its going to be an ideal time to own both broad markets and some specific sectors such as consumer discretionary stocks, and possibly a couple of underloved sectors (providing the charts show a positive base and breakout!!!) such as energy and CDN banks.
      I will look at sectors in seasonal favor, and individual stories for ideas. But its a bit early to start thinking about what to buy IMO–we have yet to see if/as/when a correction completes itself–and from there, look at what looks to be attractive. I’ll blog on those thoughts as they occur.

      Reply
  • Its good to know there is some money to be made in the sideways summer doldrums market.

    Reply
  • It was difficult buying that last dip around july 8 as it sounded like the world was coming to an end with the Greek crisis. I was certain it was going to finally break down from the trading range then. I have found the sells at the top of the range have been somewhat easier than the buys as least with reference to this recent trading range.

    Reply
  • Hi Keith:
    Thanks for your SELL signal.

    My simpler signal on this most recent rally was a break below 2110-2115 and a weaker 10 year yield. We will see if there is a follow through or if AMZN and other positive earnings give the market more life. The weak PMI in China maybe negative. Anecdotally, the rate of change on many stocks appears to have increased both for gainers and loosers. I find myself raising cash 65%, tightening stops and reducing holding period. HED.TO inverse to XEG has been a good play and may have some life left if the US $ stays weak. In the meantime, following your SELL signal I am sharpening my pencils for some Direxion sectoral inverse plays.

    Do an increased number of failed breakouts on the S&P reduce the chances of breakout success? The candlestick on the S&P looks awful bearish, though I was not able to assign it to a particular type – dark cloud cover, piercing.

    Khokon

    Reply
    • Yes Khokon–the more failed attempts at a breakout, the more likely it breaks to the lower side eventually. Bollinger bands expanding can also show us that something is about to change (std deviation is increasing, thus the winds of change are blowing!)
      The only candle formation that I’ve noticed in the current sideways range has been the presence of big bodies (big intra-day swings) on the daily chart at the bottom of each swing. As usual, now that it seems we are coming off the top, we are seeing relatively small to average sized candle bodies, suggesting the move to 2040 -ish is quite likely. Look before you leap at that level, though–I will want to see my momentum hooks etc before stepping in even at that level.

      Reply
  • As I see it earning per share (perceived, imagined, fabricated) drive the market. Through share buyback they seem to have maintained them. When perceptions of poor earnings become believed a sell-off takes place. Has your fundamental guy come to any conclusion when this trend change in value might occur.

    Reply
    • Craig hasn’t seen massive evidence for a big earnings breakdown, according to conversations we’ve had. Having said that, so far its been a lackluster earnings season–mixture of hits and misses.

      Reply
  • READING THAT CRB INDEX IS NOT ABOUT TO TURN ANYTIME SOON ON THE UPSIDE AND BONDS NOT A SO GREAT ALTERNATIVE (TLT UNDER 200DMA), WHERE DO YOU SEE THE $TSX SUPPORT (EITHER MINOR OR MAJOR). MARKET BREATH IS BAD ENOUGH IN CANADA AS WELL. I AM ASKING MYSELF IF SMART MONEY BACK IN MONEY MARKET FUNDS FOR THE TIME BEING?

    Reply
    • JP–see my note above re the TSX–I mostly just follow the S&P500 for guidance

      Reply
  • The TSX has already corrected close to 10% from the peak. From the chart can you tell if there’s more down movement to come. Also i notice that the S&P 500 is the go to market for buy and sell signals. Is it the same fir the TSX, if not could you provide a similar chart for the TSX. Thanks

    Reply
    • I don’t often chart the TSX–its a rather useless index IMO. Basically 2/3rd of that index is in 3 sectors –Energy, financials, materials. Thus–just follow those sectors to see where the TSX might end up.

      Reply
  • Hi Keith- With your outlook being negative and with seasonality agreeing with you, would this not be an opportune time to buy an inverse fund (HIX) of the TSX? I never really see anyone recommending this on BNN but really isn’t buying this in a negative environment just as prudent as buying the index long in a positive environment?

    Reply
    • I would wait for a breakdown below S&P at 2040 by at least a week before buying an inverse or a bear ETF–but that’s just me. For now the S&P500 is in a sideways range of 2040-2140 (draw those lines with a fat crayon!)–inverse and bear funds are good to either trade the tops of the range very short term–but you need to be quick to get out, or wait for a breakdown of 2040-ish to hopefully make money on a bigger and longer lasting move.

      Reply

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