Long termed macro signals turning bearish

In addition to classic technical analysis such as trend and moving average work, I like to look at macro (long termed) signals that can provide a heads up for potential risk in the months ahead.

  • Long termed signals include: sentiment, breadth, VIX and (dare I say it) valuation metrics like PB and PE ratios.
  • Short and mid termed signals include: momentum oscillators, % stocks over MA’s and NHNL indictors, money flow and comparative relative strength.

Today I’d like to cover 3 longer termed indicators that may suggest trouble in the months (not weeks or days!) ahead for markets. Lets get right into them:

Dow Theory: INDU vs. TRAN

Dow Theory contains a tenant that Ii rely on as one of my breadth indicators. That is, the comparative movement between industrial stocks and their transportation counterparts. For longer termed readers of this blog, you know that I have cited divergence (opposite trends) of these indices on a few occasions in the past, and these divergences (in conjunction with other macro indicators) are very accurate in predicting market trend changes. The current trend appears to be changing for the transports, while the Dow Industrials keep pushing to new highs. As you will note on the chart below, this does happen periodically–and when it does, it can be ominous of a correction- although it is  a very leading indication.

TRAN

 

Sentiment:  Smart vs. Dumb Money

I look at plenty of sentiment indicators. But if you put a gun to my head and told me to choose my favourite, it’ll always be the “Smart/Dumb” money compilation of surveys that sentimenTrader puts together. Right now, their proprietary indicator shows us that Dumb money (red line)  is buying, and Smart money (blue line) is selling. This is another leading indicator, and you want to see the two sides reach their respective extremes before panicking – but its getting darned close!

Smart dumb $

 

Volatility: The VIX

This is a really, really big picture indicator. Note on the long termed chart that the VIX indicator can stay in my observed extreme zones for months – and even years – at a time. But you’ll also want to note that the markets cannot – absolutely will not- remain there forever. When the VIX gets into the extreme “low volatility” zone of around 11, for example, its not going to stay there forever. Markets will correct, and the VIX will spike. And its getting closer to that point.

vix long

BTW-its kind of a no-brainer to buy the VIX in some form or another if it does get into the 11 zone. Historically, its seen spikes down to just below 10, but that appears to be the maximum downside–compared to the maximum upside of 35+ in an extreme market reversal. After all, volatility cannot completely disappear and go to zero. So a trade from 11-ish in a VIX investment seems to be a good market hedge, and a profitable opportunity for those who are looking for a good risk/return investment. It’s not there yet, given its current level of 13.5, but it’s getting closer….

14 Comments

      • Looked at HUV, noticed that it has just a few outstanding shares…
        Doesn’t the low share-count cause a liquidity problem if we wanted to make a more sizable trade?

        Reply
        • It can, but if you put in a bid at a specific price (the ask) then sell it with an ask at the current bid price when ready to sell, you will often get closer to actual NAV plus a few cents. If you go market- that’s a different story on a thin traded security!!!

          Reply
  • Thanks for your market commentary Mr Richards. Your book Sideways has proved to be very useful for my recent option trades.

    Reply
    • My pleasure Avtaar–and glad you’ve gotten something from the book.

      Reply
  • I have learned from hard experience that, since I haven’t the investible resources to hand it all over to you, I lack whatever special qualities I need to trade on TA, even though I still enjoy TA immensely. So I am more of a (gasp) buy and hold type. And as such, I tend to rely on weekly charts. I have been charting the 17 week and the 43 week MAs and am most interested in the fact that for many major indexes such as DJIA and S&P 500 and others, the 17 week MA remains comfortably above the 43 week MA, except for the early 2000s and 2007/8 (and very briefly in 2011). The 43 WMA is above the 17 WMA now, only the third time since 2000. Ominous.

    Also of interest, the Consumer Staples sector is the only one in Canada that has had the 17 week MA above the 43 consistently since it’s beginning 14 years ago. A good ETF to own?

    Reply
    • Hi Fred–the fact that consumer staples are outperforming here and in the US is a sign of investors seeking safety. Its a good sector–either side of the border..to own now and into the summer.
      And yes, the shorter MA being below the longer MA suggests we are still in that sideways market we’ve been stuck in since last spring (or earlier)

      Reply
  • Keith: Thanks for pointing us to the VIX commentary website. The following strong statement is enough to scare me off and I might think your followers “In 2012 when the spot VIX fell 23%, this ETN’s net asset value plunged more than 78%. And in 2011, despite the fact that the spot VIX rose 32%, this ETN’s NAV fell about 5%. A buy-and-hold investor could have had the right idea but would have been burned by contango regardless.””
    Point I takeaway is “right idea but burned”. So for me it is better to buy and inverse market etf like you have published before like HDGE-N.
    Great post, now a matter of awaiting the inevitable in months not weeks or days.

    Reply
    • Yes–good point–VIX securities are short termed in nature–contango (time and storage affects on pricing of futures) can mess up a trade!
      More conservative way is a short or single inverse ETF–if you want to call that conservative (which it isn’t unless you strictly use them to offset and hedge , not to bet)

      Reply
  • Keith: While I absolutely appreciate your blog and forecasts, is it fair to say your Jan 25th 2016 post was a miss? It stated “Target range for the S&P’s rally lies between 1950 – 2000. ……trends suggest this market is entering into a mid-termed bear phase. This rally is one to be sold.” I also recall you suggesting you would be selling into this rally once it hit 1950-2000 range.
    Looking back if you agree it was a miss, what caused the deviation from your forecast. Were your technicals off? Did some fundamentals change? Perhaps we all could learn from it as we go forward. I fully appreciate forecasting will be wrong in some way, and I give credit to people like yourself willing to make forecasts. However I also like to learn from situations.
    Highest regards….

    Reply
    • Yup–it went higher than expected. My target was based on resistance patterns at that level. Obviously that was blown through, which will happen. Right now, the next target would be old highs of 2135 – but that doesn’t mean much beyond that being a stopping point. I’m not even predicting it will get there–its just an upside point if should it go higher. The big question is, will it go though 2135? My two cents worth is that it won’t-its a big wall at that level, plus oil, which led the market to late, is no longer cooperating (hey–I got that one right – I felt $42 would be resistance–and it was!)
      But if 2135 is taken out–the market will be quite bullish. Again though, my bet is–it may not happen until at least the post election time frame.

      Reply
  • WTI is hitting 36.16 today. It seems the TSX isn’t worried. For instance, banks have held up well. Interesting!
    To play oil going back to 45, I plan to use the BMO ZEO ETF (HUC doesn’t move in sync with WTI). Do you like the odds of oil holding above the 35.50 support (and so would buy today), or are you waiting to see if it goes back to 38.00 before starting a position? Thanks Keith! I’m new at technicals.

    Reply
    • Looks to me like the neckline support of the double bottom was $34, so it could go there.
      Given it didn’t break the $42 trendline and resistance are, I’d say that’s the best case for a target. Problem is that energy’s seasonal cycle will end in a few wees….hmmmmm…

      Reply

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