On the one hand…

 

A few notes regarding recent market activity. Some bullish observations, some bearish.

On the bullish side:

We have a lovely breakout for oil through my prior mentioned $42. Despite the failure of last week’s producers meeting, the market found reason to bid oil right through the old downtrend line. Although overbought on a near termed basis, WTI looks pretty good as a mid-termed play going forward. The bullish engulfing pattern is positive. And that’s going to help the markets, especially the TSX.

oil

 

Also on the bullish side is the fact that momentum has been on the markets side. Paying no attention to the man behind the curtain (earnings and PE ratio), the S&P is making higher highs and higher lows on the daily chart (not so much on the long chart – see below).

Somewhat positive is the markets move above the 200 day MA–although, in a sideways consolidation pattern (as has been the case for over a year), one must pay less attention to commonly followed MA’s. Trend following averages are not accurate in a trendless market – as markets will weave over and below the MA’s giving false signals until a trend emerges. Please see my book Sideways for more information on this trait. Below is a long termed view of the markets—note the change in trend, not seen since the beginning of this bull. Click to enlarge. More on this chart in a moment…

S&p LONG

 

Finally, SPHB (Powershares high beta) vs. SPLV (Powershares low beta) relative strength is picking up – money is going back into beta as you will note on the bottom pane. When money leaves the safety of low beta dividend payers and moves into growth, that can be a bullish sign. It should be noted on the chart below that the high beta ETF is facing a wall of resistance shortly.

SPHB

 

On the bearish side:

On the bearish side for the S&P500, the important overhead resistance of 2135 looms ahead. This is a level not cracked since last May- despite numerous attempts. Similar rallies to 2130-ish have failed – and this most recent attempt at breaking the old highs will once again face seasonal headwinds.

Seasonals–Sell and May and go away?

Also on the less-bullish side – the longer termed chart of the S&P, above notates the markets reliance on easy-money since 2009. The coincidence of easing and stimulation is clearly seen on this chart. It is inarguable that the Fed’s change in tone from dovish to hawkish in 2014 was coincident with the end of the 2009- 2014 uptrend. It is unknown at this time what the market will need to break through the current consolidation and emerge into a new uptrend.

Finally, on the negative side is the recent “doji” spinning top candle on the daily chart. Doji’s and hammers are fairly good at predicting market turns at either extreme. Watch the next few days to see if this one counts.

 

S&P nearterm

 

The balance of this month will be telling. A failure or a positive break of the old highs by more than a few days will guide us towards a bullish or bearish trading stance going forward.

 

7 Comments

  • Solid bipartisan analysis as always sir.You deserve a larger following.

    Reply
    • The blog seems to get about 3000 hits per month, which is solid, but there is always room to grow. By all means–forward the blog address to a friend!

      Reply
      • Hopefully it will get you some new business in your fund , unfortunately some of us small potatoes will have to drool through the window looking in .. ha ha ☺

        Reply
  • Hi Keith,
    What is smart $ /dumb $ doing these days?
    How does the earning season impact your strategy?
    Thanks, Eszter

    Reply
    • Eszter–funny you should ask about smart/dumb spreads. The two groups have grown even more extreme.
      Smart money is 20% confident, dumb money is 70% confident. The spread–that is, dumb money less smart money, is -0.5 right now. This is substantially into danger territory, following sentimentraders zones (suggesting anything below -0.25 as dangerous). This area has been hit Jan. 2014, July 2014, March 2015 and it came close (but didn’t quite hit the current level) in late 2015. All of these signals were leading indicators–but in every case a market correction followed within a few months, and/or a market top was seen. For example–the March 2015 signal did not proceed a correction (that didn’t happen until last August) but it did signal the market top, which occurred within about a month and a half.
      Earnings season does not impact our work on a macro basis–only on individual stocks we hold.

      Reply
  • You had mentioned that you were considering buying XHY. Can you tell me why it had dropped to $18 at the beginning of February? It is now just slightly over $19. I am considering buying it in my TFSA. Would it be good to diversify my risk against a possible market correction? Thanks.

    Reply
    • XHY is low grade credit bonds (junk bonds)–the group suffered with the decline in oil prices – as many bonds in that space are energy names. There was also some “throw out the baby with the bathwater” selloffs on other bonds in that space not connected to energy.
      The sector is rising now, based on the strength in energy. If you like energy – you can own this type of ETF.

      Reply

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