Some simple questions

We’re all very excited about the new highs being put in by the S&P 500 over 2016. After all, the S&P 500 was stuck in a trading range with a cap at around 2130 for over a year, until the breakout in July. Heck, even the TSX 300– which is still underwater from its old highs, has been showing some life this year. But there are some questions that I, as a technical analyst, have to wonder about as I watch the markets march forward.

 

Participation

nyse

My first question is – if the S&P 500 is showing us that markets are in great shape, why doesn’t the broader NYSE composite back that index up? At the time of writing, the NYSE index is still a good 3.5% below its May 2015 highs. In other words, despite the S&P 500 composite busting out of its 1 year + long ceiling, the broader market index has not done so. The NYSE holds a wider exposure to different market caps and a different weighting in sectors and individual stocks – perhaps it is telling us this market is being driven mainly by larger capped stocks? The chart of the iShares Russell 2000 Small Capped index tells us that this is indeed a factor. It too is struggling to approach, let alone break the old highs.

iwm

 

Volume

 

Part and parcel with broad participation is volume. And you can see on these charts that volume has been steadily declining for the entire year. I recently read a couple of commentaries noting the low volume of the summer. Low volume is typical in July and August – so my concern is not so much with the summers volume. I’m concerned about a rising market on low participation. So who is it that is participating and driving markets up? The next chart might help answer that question.

 

Discrepancy between smart and dumb money confidence

 

Smart dumb $

Sometimes a reading of “Smart” (institutional traders, pension managers, commercial hedgers) confidence shows less conviction than “Dumb” (retail money, small traders, mutual fund buyers). It doesn’t necessarily tell us much when one group is more bullish than the other—except in the case of extremes. When that level gets extremely bullish while, simultaneously the other gets extremely bearish – there is usually a market shift about to happen. Note on the chart below, courtesy of sentimentrader.com, we can see a level of extreme optimism by Dumb money with coinciding extreme pessimism by Smart money – as evidenced by their very significant breaching of the respective horizontal indicator lines. My question  – why has this extreme level lasted so long without corresponding market downside? I wonder if, as David Wilcox sang in his hit song Bad Apple, “The longer we wait the worse its gonna taste”?

 

We moved to about 28% cash last week, plus a 5% hedge position (bringing us closer to 38% cash equivalent) in light of these questions.

 

Keith on BNN this Wednesday August 24, 2016 at 1:00pm

Nov 2012 small

Phone in with your questions on technical analysis for Keith during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]

 

4 Comments

  • In my investing decisions I give precedence to TA’s that do liquidity analysis. The guy I pay remarked when the spx was breaking out “1987”. He pays particular attention to what institutions are doing with options to generate a sell signal and is extremely nervous. Another blog I read remarked that Fed/treasury could provide the liquidity until after the elections. It is my opinion that the Clinton nomination was fraudulently achieved with much more dirt coming down the pike. The news media is pedaling a false narrative about Trump. For me the question is when to the institutions lose confidence and decide to sell overwhelming the Fed’s ability to prop the market up

    Reply
  • I find it really strange that the market keeps going up. In late June we were talking about Brexit, the dollar, and oil prices and then all of a sudden the markets are coasting. It seems the market has a really short term memory. If you look at the vix, it appears pretty close to the bottom of the 5 year range, perhaps we should watch for a turnaround. Everyday in the morning I either see the markets take off or start off negative and then turn positive, ie. a lot of optimism. Brooke Thackray notes that there are very few seasonal opportunities from mid July to early October. Keith, thanks for the info on the volume and a special thanks for the smart money dumb money graph.

    Eric

    Reply
    • I think it makes sense in a way. The dumb/smart money chart only really tells us about confidence, not about respective volumes. And these days are slower days for big institutions (in terms of important moves). Therefore the group that’s doing the trading right now is the most bullish of the two, and therefore gets its way. For now.

      From another perspective, interest rates have been so low for so long, there’s been a ton of QE that has pushed bond yield downs and as a result, I think pushed valuations on equity up (utilities anyone?). Perhaps those valuations are the new normal, as long as treasury & safe bonds can’t really play their traditional role of providing some income. Given the comparison about the S&P on the one hand and the NYSE/Russell on the other hand, this would seem to bear this observation out: the large caps (big dividends stocks, next-safer stuff to bonds for incomes) are going up, but not so much the rest. So again that makes sense – yes valuation are high but given the circumstances perhaps not too high yet and this could be why there’s still room for them to go higher. For now.

      I’m still overall worried and I’ve been following Keith’s advice and raising some cash. I was quite interested in the marijuana stocks and I’ve done good on them the last little while but sold most of it – if there’s a correction they will plummet. I hope there will be a correction on the order of last year’s, we’d be in excellent should that happen to position for a strong 2017.

      Reply
      • Good comments Francis–the “safe” stock rising factor is something I’ve talked about on the blog recently

        Reply

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