Storms a comin’

storm

The U.S. market has been the world’s super-star over the recent 6-year bull market. It’s been a fun ride, but I see a potential problem with the volatility patterns since 2013. That is, there really hasn’t been any volatility over the last couple of years, and this worries me. The chart below show us the previous levels of volatility coming off of the 2009 bottom – brought on by the hopes and fears surrounding the Fed’s “QE” and “Easing” programs, along with the never-ending saga of European woes. As I’ve noted in prior blogs, we haven’t had a 20% correction since 2011 – nor any type of meaningful double digit correction beyond a few 10%-er’s since 2013.

QE pattern

The VIX chart below demonstrates the lack of volatility- on a grand scheme – since 2012. It’s been hovering around the bottom of its long term range (red line)  – a state that tends to change eventually.

vix long

I’ve also noticed a change in market breadth on at least one of the indicators I follow. The New high/low chart below shows a divergence between the S&P500 (red line) and the net ratio of new highs vs. new lows on the NYSE (blue line). As you will note on the chart (freestockcharts.com), I’ve circled 2 other times that type of divergence occurred. This divergence in breadth signalled the 2008 crash quite nicely. The divergence in breadth in 2013 was a false signal. However, the angle of decent by the New high/low indicator was not as extreme as it was in 2007. You will note that the current angle of decent on the New high/low indicator is quite sharp – similar to that of 2007.

new high low

 

 

Finally- note the consolidation pattern on the daily S&P500 chart below. Such triangular consolidations often lead into aggressive moves upon a breakout from the pattern. A meaningful (3-day) breakout through – say, 2120 on the upside may be bullish. A meaningful breakdown through 2080 may be bearish.

S&P nearterm

I’ve noted the bearish readings on the sentiment indicators I follow in past blogs (dumb money enthusiasm, put/call ratio 1:2, etc), so I won’t go into them on this blog. My “Bearometer” (search my past blogs on this indicator for more info) is also reading low confidence “2” at this point – another leading indicator suggesting caution.

The indicators that I follow are never absolute. We could see a continuation of the low-volatility bull market for the summer. But my bets are against that potential at this juncture. I’m 27% cash at this point, with an eye on bringing that level closer to 40% in the coming weeks.

 

Bearometer 2

 

 

Tomorrow: Community talk on technical analysis with Keith Richards at Richmond Hill Central Library

1 Atkinson St, Richmond Hill, Ontario this Thursday April 16th 7:00PM

Keith will be speaking on how to “Win by not losing”: Using the power of technical analysis to profit in uncertain markets.

 

Keith on BNN Market Call next Monday April 20, 2015 at 6:00 PM

Tune in to BNN Monday April 20th to catch me live on BNN’s 6:00 pm call-in show.

You can email questions now to [email protected] – (specify they are for Keith) or you can call in with questions during the show’s live taping between 6:00 and 7:00pm. The toll free number for questions is 1 855 326 6266

 

 

Final note

I noted in a blog last week that my cycling coach Ed Veal was going to attempt to break the Canadian 1-hour speed record on Friday. I’m pleased to say that Ed nailed it. http://www.canadiancyclist.com/dailynews.php?id=29308

Ed-Veal-Wave-20150410_6181_2

16 Comments

  • Hi Keith,

    You mentioned you raised cash to deploy into energy sector on your last BNN appearance. With oil price breaks over $54 resistance level, are you planning to re-deploy your cash into oil or energy sector?

    Thanks,
    Rebecca

    Reply
    • Great question–seasonality is ending, so I am cautious here. But a breakout that lasts for a few days will be enticing. I may take an equity position, but I want to see a few days of conviction before doing so. I’ll probably blog on that if/as/when that happens.

      Reply
  • Hi Keith,
    Thanks very much for the technical analysis that you provide. I just wanted to ask if you would consider buying the inverse market ETF’s for the S&P500 (or other indices) if/when the correction begins.

    Reply
    • Ron–the problem with inverse is that the daily resets can affect things–mind you, non-levered inverse ETF’s aren’t too bad for that, but there is still a minor difference in a direct long termed inverse product. I prefer HDGE on the US market, it shorts a basket of stocks. I’ve charted it for a few years, and it is quite negatively correlated to the S&P500. I have traded it before, and may do so this year. As you say, though–not until I see things start to break down.

      Reply
  • The NYA NYSE composite has just today broken out of it’s long term range. We will have to see if it holds of course.

    Reply
  • Keith

    Once again a very good analysis of the market. This shows what I have been thinking of a possible correction due to certain factors. Could this be like what happened previously from the last major downturn. Keep up the good work.

    All the best
    Kevin

    Reply
  • I am hopeful we will in fact have a significant correction of 20%+. It will take away a lot of the waiting we have had for some time.
    That said based on various advisors, not the least is Brooke, I am of the mind that we need an “event” before we will actually see a significant drop. The S&P500 is trading at 17+times earnings which is considered by some “well priced” meaning it is highish but not excessive based on the belief earnings will continue to rise.
    However in Brooke’s latest newsletter he states “Will earnings rescue the stock market? Probably not. This quarter earnings are expected to contract. As of April 2nd, Q1 2015 earnings are expected to contract by 2.8% (Thomson Reuters).
    So if you believe we need an event, perhaps a couple could be looming out there….
    i) earnings contraction which would place the S&P PE multiple too high hence a need to contract or,
    ii) an increase by the Fed Reserve to interest rates, but likely more than what the market already is anticipating or
    iii) some unexpected geopolitical situation in the world. Greece leaving the Euro is likely not a market mover anymore.

    So the point I am making is that while your indicators point to some correction, and I do not dispute your thesis, the question begs to be asked i) when and ii) the magnitude. Both of these I believe will depend on the event taking place and how dramatic. If earnings do contract, maybe we simply see a sideways market, or a correction of less than 10%. If the Fed delays interest hikes this is positive for earnings and hence the market correction will be limited. So unless we get a “shocking or unexpected event” I would not expect a 20% type correction. For those of us with cash, lets hope for an event and that it is dramatic enough to move the market. But I’m not convinced a dramatic event is in the cards, hence either a small correction or more sideways markets in 2015 is a likely scenario.
    If you see the correction your analysis is predicting to be greater than 10%, I’d like to understand where this is likely to come from.
    Cheers

    Reply
    • A well thought out comment Daddyo – thanks for that.
      I agree–all market corrections need an event to get them started. In fact, that is a premises of the timing of a correction. So the technical indicators are the leading indicator, the event is the rational behind the correction.
      My favorite analogy is that of a party balloon:
      Technical overbought indicators (momentum, sentiment, breadth) show the balloon is getting too tight. Somebody has inflated the balloon too much. But that doesn’t by itself cause it to pop.
      Somebody walks by the balloon and they have a broken button on their shirt sleeve which is sharp. He scrapes the balloon by accident. Everyone points at him and says “You broke the balloon”. However, whether it was his button, or somebody else with a pencil sticking out of their pocket brushing the balloon – the fact is that something sooner or later will pop the balloon.

      The market is a bit too inflated (BTW–I am not suggesting its in a bubble). Some reason will come along to “pop” it down by a double-digit correction –but we don’t know what the “something” is just yet. Nor when–but we do know that the balloon is too tight. And that should make us nervous.

      Another analogy: I don’t smoke cigarettes, even though some people live to 90 smoking so I could be safe to do so. Odds are that most of us wont be so lucky and live to 90 while smoking–the odds are against it. Same thing for the current market conditions–its a matter of probability for a market correction, but there are no absolutes. Perhaps the bull will outlive the expectations–like the smoking 90 year old. I’m not betting that way, despite that (less likely) potential.

      Reply
  • Seems like China has changed its margin and short selling rules. Do you think this is the catalyst for a big correction? Bert

    Reply

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