Strong like bull!

 

The past few days saw much of the Santa Clause Rally’s gain evaporate on the S&P 500 – although we are still above the index’s December 2014 low point. Is the market in danger of a major selloff? Lets look at the technicals to see what might give us an answer to that question. First, the seasonal factors.

What the seasonal experts sayBThackray_2015_investors_guide_cover_200x300

I reviewed Thackray’s 2015 book and noted that January has been bullish only about half of the time since 1950. Equity Clock (www.equityclock.com) has a seasonal graph of the S&P500 that suggests choppy returns in January and February—particularly in the first part of January. So, from a seasonal perspective, the recent volatility might not be so unexpected. And of course, seasonals are usually strong until April or May from this point.

 

AD LINE

Next, lets look at the internals of the market. One of my major “market health” indicators is breadth – via the cumulative Advance / Decline line. I like to draw a 200 day MA against that line to determine its larger trend. A break below the MA may spell trouble. According to the chart above, this is not the case right now. I also look for divergences. I like to see peaks and troughs on the A/D line (black line on chart) rising with peaks and troughs on the S&P 500. If you get a divergence – that again may spell trouble. So far, we’re getting corresponding strength on the A/D line vs. the S&P 500—as I’ve noted on the chart with my black trendline indicators.

 

Technical Analysis 101

Now, I’d like to go back to Technical Analysis basics . Take a look at the S&P500 chart below. What do you see?

  • Higher highs, higher lows: uptrend in place. High significance.
  • Support above the 40 week (200 day) MA: uptrend healthy. High significance.
  • Accumulation/Distribution line trending up (bottom pane): Moneyflow remains positive. High significance.
  • Diverging momentum oscillators: these divergences do show some potential for risk. Medium level significance.
  • Increased volatility: note the large candles (big up and down weekly moves) of late. VIX (not shown) is rising on that volatility.  Lower significance.

 

S&P nearterm

 

All in, the most important factors (trend and moneyflow) are bullishly trumping the caution notes by the less significant factors (momentum and volatility). Seaonality should keep the market moving over the coming months. So too should the Presidential cycle (3rd year of the term is typically bullish). The signs are there for a larger selloff later this year – but for now, markets remain “Strong like bull”.

 

Learn Technical Analysis

I’ll be conducting a free technical analysis workshop at the Richview Toronto Public Library: 1806 Islington Ave, Toronto, ON M9P 3N3 – January 14, 2015 @ 7:00 PM. This may be my last library seminar for the winter, so if you live in the area – Come out and join the discussion!

13 Comments

  • Hi Keith,
    You recommended WSP on your recent BNN appearance. It has been keeping trading lower in the last few trading sessions. Do you think it’s a good entry point here? Thanks!

    Reply
  • Keith,

    I have a question about money flow. I’d like to use BIP.UN-to as an example, because you did/still own it. You mentioned on BNN in Nov 2014 that money was flowing out of this and that is why you trimmed your position. I assume you saw that CMF and Acc/Dis on BIP was flat/declining for a while. However, the stock has been making new highs ever since the October lows, with no real improvement in these money flow indicators. Can you please provide some insight into this divergence?

    thanks.

    Reply
    • My only thought regarding the strength on BIP’s stock price, despite the meandering moneyflow, is the “flight to safety” in the recent volatile market environment. High dividend stable cashflow companies like BIP can command a premium when things are looking scary out there. The utilities sector in the US – which is normally defensive, recently rounded over. That may suggest BIP’s strength may slow down-they have a fair exposure to utilities-but BIP is a more diversified play than a pure utilities company.

      Reply
  • Hi Keith,
    Congratulations on your 2014 performance
    Thanks for all the articles. Also for your 2014 suggestions esp ( I bought bip.un & cae) + cont’d to hold msft on your recommendations & am Happy – Thanks again (smile).

    Quick questions :

    1. On your performance what comprises of N.American markets &
    2.If my memory serves me right you were planning to come with an etf , whats the progress?? I blv I heard on one of your BNN shows ( or maybe I was dreaming my wish?)
    Wish all Best in 2015

    Reply
    • Thanks Muntazir
      I’m working on a project for a potential fund offering –its still a project in the works, but, perhaps 2015 will see my fund released.
      Regarding the NA index–its 15% S&P500, 85% TSX300
      We have always been pretty open to buying securities anywhere –i.e. international ADR’s, US stocks, and CDN stocks–but at the end of the day, we still look at ourselves as CDN managers, so our index is biased that way. It worked against us in 2006-2007 (oil boom) but it has worked to our favor in the last few years having the higher TSX component in the index. If oil bottoms this year and rallies back to $70 later this year or in 2016–we will be at a disadvantage by holding US stocks–but then its up to us to spot that trend and act on it so we can continue to beat our NA index!

      Reply
  • HI Keith,

    thanks for your response regarding BIP.UN. I am trying to select the best indicators to use for my style of investing and avoid the noise/whipsaws and stay in the trade. As a trend follower for intermediate term, what things should I be prioritizing?

    You and the Vialoux’s have been so valuable to educate the retail investors in Canada

    thanks!

    Reply
    • Hanson–honestly, you should read my book Sideways to answer that question. Its written for folks like you asking this question!
      You can also read the 3 most recent issues of Moneyletter, where I wrote a 3-part series on creating a plan.
      Go to http://www.valuetrend.ca and click on the icon for ID and Moneyletter articles. Two of those articles are posted. The third will be posted in a couple of weeks.

      Reply
  • Keith,

    I’ve seen you mention the Accumulation/Distribution line before, but not the OBV (on-balance volume). Do you prefer one money-flow indicator over the other? And is money-flow the best way to monitor institutional (big money) movement?

    Reply
    • I’ve found that Accum/Dist. is a lagging indication of cumulative flow of money–OBV is more of a coincident indicator. Both are good–I will often look at both, although the longer-termed view (such as market prognostics) seems to fit Accum/Dist best.

      Reply
  • Hello Keith,

    Always enjoy your bnn shows. You mentioned that you got out of oil in July. Very smart move. Just wondering how you came to that decision? What charts/indicators were you looking at specifically and what did you see in the charts/indicators that made you bearish on oil? What is your thinking on oil now? Do you think that oil, which seems to still be in a free fall, will need some time for consolidation and basing, or with waterfall like drop patterns on charts, could oil just as easily rebound without much consolidation and notice in a “V” shaped manner? Thanks for your insights.

    Reply
    • Marin
      Thanks very much. I sold the majority of our energy at a nice profit in July because of the triangle breakdown that occurred that month, and a breakdown of the 200 day MA. We did keep a 5% exposure to one energy stock and then sold it in December on that brief rally. We are out of energy now – beyond some pipeline exposure.
      My target has been for the low-$40’s. I now see other analysts suggesting this same level. Given the enthusiastic herd movement towards that target (i.e. rampant selling) – I think it will be reached pretty soon–within a month or so. I plan on buying per my usual rules. That is–wait for a base (no more lower lows) and a breakout.

      Reply

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