Tug-of-war signals

There seems to be a bit of a conflict between the extremes within bullish and bearish technical signals on the US markets right now.

On the one hand, we have a strong trend that is marked by the consolidation breakout by the SPX (and the DJIA) last month. The market is above its vital 200 day moving average (40 weeks). I will note that its more than 13% ahead of that trend indicator. I tend to expect a pullback if the market is too much more than 10% above its 200 day SMA. Its early yet, but do keep that in mind. Moneyflow (accumulation/distribution- bottom pane) is strong for the SPX. Breadth for the SPX (not shown) via the Cumulative Advance / Decline line is bullish. All of this means that the larger trend is intact, and healthy.

The TSX … not so much. No new high…yet. We shall see.

The conflict

Back to the SPX…Below is a chart of one side of the “Smart Money/ Dumb Money” indicator that I use within my Bear-o-meter compilation, last reported on Dec. 2nd.

What you are looking at below is sentimentraders “Dumb Money only” indicator. It tracks the investor confidence of retail investors…. mutual fund equity flow, ETF equity flow, small equity trades/ small options trades. These investors are notoriously wrong at market extremes. You’ll notice the indicator is well above the horizontal red (too optimistic) line. Sentimentrader back tested the indicator using historical data when it hit the same level as its hit recently. I’ve circled on the chart how the S&P 500 fared over various timeframes, per their research. You’ll want to study the “win rate” percentages at the bottom of my highlighted area. Note that the market can usually rise under similar sentiment conditions for about a month. Its at the 2-6 month period where the proverbial poop hits the fan. Their data shows literally no positive periods of performance under the current condition in the 3 to 6 month follow-ups. Scary.

Put/ call ratio

I noted on the December Bear-o-meter blog that the CBOE put to call ratio was just barely above a bearish signal. Well, here we are a week later, and its gone bearish. See below. Keep in mind that this is a pretty whippy indicator, so it changes its mind in a hurry. Still, its been below the complacency line quite often lately. Not a great sign.

VIX

The VIX is also reaching my first-level “risk” alert status. The chart below shows us that option premiums are shrinking – this is a sign of complacency. Although a deep sell signal is hit only if the VIX approaches 12 or below in my way of doing things,  the VIX can indicate a temporarily overbought market when it nears 20. That’s where it roughly resides now (gold horizontal line on chart).

Momentum

Finally, we have some momentum studies on the weekly chart getting close to an overbought sell signal. See the chart at the top of this blog. They are not quite there yet, and would need to hook down to complete a sell signal. But, they are getting there.

Conclusion

Methinks we are perhaps looking at a few more days of good times before some level of pullback occurs. The 3-6 month outlook via the dumb money indicator is a bit worrisome. But, its just one indicator without too many historic data points to draw conclusions, so its hard to draw a firm outlook from it. Also, lets not forget the “unprecedented” times we live in. With most historic analytical studies, signals were generated in an environment where investors could hide in cash or bonds for extended periods while earning some interest. With rates as they are, “TINA” (There Is No Alternative to stocks) pushes money back into equities faster after market corrections. So, my view remains that corrections should be bought until a major trend indicator (200 day SMA, lower low & high on the weekly chart) signals otherwise. Perhaps some type of neartermed correction is coming soon. Again, we shall see.

Yearly Rant

I’m in the midst of writing my yearly rant blog, and hope to publish it just before Christmas. This year I’m having a blast writing it. I’m proposing a new & unique tax system for Canada. I’m sure that my proposal will strike anyone with some financial sense as interesting. I’m also sure that it will never be adapted. Stay tuned for that.

quote-teal

10 Comments

  • Oil Oil Oil ???
    Mid and longer term real upside and pullbacks should also be bought?

    Thanks Keith
    Happy holidays

    Reply
    • We’ve been legging into oil Bob. We like the producers more than the pure commodity play. Many of the producers pay dividends and have the technical potential for a 30% move. Meanwhile, the commodity has about 1/3rd of that upside with no dividend. Its clear to me that the risk/reward potential favors producers at this moment. We had been buying on the dips a little at a time. We have roughly 5% in oil producers, 4% in oil/gas producers and just over 3% in a pipeline. We may add some more if a pullback is big enough. But the point I’m making is, we are in the sector and bullish.

      Reply
  • I’ve been thinking of adding to my gold position or taking a small position in an oil name (TOG specifically).

    My hesitancy is a few things. With gold, its the uncertainty if the technicals indicate a leg back up. Could you kindly evaluate?

    And with oil, it’s the risk and even though it would only be a 2.5 to 5% position I hesitate with the increased lock downs.
    I hope you could provide me with some advice.

    Thank you.

    Reply
    • No advice Lance, just comments on my observations and disclosure of our own actions–doesn’t mean they are right
      Gold: we own, note that it seems to be bouncing off support. If the USD remains weak, gold should hold. Its also a bastion for inflation protection. I’m looking for a move to $2000 again, but would stop out below $1650
      Oil–like I said to Bob in the other comment response–we like the producers.

      Reply
        • It bounced off of support and so far is moving higher. Next resistance is $21 at the 200 day SMA. Might be a good plan to leg in. So far it looks ok to me. Really do not want to see that roughly $18 support broken, so there is your stop

          Reply
  • Hi Keith:

    I really appreciate your comments. Do you think with this correction coming that the Canadian dollar will go down. I am thinking to move my funds from USA to CA.

    Regards,

    Sam

    Reply
    • The USD might be a bit oversold, thus you could always see a surge which would impact the loonie. But it does look like we could see another 2 cents upside on the CDN dollar at some point. As one of the very accurate institutional research services I subscribe to noted, the CDN $ would go much higher if we didn’t have the Liberals in place (very harmful fiscal policy)–but they still see a bit more upside on the C$.

      Reply
  • Keith in your rant on the tax system, perhaps you may include some logic why Canada would not adopt a flat tax rate system. My understanding is that the UK pays say 15% flat tax and they may not even need to file a tax form. The complexity of our tax system is so great that we employ thousands of public servants to administer it, and we employ thousands of tax accountants to try & fid loop holes. Without understanding the implications, it seems to me that a simple tax system that hits everyone equally and keeps the submission simple has some merit. Perhaps in your rant you can shed some light.

    Reply
    • Daddyo–my rant talks about another aspect (spending) of the tax system- but to your point –I ENTIRELY agree with you re flat tax— this has been a main drive by Maxime Bernier–its too bad he didn’t stay with the PC, as he would have been an influence towards that end
      I find many Canadians are so brainwashed via socialist propaganda that they end up ignorant behind key principles of economics, the rights of the individual, and taxation. Flat tax makes too much sense to be acceptable here.

      Reply

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