After yesterday’s blast, bears took another chunk out of the recovery. Bulls might actually get more joy with a small position at the lows of the last three days in Large Caps. Pre-market action will be key; should it look like the market will open below the 3-day low then there could be a runaway lower. In such case, waiting for things to settle after the first 30 minutes of opening trading may offer a better entry.
What will give bears hope is the Russell 2000. This index is finding itself under increased pressure. What ‘hope’ the 50-day MA gave bulls yesterday was dashed by today’s close. Technicals are now net bearish, joining those of Large Caps. This has the makings of a breakaway move lower. If there is going to be a panic move, Small Caps could be the one to suffer the most.
The Nasdaq is playing a far quieter game. Under different circumstances, today’s action might be viewed as much more bullish. The two-day pattern is a ‘bullish harami’ and despite distribution over two of the last three days, there is a chance bulls could deliver a nice upside kick. Watch pre-market for leads; stops go on a loss of 5,097.
For tomorrow, bears should watch the Russell 2000, bulls the Nasdaq. Volatility is picking up nicely and money is to be made over the near term.
It’s kind of silly that we’re even calling what went on Friday and over the weekend a “sell-off”, but that’s just indicative of how spoiled we’ve gotten by the absence of normal volatility this summer.
But summer is gone, like the headphone jack, and September is getting underway in a manner quite true to its volatile reputation.
So anyway, what’s do we make of this sell-off, shallow though it’s been so far? I turn to some of my favorite technicians this morning…
First, Ari Wald at Oppenheimer, who sees it as a buying opportunity. Ari notes that yields could back up on the 10-year to 1.8, 1.9% and still not present a problem for the equity market. The Taper Tantrum in 2013 is a good analog for this – stock volatility after Bernanke’s hawkish warning presented a fantastic chance to get long. He also notes that the Put/Call ratio is flashing a tactical buy signal, as well as the Vix spike.
Here’s Ari on what a Vix spike in the context of an uptrending stock market portends:
The recent spike in the VIX has also reached a buyable threshold, by our analysis. We define a VIX spike as a reading that is 50% higher than its 63-day low; this helps normalize for different volatility environments, and we consider the S&P 500 in an uptrend when the index is above its 200-day m.a. Spikes in the VIX typically occur around short-term market lows, and we’ve found it’s a more compelling signal when trend is positive. Since 1990, the S&P 500 has averaged an 8.4% gain in the next six months when this signal of selling exhaustion is triggered vs. a 4.2% gain during any six-month period.
You may click to embiggen his chart:
Next, Jon Krinsky at MKM, no stranger to regular readers here. Jon sees Friday’s action as a fumble in the proverbial red zone. Just when the bulls thought they had it all sewn up for 2016…
The Bulls were driving down the field, looking to close
After weeks (and weeks) of inactivity, markets have delivered two big days of activity: Friday’s sell off and today’s recovery. Which of these days delivers the basis for market action over the next few months remains to be seen. One could argue today’s lighter volume and inability to recover all of Friday’s losses gives bears the edge, but the longer term trend is all bullish. I am biased by holding a Dow Jones short, but intermediate term technicals have turned bearish for both S&P and Dow.
The rally in the S&P stalled out at the 50-day MA. The index has underperformed since July and Friday’s gain only made modest in roads into returning to a leadership role.
On the flip side, Friday’s sell off in the Nasdaq tagged the 50-day MA before mounting a recovery. Such action looks more like a recovery ‘buy-the-dip’ which plays with the continued relative out performance of Tech indices relative to Large Caps.
Small Caps had enjoyed a period of out performance, but looking back over the last 6 months it has been in a state of flux. It too found support at the 50-day MA as did the Nasdaq, but it lost relative ground to the Nasdaq. Small Caps are a critical leadership index for secular bulls and it’s struggling.
For tomorrow, look for some bullish upside as bulls test the resolve of Friday’s bears. Whether new highs can be delivered is another matter, but I suspect markets will deliver a day of tight action. If bears do win out, look for a walk down of 3-4 days back to Friday’s lows.
After a stifling tight range for many weeks – and more of that the first 4 days of the week, we finally saw a break in the action Friday. It occurred to the downside. Quite a few technical markers were broken; more on that later. It was all about the Federal Reserve again as someone dared to promote the idea that a rate hike could occur!
Comments from Boston Fed President Eric Rosengren—a voter this year on the Fed’s interest-rate setting board—helped to contribute toe the selloff. He said that the U.S. central bank could resume gradual rate increases as the risks facing the economy are more in balance, reigniting Wall Street’s fears about the end of easy-money policies.
To show how inane the market is about trying to read the tea leaves of a whopping 25 basis point rate hike, just the talk of a speech Monday by a normally dovish Fed member (Lael Brainard) helped stoke the fire of Friday’s selloff.
Thursday the European Central Bank sat pat, rather than do even more stimulus – which ruffled some feather of the “easy money, now and forever” crowd.
Ironically economic data the past week was pretty mediocre which the bulls were liking as it means no rush for the Federal Reserve to move. “Bad news is good news”:
The Institute for Supply Management said its nonmanufacturing index fell to 51.4 last month from 55.5 in July—the slowest pace of growth since 2010.
There has been a recent spike in the number of Unchanged Issues which has, at times, signaled too much investor complacency in the past.
As readers are aware, our biggest stock market concern in recent weeks has been focused on the widespread overly bullish sentiment. Today’s Chart Of The Day presents one further example of potentially too much complacency on the part of investors – at least prior to today’s market plunge. Perhaps the most disregarded yet widely disseminated market statistic is the number of Unchanged Issues on the exchanges on a given day. Everyone focuses (rightly so) on Advancers and Decliners, but mostly ignores the Unchanged Issues. We mostly did as well, until we began to chart them more closely a few years ago.
Interestingly enough, we found that spikes in Unchanged Issues can be a sign of complacency while low levels can indicate elevated fear on the part of investors. These signals can be valuable on a contrarian basis when identifying potential bottoms and tops in the market. If you think about it, when market fear is high – at bottoms – volume is elevated and stocks of all stripes are on the minds of investors. When markets are rising – or stagnant – some issues, especially lightly traded ones, may slip investors’ consciousness.
I know many folks may find this notion a bit of a reach, or just downright goofy, but take a peak at the chart below. When tracking Unchanged Issues on the NYSE (using a 25-day average), we have seen that spikes have tended to occur near intermediate-term market tops. It is not a foolproof signal, but elevated numbers of Unchanged Issues showed up near tops in June 2007, April 2010, April 2011, September 2012, September 2014 and May 2015.
The concern currently is that NYSE Unchanged Issues as a % of All Issues is at its highest level in more than 10 years.
So is this signal a valid red flag? And has today’s action taken away some of the sting? (By the way, we regret not being able to post this prior to the day’s action – sometimes our client and subscriber responsibilities preclude more timely posts, however). The signal does fit with most of the frothy sentiment
At week’s end, four of the eight indexes on our world watch list posted week-over-week gains, down from seven the previous week. The average week-over-week change was -0.14%, down from 1.51% the previous week. There was a substantial global divide underlying the fractional loss. The four gainers were the Asian indexes, with the Hang Seng’s 3.58% as the outlier at the top. The losses for the four Western indexes ranged from the DAXK’s -1.03% to the S&P 500′s -2.39%. The global split owes some of its spread to the Friday freak-out over a hawkish Fedspeak after Asian markets had closed. Particularly, surprising was the news of a previously unannounced Monday speech by uber-dovish Lael Brainard on Monday at the open of the FOMC week. Will she signal a less dovish stance? Stay tuned!
A Closer Look at the Last Four Weeks
The tables below provide a concise overview of performance comparisons over the past four weeks for these eight major indexes. We’ve also included the average for each week so that we can evaluate the performance of a specific index relative to the overall mean and better understand weekly volatility. The colors for each index name help us visualize the comparative performance over time.
Here is an overlay of the eight illustrating their comparative performance so far in 2016.
Here is a table of the 2016 performance, sorted from high to low, along with the interim highs for the eight indexes. Four indexes are in the green year-to-date, unchanged from last week. The big Hang Seng rally put the Hong Kong index at the top, replacing the Brexit FTSE. The Shanghai remains in the cellar.
The Global Bear Market Perspective
The column chart is sorted by the least to worst declines from previous peaks as of the week’s end. Seven of our eight watch list indexes had dropped into bear territory (a 20% decline), the S&P 500 being the sole exception. As of the latest close, only one of the eight is in the bear zone, unchanged from last week.
A Longer Perspective
The chart below illustrates the comparative performance of World Markets since March 9, 2009. The start date is arbitrary: The S&P 500, CAC 40 and BSE SENSEX hit their lows on March 9th, the Nikkei 225 on March 10th, the DAX…
..”Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”..
..”The stock market is filled with individuals who know the price of everything, but the value of nothing”..
..“Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two … The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities.”..
..”It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”..
The historically unprecedented narrow trading range of the S&P 500 was snapped today by the biggest decline in 53 sessions. Today’s closing loss of 2.45% was the largest since the 3.59% selloff on June 24th. Today’s action essentially confirms the metaphor of an equity market infant nursing on mother Fed’s breast. The selloff was triggered initially by hawkish remarks by the normally dovish Boston Fed President Eric Rosengren, a voting member of the FOMC. But more surprising was the announcement of an unannounced speech by even more dovish Lael Brainard at the open of the FOMC week, which runs counter to the general policy a silent Fed prior to the FOMC meeting end.
Interestingly, the yield on the 10-year note closed at at 1.67%, up six basis points from the previous close.
Here is a snapshot of past five sessions in the S&P 500.
Here is daily chart of the index. Volume rose on today’s decline but remains subdued by comparison to the two-day selloff in June. The index closed at its intraday low and is now below its 50-day moving average.
A Perspective on Drawdowns
Here’s a snapshot of selloffs since the 2009 trough.
Here is a more conventional log-scale chart with drawdowns highlighted.
Here is a linear scale version of the same chart with the 50- and 200-day moving averages.
A Perspective on Volatility
For a sense of the correlation between the closing price and intraday volatility, the chart below overlays the S&P 500 since 2007 with the intraday price range. We’ve also included a 20-day moving average to help identify trends in volatility.
Note: This update incorporates Q2 Second Estimate GDP and recent release of the Wilshire Q2 numbers.
Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that “it is probably the best single measure of where valuations stand at any given moment.”
The four valuation indicators we track in our monthly valuation overview offer a long-term perspective of well over a century. The raw data for the “Buffett indicator” only goes back as far as the middle of the 20th century. Quarterly GDP dates from 1947, and the Fed’s balance sheet has quarterly updates beginning in Q4 1951. With an acknowledgement of this abbreviated timeframe, let’s take a look at the plain vanilla quarterly ratio with no effort to interpolate monthly data.
The strange numerator in the chart title, NCBEILQ027S, is the FRED designation for Line 41 in the B.103 balance sheet (Market Value of Equities Outstanding), available on the Federal Reserve website. Incidentally, the numerator is the same series used for a simple calculation of the Q Ratio valuation indicator.
The Latest Data
The denominator in the charts below now includes the Second Estimate of Q2 GDP. The latest numerator value is Q2 data from the Fed’s “Corporate Equities; Liability” extrapolated based on the quarterly change in the Wilshire 5000. The current reading is 126.3%, up from 118.6% for the Second Estimate. It is off its 130.9% interim high in Q1 of 2105.
Here is a more transparent alternate snapshot over a shorter timeframe using the Wilshire 5000 Full Cap Price Index divided by GDP. We’ve used the St. Louis Federal Reserve’s FRED repository as the source for the stock index numerator (WILL5000PRFC). The Wilshire Index is a more intuitive broad metric of the market than the Fed’s rather esoteric “Nonfinancial corporate business; corporate equities; liability, Level”. This Buffett variant is off its interim high of Q2 of 2015.
A quick technical note: To match the quarterly intervals of GDP, for the Wilshire data we’ve used the quarterly average of daily closes rather than quarterly closes (slightly smoothing the volatility).
How Well do the Two Views Match?
The first chart above uses Fed data back to the middle of the last century for the numerator, the second uses the Wilshire 5000, the data for which only goes back to 1971. The Wilshire is the more familiar numerator, but the Fed data gives us a longer timeframe. And those early decades, when the ratio was substantially lower, have definitely impacted the trend.
To illustrate the point, here is an overlay of the two versions over the same timeframe. The one with the Fed numerator has a tad more upside volatility, but they’re singing pretty much in harmony.
A conspicuous feature of the Buffett indicator is the upward trend over the decades since the start of the data series. For a better sense of valuation over time, let’s detrend the data by letting Excel draw a regression through the series and eliminating the upward trend. First, let’s draw the regression through the series.
In a CNBC interview in 2014, Warren Buffett expressed his view that stocks aren’t “too frothy”. However, both the “Buffett Index” and the Wilshire 5000 variant suggest that today’s market remains at lofty valuations — still above the housing-bubble peak in 2007, although off its interim high in Q1 of 2015.
A we’re question repeatedly asked is why we don’t include the “Buffett Indicator” in the overlay of the four valuation indicators updated monthly. We’ve not included it for various reasons: The timeframe is so much shorter, the overlapping timeframe tells the same story, and the four-version overlay is about as visually “busy” as we’re comfortable graphing.
One final comment: While this indicator is a general gauge of market valuation, it it’s not useful for short-term market timing, as this overlay with the S&P 500 makes clear.
Today’s release of the publicly available data from ECRI (Economic Cycle Research Institute) puts its Weekly Leading Index (WLI) at 138.9, up 0.5 from the previous week. Year-over-year the four-week moving average of the indicator is now at 5.67%, up from 5.20% the previous week and its highest since September 2013. The WLI Growth indicator is now at 8.3.
“The Brecession Blunder”
ECRI’s latest website feature is an article pointing out the false expectation that the Brexit vote would trigger a recession. “Only now, with evidence mounting that such a recession hasn’t materialized, is there puzzlement about the ‘Brecession blunder’ – how could so many economists have been so wrong.” Read the full article here.
The ECRI Indicator Year-over-Year
Below is a chart of ECRI’s smoothed year-over-year percent change since 2000 of their weekly leading index. The latest level is above where it was at the start of the last recession.
RecessionAlert has launched an alternative to ECRI’s WLIg, the Weekly Leading Economic Indicator (WLEI), which uses 50 different time series from various categories, including the Corporate Bond Composite, Treasury Bond Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. An interesting point to notice — back in 2011, ECRI made an erroneous recession call, while the WLEI did not trigger such a premature call. However, both indicators are now generally in agreement and moving in the same direction.
Appendix: A Closer Look at the ECRI Index
The first chart below shows the history of the Weekly Leading Index and highlights its current level.
For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the percent off the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.
As the chart above illustrates, only once has a recession ended without the index level achieving a new high — the two recessions, commonly referred to as a “double-dip,” in the early 1980s. Our current level is still off the most recent high, which was set back in June of 2007. We’ve exceeded the previously longest stretch between highs, which was from February 1973 to April 1978. But the index level rose steadily from the trough at the end of…
This is the first of several investment think pieces I have in my head dealing with investment philosophy, where markets are now and maybe even a stock or two... They are surprisingly hard to write so these posts might come slowly...
When I was starting out in the investment game I read Warren Buffett's letters from inception, Ben Graham, Phil Fisher, anything I could on Charlie Munger and the rest of the standard investing cannon.
Ever wondered just what happens when the immovable object of safe-space-demanding social justice warriors collides with the irresistible force of free-speech-seeking American students? Wonder no longer...
On Thursday night protestors at Kansas University (KU) hijacked a Young Americans for Freedom (YAF) meeting, reportedly unleashing a virulent tirade against the conservative students, providing a glimpse into the crazy arguments of the far Left.
By Lawrence A. Cunningham. Originally published at ValueWalk.
We all write more than ever today, but do we communicate well? As one group, corporate directors, pondered how to communicate effectively to shareholders, they turned to the gold standard. They wondered, what most distinguishes Warren Buffett’s annual missive to Berkshire Hathaway shareholders, and asked me, as a student of these writings for two decades, for the answer.
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The German Stock Market has been a quality leader in both directions the past few years. Below looks at why one might want to keep a “close eye” on this key global stock index, to see if it can hop over a important breakout level.
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Similar to the S&P 500 and many stock indices in the states, the DAX index remains inside of a uniform rising 6-year channel, since the 2009 lows.
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It was all about the Federal Reserve as we noted it would be. In last week’s recap we said:
From this perch there has been and continues to be zero expectation for a September rate hike as the Fed doesn’t want to be seen as “political” and trying to move the market ahead of November, but the Fed is at least trying to throw some bones out there to make the market a bit less complacent.
All eyes on the Federal Reserve with a meeting Tue/Wed and a press conference by Yellen Wednesday. Since we expect nothing to happen Wednesday in terms of raising rates maybe the market will be in “relief” mode. Unless there is strong language from Yellen hinting at a December rate hike....
"When you let the free market take over, the little people get screwed and bankers get rich. Chile tried privatizing retirement plans and surprise, surprise, fund manager ate the profits… Pretty sure the results would be the same here..." ~ Jean-Luc
I was so pleased yesterday by the announcement that I have joined the Research team at GoldCore as it meant that I could finally start talking about it and was back in a role that lets me indulge in my passion by researching and geeking out on all things gold, silver and money.
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Epizyme was founded in 2007, and trying to create drugs to treat patient's cancer by focusing on genetically-linked differences between normal and cancer cells. Cancer areas of focus include leukemia, Non-Hodgkin's lymphoma and breast cancer. One of the Epizme cofounders, H. Robert Horvitz, won the Nobel Prize in Medicine in 2002 for "discoveries concerning genetic regulation of organ development and programmed cell death."
Before discussing the drug targets of Epizyme, understanding epigenetics is crucial to comprehend the company's goals.
Genetic components are the DNA sequences that are 'inherited.' Some of these genes are stronger than others in their expression (e.g., eye color). Yet, some genes turn on or off due to external factors (environmental), and it is und...
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