by ilene - July 23rd, 2016 7:49 pm
Courtesy of Dana Lyons
The S&P Mid-Cap Index is trading in the tightest 8-day range in over 20 years; is a big move imminent?
Yesterday, we wrote about the Dow Jones Industrial Average’s rare streak of 7 consecutive all-time highs since its long-awaited breakout. However, scanning the broad equity landscape, it appears that consolidation has been more the norm since the market’s last big up day on July 12. This consolidation is demonstrated by the S&P 400 Mid-Cap Index as clearly as any space. Specifically, the 7-day range in the index spans less than 1 percent for just the 8th time ever. And, at precisely 1.00%, the 8-day range is the narrowest in more than 20 years. In fact, all of the historically tighter ranges occurred in the low-volatility early to mid-1990′s period.
So what are the implications of this tight range? Well, it is generally thought that exceptionally tight ranges lead to out-sized moves once the range is broken. The notion is that the action is akin to a coiled spring that, when released, expends its considerable pent-up energy. And, generally, we have found that to be the case with breakouts from similar ranges. However, it also depends on the type of environment we are in as well.
From 1992-1995, for example, the daily average true range in the S&P 400 averaged about 0.65%, an exceptionally low level. Thus, we should not be surprised to see that most of the historically tight trading ranges took place during that period. We also should not be surprised to see that the tight ranges of that era did not always lead to out-sized moves.
On the other hand the average true range during past 4 years has averaged around 1.30%, or about double that of the early-1990′s period. Therefore, when we see an unusually tight range like we are seeing now, it is not unreasonable to expect a sizable move once the tight range is broken.
Additionally, in an environment like the present, a tight range or consolidation is often representative of a continuation pattern.
by ilene - July 22nd, 2016 4:30 pm
Courtesy of Lance Roberts of Real Investment Advice.com
While the markets have indeed broken out to new highs, as I addressed earlier this week, it has done so without a significant improvement in the fundamentals. However, the breakout, such as it is, should not be dismissed or ignored. The technical underpinnings have improved enough to warrant an increase in equity related exposure given a proper entry point in the days or weeks ahead. Such an entry point would require a relaxation of the extreme short-term overbought conditions that currently exist. But a violation of critical support would negate the breakout and return the market back to a more bearish posture.
The potential for such a pullback is extremely high. As Tom McClellan noted recently, the “14-day Choppiness Index,” which tracks the path of a short-term trend, suggests Wall Street’s “uptrend is getting tired.” As McClellan notes, the very linear path for the index implies that the trend is likely to come to an end soon, while more volatile, or choppy, action suggests the opposite. A low reading in McClellan’s index signals a fairly straight-line, or linear, move. And presently, his choppiness index is at its lowest level in two decades.
“The reading on Monday was the lowest since Feb. 12, 1996 (yes I scrolled all the way back that far to find a lower one). And in case you are interested, that 1996 instance marked a price top which was not exceeded until 3 months afterward. Linear trends either upward or downward are very exhausting, requiring a lot of energy from either the bulls or the bears to keep everyone in formation and marching together. The market tends toward entropy, so excursions like this toward extreme organization cannot last for very long.”
Furthermore, with volatility levels at extremely low levels the probability of a further advance, without a pullback first, is extremely limited. My friend, Salil Mehta made a great comment on this recently noting that at current levels of volatility there is only about a 20% probability of further declines.
“At 11 [in the VIX] you are really close to the floor. chances are higher that you won’t go lower on VIX and will
by ilene - July 21st, 2016 3:10 pm
Courtesy of Dana Lyons
With stocks’ steady drift through all-time high territory, investors’ relative near-term volatility expectations have plummeted to near record lows.
One of the hallmarks of the post-February rally in stocks has been a healthy dose of investor skepticism and anxiety. But for brief periods, e.g., towards the end of April, investors have been slow to embrace the move. Such disbelief is one trait that has helped prolong the intermediate-term rally, now more than 5 months old. In recent weeks, we have mentioned in posts and interviews that perhaps the one thing that will usher in greater enthusiasm on the part of investors is a new high in the major averages. Perversely, that was one potential development, we surmised, that may shift sentiment far enough to the bullish side that it could finally place the intermediate-term rally in jeopardy. That scenario appears to be possibly playing out.
Why do we say that? Well, one piece of evidence suggesting a new-found elevated level of investor complacency comes from the volatility market. One way to judge investor comfort or anxiety is to look at the level of expected stock market volatility via instruments such as the S&P 500 Volatility Index, or VIX. Presently, the VIX is plumbing one of its lowest levels since 2007, so investors are displaying very low expectations for stock market volatility at the moment.
Another way of using volatility to measure the extent of investor nervousness is by comparing near-term volatility expectations versus those farther out. For example, the VIX is actually the 1-month volatility index. Meanwhile, the VXV is the 3-month volatility index. Typically, the VIX will be lower than the VXV as there is less time in the near-term for volatility rises to occur. When investors get especially nervous (usually during a selloff), near-term volatility expectations can actually rise above those farther out, i.e., the VIX/VXV ratio rises above 1.00, or 100%. Conversely, during times of complacency, the VIX can drop to relatively low levels versus the VXV, historically under 0.80, or 80%. That’s where the VIX/VXV ratio currently finds itself – and then some.
As of yesterday, July 19, the ratio stood at 76.0%, one of the most complacent readings since the inception of the VXV in 2007.
by ilene - July 20th, 2016 9:28 pm
Courtesy of Nick Colas of Convergex
Viva Las Vegas – The Gambler's Fallacy
The Dow has closed at a record high for nine days in a row, so it (and U.S. equities generally) MUST be ready for a pullback, right? Not so fast. Thinking that reversion to the mean happens swiftly and reliably is something called “The Gambler’s Fallacy.” To borrow from an old capital markets aphorism, things can stay weird longer than you can stay solvent betting against them.
Today we review a recent academic paper that highlights three examples of this mental error, ranging from judges hearing asylum requests to baseball umpires and bank loan officers. All of them make the same basic mistake in real-life situations despite their professional credentials and experience: assuming that the next decision is somehow linked to the previous one. Umps call marginal strikes after calling a ball, and judges decline refugee status more often after granting the previous person asylum during a day of hearings. The key lesson: every decision you make is unique, and should be unrelated to prior judgements.
* * *
During the summer of 1891, a small time British con man named Charles Wells took a holiday to the south of France. Like many tourists of the day, he frequented the famous casino in Monte Carlo. Unlike many tourists of his day, however, he managed to “Break the bank” – depleting the table where he was playing of all its reserves – several times. He reportedly took home as much as $8 million in today’s money, although his reputation as a swindler both before and after the event left some doubt about whether the whole thing was a publicity stunt.
Fast forward a few years to August 18, 1913, and something equally unexpected occurred: the roulette wheel came up with a black number 26 times in a row. Now, the casino had been in operation for decades by now, so a streaky wheel should not have been terribly remarkable. But instead of taking it stride, the crowds that night bet ever large sums during this run, fully expecting a red number to come up. It finally did, but not before the bank had broken some of the gamblers.
The event gave us term “Monte Carlo fallacy”, which has morphed into the “gambler’s
by ilene - July 20th, 2016 8:30 pm
Crude oil is the world's most actively traded commodity (and today's chaos evidenced that perfectly), and oil-related markets are a staple for traders, hedgers, investors around the globe. The below infographic, put together by Aspect, covers the history of crude oil trading, while also highlighting the major events that have shaped the landscape of the oil market as we know it today.
As VisualCapitalist's Jeff Desjardins points out, the infographic serves as the perfect primer for all the questions about oil that you had, yet were afraid to ask. It also illustrates the impact that unexpected geopolitical events can have on the oil price – and how this volatility can be contagious to other global markets.
by ilene - July 19th, 2016 8:09 pm
Courtesy of Michael Batnick, The Irrelevant Investor
Everybody who ever invested a dime in the market had a mentor. And if they didn’t have one when they started, it probably didn’t take long before they went searching for help. Jesse Livermore said “there is nothing new on Wall Street,” and because there is nothing new, lessons learned 10, 20, and even 100 years ago are as true today as they were the day they were written. And because of this, you don’t require any physical one-on-one time with somebody for them to be your mentor. Everything they would tell you to your face can be found in their writing.
I want to share the people who have had the biggest influence on me. This list could easily be four times as long, but to avoid this post becoming a book, I had to draw a line somewhere.
This list begins with the godfather Jack Bogle, founder of The Vanguard Group. Bogle taught me the power of indexing, to keep costs down, and to think long-term. Here are two brilliant quotes from The Little Book of Common Sense Investing:
Don’t look for the needle in the haystack. Just buy the haystack!
The stock market is a giant distraction to the business of investing.
And this is Bogle on investor behavior, from Common Sense On Mutual Funds:
When stock prices are high, investors want to jump on the bandwagon; when stocks are on the bargain counter, it is difficult to give them away.
“Adam Smith’s” The Money Game is one of my favorite investment books ever written. It was originally published in 1967, and aside from technological changes, you would think it was written today. Smith taught me how much the market, and even more so the investor, are influenced by psychology. Here he is, from his 1967 classic:
A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given
by ilene - July 19th, 2016 4:30 pm
Courtesy of Joshua M Brown
Jon Krinsky dropped a beauty for institutional clients of MKM Partners this weekend, refuting the five most common arguments from the bears for why last week’s new record highs represent a market top. Jon is a technician, so if the picture changes, so will his views, but for now he believes traders should be in dip-buying mode rather than playing for a deep pullback.
Below, five common bear arguments and Jon’s refutations:
#1: The Market Is Overbought
While the market is overbought on a very short-term basis, longer-term momentum is far from overbought, and monthly MACD is close to giving a bullish crossover.
#2: The Market Is Expensive
While we don’t use valuation as part of our analysis, we realize that some may consider the market ‘expensive’ here. There have been many times throughout the last 60 years, however, when the market was ‘expensive’ and still had plenty of runway.
#3: Emerging Markets Are Rolling Over
The MSCI Emerging Market Index is up 9.28% YTD, above all of its moving averages, and has the highest percentage of components above their 200 DMA since early 2014.
#4: The Transports Haven’t Confirmed
They also didn’t confirm in early 1995, until they did. The TRAN Index is up ~25% off its lows, has broken a two-year downtrend, and the cumulative advance-decline line is nearly at an all-time high.
#5: Sentiment Is Frothy
Short-term sentiment is frothy, but longer-term, is far from it, in our view.
Here’s how he tackles #4, the transports non-confirmation: It doesn’t matter. Or, it doesn’t matter yet.
There have been other instances where the Dow Transports negatively diverged from a DJIA bull market and then converged much later. Take 1995, for example, after which the S&P 500 (and Dow Jones Industrials and QQQ’s) literally exploded higher for the next four years…
Five Bearish Arguments… And Our Rebuttal To Them
MKM Partners – July 17th 2016
by ilene - July 18th, 2016 10:38 pm
Courtesy of Michael Batnick, The Irrelevant Investor
The amount of time between the scary events taking place in our country and all over the world seems to be narrowing at a rapid pace. The human tragedies that the world is experiencing are unthinkable and beyond sad to watch. But looking at the market’s response to crisis, we learn that no financial decisions, specifically relating to your portfolio, should be made on the basis of geopolitical uncertainty.
I was surprised to see the futures open flat last night, and trade higher this morning. But I shouldn’t have been, because a quick look at history reaffirms that events outside the market just do not get the response from stocks that you might imagine.
Here are a few examples.
- The Dow Jones Industrial Average had its best year ever in the first full year after World War I broke out. In 1915, it gained 81.7%. This gain has never come close to being duplicated, and will likely stand as an all-time record.
- U.S. stocks gained 15% in the two weeks following Hitler’s invasion of Poland.
- J.F.K was assassinated on Friday, November 22, 1963. On Monday the stock market was closed and when it reopened on Tuesday it gained 3.98%. This was the strongest move in a year and a half and is stronger than 99% of all days on record until that point. Also, in the six previous years, a move this strong had only happened one other time. The Dow finished 1963 finished up 17%.
- In 1968, the day after M.L.K was assassinated, stocks fell 0.59%. Then they rose over the next seven days. 61 days later, R.F.K was assassinated and stocks fell half a percent that day, then rose each of the next four days. The Dow gained 4% that year.
- Stocks were down less than 1% the day after Nixon resigned. Granted it was in the teeth of a bear market that would fall another 26% over the next four months, but the immediate reaction to the first and only presidential resignation seems rather tame.
by ilene - July 16th, 2016 11:59 pm
Courtesy of John Mauldin, Thoughts from the Frontline
“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”
– Robert Frost
“Money won’t create success. The freedom to make it will.”
– Nelson Mandela
I am going to interrupt my regular letter for a few pages, as the events in Turkey in the last 24 hours compel me to offer a few thoughts. Fortunately for you, patient reader, rather than getting my own less-than-expert analysis, you will have that of George and Meredith Friedman, members of the Mauldin Economics team who have been doing geopolitical analysis for 40 years and who have serious connections in Turkey. We will open this week’s letter by looking at George’s brief take of the actual meaning of what is going on in Turkey, as events continue to play out there.
George has an experienced team of analysts who write for his firm Geopolitical Futures. They are seemingly on 24-hour call, and they have highly placed connections all around the world, so George’s team can gain deep insights into whatever is happening in a country on an almost immediate basis. I am privileged in that I can pick up the phone and get to him whenever I need a deeper dive into what is going on in the world. After George’s brief analysis we’ll get into a few economic thoughts as well. So let’s start with George.
Mid-afternoon on Friday in the US (late evening in Turkey), we started to receive reports that tanks were deploying in Istanbul and two bridges over the Bosporus had been closed by Turkish Army troops. A bit later, we got reports that armor had been deployed in Ankara, Turkey’s capital, and that there was fighting going on between Turkish Army special forces and national police around the parliament. Turkish F-16s were seen in large numbers in the skies. A military coup was underway.
by ilene - July 16th, 2016 1:20 pm
From Bay Area School Drop-out to Billion Dollar Baby to Biggest Loser… the rise and fall of Elizabeth Holmes and her hobby-horse Theranos is as much media-hyped fantasy as it is smoke and mirrors. In order to help explain the rollercoaster car-crash, KQED put together this comic book. Enjoy…