The Market Trend Report highlights key technical characteristics of the financial markets, utilizing traditional technical tools and sentiment analysis to assess the risk of a change in the market trend. These trend-following analytics form the basis of the Market Trend portfolio managed by The Absolute Return.
March 22, 2017 UPDATE: Revisit of 3/9 short-term sell signal
TrendFlex Classic Credit Risk (CR) Signal flashed a sell on 3/9/17 as reported on Baseline Analytics. This signal influences the tactical investment strategy in the Market Trend portfolio. The chart below shows the TrendFlex Classic CR line crossing below its moving average. Although the longer-term TrendFlex Allegiance signal remains long, the short-term character of the equities market favors the "risk-off" trade.
FEBRUARY 26, 2017 UPDATE: Checking in on the trend extremes
As the equity indices continue to forge new highs, our TrendFlex extreme indicators, utilized to identify a potential change in the market trend, hover around neutral to extreme readings.
Our Corporate Bond vs. S&P 500 index ratio as seen at the bottom half of this chart, pushed to a new low this week, and gapped widely below its moving average. This is an extreme reading that bears watching for a trend shift
Our TED Spread indicator is neutral but on the verge of turning to a new extreme. Note below how the CCI reading (bottom portion of chart), once it moves to the +100 level of the chart (blue sections), tends to precede a decline in equities. Conversely, note the red zone (-100 reading) where the indicator foreshadowed a surge in the S&P 500.
Finally, our VIX and Put/Call indicators are mixed. Although VIX has met up with its moving average (we look for large gaps from its moving average to confirm a pending trend change), it remains rather low at 11.47.
As the chart below depicts, VIX can remain low for a while before equities correct (see the blue vertical lines where VIX settled in the past near where it is today.
So perhaps equities are nearing the point where a consolidation or modest (5%?) correction is in the cards, which will hopefully dissipate some of the froth in the markets and introduce a new buying opportunity. As the new administration moves further out of the honeymoon period, however, the challenge to pass business-friendly tax and other economic policies may begin to cast a shadow on bullish sentiment.
FEBRUARY 15, 2017 UPDATE: REvisting the TrendFlex Signal
As equities reach to the stratosphere, a shift in the TrendFlex signal underscores the bullish environment. On our February 6th update (below) we noted a "close call" whereby the TrendFlex Classic CR indicator appeared to be heading for a cross below its moving average, a bearish development. With continued market enthusiasm and extremely strong market breadth, our TrendFlex Classic CR indicator has moved smartly higher (bullish for equities). See the chart below.
FEBRUARY 6, 2017 UPDATE: Trend change risk assessment
The TrendFlex Classic CR (“Credit Risk”) indicator is a short-term measure of the risk of a change in the trend of the S&P 500. We follow this indicator versus a moving average line and note Buy and Sell signals as the indicator crosses up (Buy) or down (Sell) through its moving average.
As the S&P 500 has seen increased volatility while attempting to consolidate recent gains, the TrendFlex CR indicator is close to breaching its moving average to the downside, a bearish development. The signal tends to lead equities price movement, so we take this development as another caution sign for equities.
Although the intermediate-term trend clearly is up, the risk of a short-term trend change appears to have increased. See the chart below:
February 2, 2017 UPDATE: A neutral reading in our "extreme" indicators
Taking a look at the CBOE VIX and Put/Call Ratios at today's close, it appears that one of our more consistent "Extremes" indicators has turned neutral. Equities have traversed through fits and starts of volatility recently, and that behavior had manifested itself in an extreme reading in late January (see the blue arrows on the right side of the chart below.
This extreme was highlighted in our January 25 update (below), introducing the potential for a short-term decline in equities (which happened). The S&P 500 has since settled back to near its 34-day moving average (blue line) as recent gains are consolidated.
Our take is that with stock market settling back, it appears to be preparing for the next leg upward (resumption of the major trend). Indeed, major indices have been pushing up against overbought levels and upside momentum has been waning.
Although this neutral "extremes" indicator does not suggest any sharp downside risk, equities may need some more time to prepare for the resumption of the uptrend. A firm consolidation to the 34 or 50-day moving average, as the S&P 500 appears to be attempting, may be what is needed to prepare for the next leg up.
Our Credit Risk Extreme indicator is no longer at an extreme reading (measured by the gap vs. its moving average in the chart below). However, it is interesting to note that the indicator appears to be forming a double-bottom. A breakout from that basing range could suggest a shift to the downside in equities (and begin to favor bonds).
We will watch this relationship carefully, as a shift above its moving average signifies risks to equity positions. The good news (for equity bulls) is that the indicator is so low to begin with, that a shift above its moving average may not entail the meaningfulness as it had in the past. The jury is still out on the significance of this indicator as we close out the trading week.
JANUARY 25, 2017 UPDATE: state of the extremes as equities challenge highs
Two key indicators have reached extreme readings, which tend to precede shifts in the equity market trend.
Both the CBOE VIX indicator and the CBOE Put/Call Ratio have gapped well below moving average measures that have been useful as contrarian signals for short-term downside shift in equities. As can be seen in the chart below, a low reading in VIX vs. its moving average denotes short-term peaks in the S&P 500. We may be seeing one of those peaks following Tuesday's (January 24th) market close. Although this extreme reading indicator does not always pinpoint the day of a trend change, it is worth considering as a warning sign that the rally may be reaching its climax.
Another extreme indicator we follow is the TED Spread, or the spread between the 10-Year Treasury and Eurodollar futures. Peaks (or rises) in the TED spread tend to be an indicator of credit risk. While it does not appear evident that credit risk is seeping through the financial markets, the rise in the TED spread expresses expectations of risk that bears watching. Note in the chart below how the peaks displayed in the lower portion of the chart (blue portions of the oscillator) tend to precede equity declines.
Although the equity market indices are clearly bullish, extreme readings as such are cause for pause and reinforce the importance to preserve capital (and refrain from getting caught up in new high euphoria).
JANUARY 19, 2017 UPDATE: Growth vs. Value: Trend Shift in the works?
Growth stocks, as represented by the Russell 2000 Growth Index, have generally outperformed value stocks since mid-2010 (see the chart below, denoted by the green boxes). Since the start of 2016, however, value has outperformed growth, as can be seen by the large red box on the right side of the chart.
A 50-day exponential moving average is employed to demonstrate the price activity in favor of one versus the other. What is interesting on the chart is the top portion, which shows the RSI of the Growth/Value stock ratio. That RSI was deeply oversold and has crossed above the 30 level, a bullish development (see green circle). This may be an indication of a shift in sentiment back toward growth stocks.
JANUARY 18, 2017 UPDATE: Gold Miner's Technicals - An Interesting Setup?
Gold and the Gold Miner's ETF (GDX) have been despised for quite a while. It is often when an investment is shunned and ignored, that it is ripe for a shift in sentiment and price.
Looking at the VanEck Vectors Gold Miners ETF (GDX), it is interesting to note that price has bounced from a long-term support level near 20 (see the monthly chart below):
Also noteworthy, on the daily chart, the GDX has closed above its 50-day exponential moving average. GDX rallied from its recent lows near 19 on decent volume.
So we could be looking at a profitable turning point in GDX (and gold in general). Perhaps volatility and uncertainty regarding the new administration or even some early signs of price growth in the inflation readings, are influencing this recent price behavior.
january 13, 2017 Update
Equities remain in consolidation phase as the major indices look for a continuation pattern breakout to new highs. As for extreme sentiment readings, those have generally settled back to neutral with only the CBOE VIX reading remaining at a modest contrarian extreme.
Our proprietary TrendFlex family of market trend indicators guides the tactical strategy utilized in The Absolute Return Market Trend Portfolio. The TrendFlex CR (Credit Risk) indicator provides the basis for the Market Trend portfolio strategy. Since its inception in May 2006, the indicator has gained 248% versus a gain of 83% in the S&P 500.
January 10, 2017 Update
As equities reach new highs, several market trend risk indicators as measured by our proprietary TrendFlex system are underscoring the risk to long positions at this stage of the rally.
Our flagship TrendFlex Classis CR (credit risk premium indicator) is about as bullish (for equities) as it can be, which can be interpreted as a contrarian signal. We are firm believers in "reversion to the mean," and as the chart below suggests, the wide gap between the ratio of corporate vs. treasury debt versus its moving average (dotted line) calls for a possible pause in the equity uptrend.
The weekly version of the TrendFlex CR similarly demonstrates today's extreme readings:
No doubt that the charts above are wildly bullish. Although we are trend followers, we take very seriously the indicators that measure the risk of a trend change.
Baseline Analytics Extremes highlights three key TrendFlex Indicators and their level of extremes. The key indicators include the following:
- CBOE VIX and Put/Call Ratio
- TED Spread
- LQD vs. S&P 500 GAP reading
Here is what these indicators are telling us, following the market close of 12/23/16.
The Vix/Put Call Gap versus their respective moving averages measures complacency among traders and investors. Note the VIX (top portion of chart below) falling well below its moving average. As can be seen on the chart, such gaps below (and above) its moving average tend to precede shifts in the S&P 500. VIX is hinting at a potential setback in equities. Interestingly, the Put/Call ratio is neutral.
The TED Spread is a measure of perceived credit risk in the US Economy. Peaks in the spread (see blue areas in bottom of chart below). This indicator has preceded shifts in the market trend rather consistently over the timeframe displayed below. It may be hinting at a firming of Treasuries following their rather sharp selloff since peaking in July.
Finally, the gap between our LQD/S&P 500 ratio (a derivative of the Trendflex CR indicator) sat at an extreme low in late December (see bottom portion of chart below) which preceded a modest pullback in the S&P 500. Today this gap versus its moving average has all but closed, neutralizing the previous extreme reading. A large gap suggests that equities have moved too far too fast, and have since settled back a bit.
We have also previously noted the progress in the Dow Theory technical indicator. The two indices (Dow Jones Industrial Average and Dow Transportation Index) recently hit new highs, a traditional technical measure of a confirmed bull market. Again, however, we harken to a cautious stance given the swiftness of this move upward and the extreme readings in our various indicators.
What to do? Think about wading into long positions in instruments that have swooned during this uptrend (perhaps small positions in bonds, gold, agricultural commodities) to diversify and dollar-cost average. Europe and emerging markets are also beginning to look interesting (perhaps VGK and EEM will play catch-up to the US). Given the extreme contrarian reading in VIX and the surge in the TrendFlex CR indicators, hedging long positions with e-Mini S&P 500 futures may be in order, as well as selling call options.
Equities have tended to do well in the week before the holidays and afterward, but have consistently slipped as the new year dawns. We would rather hedge our bets and look for prices to settle down before adding to long positions, as the major indices, although overbought, are clearly bullish.
Best to your investing, and Happy New Year!