S&P 500 (SPY @ 183.65) is looking less bearish but has yet to take out its recent highs

Friday 14 February 2014 2:00 p.m. New York time
The S&P 500 has done far better than I expected a few days ago, recovering all the ground it lost since its breakdown at 180.93 (on the SPY) and then some.  I covered my short position at 179.98 (the trailing 10-day high) 4 trading days ago for a small profit.  We now remain flat - in the gray area between a covered short and a new long position, which would not be declared until the 20-day high is exceeded (currently 184.77).  The 5.7% rally from 173.71 is more impressive than I expected, but the market will do what it will do, not what you want or expect it to.  It is more important to adapt to the unfolding situation than to dig your heels into an entrenched position.
A few caveats remain:
  - volume on up days continues to be less than on down days, and to be declining, indicating a market that is attracting fewer convicted buyers;
  - the average gain after the blast off from the 173.71 area has been progressively less;
  - the market is approaching resistance at the old highs around 184.94 and is currently in congestion - an old brief trading range between 181.34 and 184.94.


Consolidation and a pause or pull-back are more likely at this point than a continued parabolic ascent, but stay tuned. 

China, by the way, is pausing after gapping across a downtrend line.  We shall see if it can break out, but the chart does not look convincingly bullish.  A continuation in the downtrend would shift the focus in the United States from relief over the Congressional debt ceiling authorization to continued worries about a slow down in the world's 2nd largest economy.

S&P 500 (SPY @ 179.68) looking less bearish but caveat emptor

2/10/2014 1:57 p.m. Geneva time (7:57 a.m. Eastern Standard Time)
The S&P 500 (SPY @ 179.68) traded up sharply for the past two trading sessions which in and of itself is always bullish.  It decisively broke and closed above a short-term downtrend line connecting the highs of the last 4 weeks. 
However, several caveats to this potentially bullish case remain:
  - given the extent of the decline (6% is 11 trading days) and the thickness of the gloom, a snap back rally should not be surprising (although I admit I was impressed that the market could stage it this soon);
  - the SPY has regained just over half of the points it lost during the recent sell-off; rallies retracing half of the prior decline are not unusual during a serious correction;
  - the SPY should be expected to encounter resistance at the last level of support (which was also the breakout level in mid-December) around 180.9; even if the SPY were to rally significantly higher from here, a pause at this level would be statistically more likely than a parabolic move straight up, and during this pause, there should be time for re-evaluation - a high, tight flag just below this area, for example, would be a far better signal that the market's correction is likely over than a simple 2-day rally up to this point;
  - volume on up days is unimpressive - the 3 most recent up days had much lower volume than 5 of the 6 most recent down days, indicating far more money has flowed out of the market than in. 

 

The key to making money in the markets is to remain flexible, never wedded to any idea, no matter how convincing it might have been yesterday, if new, compelling contradictory evidence becomes available today.    I cover my short position at 181.66, the trailing 10-day high, but we are not there yet.  I would not go long until and unless the market took out its 184.94 highs.

China, which has been the fundamental driver of this latest sell-off, does not look as though its decline is over. 

Using the iShares FTSE 25 ETF (FXI @ 34.40) as a proxy for the Chinese market, notice how some of the same comments can be made about the Chinese market as were made about the S&P 500, although the Chinese market has been selling off longer (since mid-December, or 42 periods versus 11 periods for the S&P 500) and has fallen more (16.5% versus 6%).  Therefore, the Chinese downtrend is more established and less likely to reverse suddenly, although dramatic counter trend rallies are extremely likely.  Bearish indicators of the Chinese market include:

 - intact intermediate-term downtrend connecting the highs of the declining market since mid-December;
 - two small bear traps (rallies that did not lead to even a day of follow-through buying - a very bad sign) and a very large bear trap from mid-November to mid-December, when the market gapped dramatically from 35.93 to 40 in two very heavy volume days, followed by subsequent filling of the gap and decline to well below the low point prior to the move);
 - far greater down volume than up volume.

Caveat emptor.  You don't have to catch the very bottom of a market to make a lot of money trading and investing.  You can let the first few percentage points of a rally go by to make sure it's real and still do very well.  We are not at the point where the rally in either the United States or Chinese stock markets is established as a new uptrend. 

S&P 500 (SPY @ 175.38) continues to look extremely bearish

Feb 5, 2014 SPY @ 175.38 before the market open:  the market's high-volume 2% sell-off on Monday confirms that this decline is not over and likely will continue for some time.   Click on either of the charts below for more details.

  

China (FXI @ 34.14) continues to be the center of this storm.  If Chinese stocks continue to sell off and worries about Chinese growth and even stability rise, then it will be very hard for the United States stock market to rally. 

 

S&P 500 (SPY @ 178.89) looking extremely bearish

1/24/13  The S&P 500 (SPY @ 178.89) is looking extremely vulnerable to a sharp sell-off for several technical and fundamental reasons.  The technical reasons are most obvious:

   - two gap down days with the last day representing a 2% drop;
   - violation of and close solidly below the trailing 20-day low;
   - very heavy volume on down days;
   - close at low of 2% drop;
   - only 3% off high after very extended (19.8% since July lows) advance;
   - solid violation of breakout point at A that was almost a mirror image of the most recent sell-off, meaning all the price action from mid-December to the present could be viewed as a bull trap (a failed breakout); 
   - "2b" top (minor) in place when prices took out the 184.69 recent high but collapsed back at 184.94.


  - violation of a 5-week flag formation above the breakout point at A, and more recently a violation of a higher, tighter 5-day flag formation.

   - implied volatility (VIX) surging off of an extremely low level (low levels of implied volatility are loosely correlated with bull markets (and complacency); higher levels are associated with choppy or falling markets; surges in VIX occur when prices plunge.

Note that the sharp rise in the S&P 500 in the past year is not bearish per se since the market tends to perform better when it has risen or fallen sharply over the past year and most market gains followed modest gains and losses.






Extending the lookback period to 3 years also does not raise alarm bells per se.   The S&P 500 rose 47% over the past 3 years, putting it in the top quartile of trailing 3-year returns since 1948, but the average subsequent 12-month change in the S&P 500 didn't turn dismal until the 90th percentile of 3 year S&P 500 changes (58.3% and above).

	n:	Past 3 year S&P 500 change from:	… to:	Next year's S&P 500 change:
Min-10%	7	-40.1%	-13.95%	17.47%
10-25%	9	-14.0%	6.82%	4.69%
25-50%	15	6.8%	27.55%	9.86%
50-75%	16	27.6%	44.03%	6.79%
75-90%	9	44.0%	58.34%	8.35%

Fundamental reasons, although less reliable in my book, are  overall bearish.
  China, the world's second-largest economy, is showing signs of stalling and even of a credit crunch of sorts.
  Europe, a United States major trading partner, is still mired in extremely weak growth with high, persistent unemployment.
  Major problems seem about to implode the economy of Turkey.
  Interest rates in the United States have risen sharply.  The yield on the 10 year Treasury note has doubled from 1.394% in July, 2012, to 2.735% currently (although the yield topped 3% in December, 2013).  The year-over-year change in the 10 year yield is 37%, putting it in the top decile (which ranges from 22% to 76%).   When the annual percent change in the 10 year yield has been 22% or higher, the market has only gained .1% per month on average (1.2% annualized).  For comparison, the median percent change in yield (ratio minus one, not difference) since 1953 has been 1.44%, and the market only rose on average the next month following months in which the yield change was at that level or below.  The stock market tends to be very inversely sensitive to changes in interest rates, doing poorly when rates are rising and making most of its outsized gains when rates are falling.  

	n:	10 year Treasury yield 12 month change from:	… to:	Next month's average S&P 500 change:	Annualized:
Min-10%	72	-48.2%	-20.78%	1.71%	22.6%
10-25%	107	-20.8%	-11.58%	0.60%	7.4%
25-50%	179	-11.6%	1.44%	1.04%	13.2%
50-75%	179	1.4%	11.36%	0.51%	6.3%
75-90%	107	11.4%	22.19%	0.10%	1.3%
90-Max	71	22.2%	76.28%	0.10%	1.2%

  Of course, these are general trends with notable exceptions, such as 2013, when the S&P 500 surged despite surging interest rates.  Nevertheless, rising rates create a serious headwind going forward and eventually they tend to be discounted.   As the yield on the 10 year Treasury approaches that of the earnings yield (1 over the PE), investors at the margin will prefer Treasuries to stocks, putting pressure on stock prices.  In fact, whenever the earnings yield exceeds the 10 year Treasury yield by 4.2% or more, the market returns a whopping 33.9% annualized on average since 1953.   Currently the earnings yield is 2.5% greater than the 10 year yield, putting it in the 75th to 90th percentile.