Momentum
Sector Relative Strength: Defensives Topping
Friday, August 10th, 2012
The charts below show the relative strength of the ten S&P 500 sectors as well as the Dow Jones Transports and the Russell 2000 relative to the S&P 500 over the last year. When the line is rising it indicates that the sector is outperforming the S&P 500, while a falling line indicates underperformance. We have also shaded each sector in red or green to indicate whether the sector has outperformed (green) or underperformed (red) the S&P 500 over the last year.
As was the case the last time we looked at sector relative strength, over the last year six sectors have outperformed the S&P 500 while four have underperformed. One shift that we have seen in the last two weeks, however, is that some of the defensive sectors have started to underperform. Look at the charts below and you will see that Consumer Staples, Health Care, Telecom Services, and Utilities have all started to roll over to varying degrees. For Consumer Staples and Utilities, both sectors are close to dipping into the red in terms of relative performance over the last year. While defensives have seen slowing momentum, sectors picking up the slack include Energy, Industrials, and Technology.
Typically, when the market is in rally mode, you often see outperformance on the part of the Transports and Small Cap Stocks. In the current leg higher, however, both indices have been lagging, and both are underperfoming the S&P 500 by a considerable margin over the last year. In the case of the Russell 2000, the index has made a modest rebound over the last few days (post Knight Trading trade glitch), but it needs to string together another week or two of outperformance before we could confidently say that small caps are participating.
Copyright © Bespoke Investment Group
Tags: Amp, Consumer Staples, Dow Jones, Dow Jones Transports, Glitch, Industrials, Investment Group, Knight Trading, Last Time, Momentum, oil, Rally Mode, Rebound, Relative Performance, Relative Strength, Russell 2000, Sectors, Slack, Small Cap Stocks, Small Caps, Telecom Services
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U.S. stock market – long-term indicators favor bulls
Tuesday, August 7th, 2012
I published a post yesterday on the short-term technical outlook of the U.S. benchmark S&P 500 Index (SPX 1401.35 ‘0.51%), referring to conflicting indicators but stating that the rally could have more legs. When the message of the short-term charts is murky, it is often useful also to consult long-term indicators to provide some guidance.
Let’s consider, by means of example, monthly data for the S&P 500. A simple 12-month rate of change, or ROC, indicator seems to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is “safely” in positive territory after threatening to breach the zero line in June.
The combination of a series of higher lows (i.e. rising bottoms) and positive longer-term momentum probably gives the bulls the benefit of the doubt, but needless to say I will be watching this space quite closely.
Source: StockCharts.com
Tags: Amp, Benchmark, Benefit Of The Doubt, Bottoms, Bulls, Guidance, Legs, Lows, Market Timing, Momentum, Rally, Spx, Technical Outlook, Term Charts, Term Indicators, U S Stock Market, Zero Line
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Technical Talk: Upside breakout for S&P?
Sunday, August 5th, 2012
The comments below were provided by Kevin Lane of Fusion IQ.
As seen in the chart below the S&P 500 Index (SPX 1390.99 ‘1.90%) held its 100-day moving average yesterday (green line) near 1,350 and today is bouncing on ECB news and better-than-expected-non-farm payrolls – does anyone smell election year mark-ups? That said, the Index is still setting higher lows since its June low, which is bullish; however it has also been capped near the 1,385 area (red line) for a while now. The Index continues to remain locked in a range, with resistance at 1,385, and near-term support at 1,350. [PduP: The closing level on Friday was 1,391.] Whichever way it breaks, momentum will surely follow. More meaningful support lies near the 1,330 – 1,325 band (purple-shaded lines and arrows) as this was the area where the S&P 500 double-bottomed recently. This is the area that is most critical in regard to keeping the market together.
There are conflicting data that could support a breakout (i.e. more consistent levels of news highs, low long exposure levels and low levels of bullish sentiment) or a breakdown (i.e. weak action in cyclicals and transports, especially truckers). However, if forced to choose, we are leaning towards an upside breakout. That said, we won’t be ashamed to pull the rip cord if key supports are broken as this would take the breakout call off the table. After all, being wrong once in a while is inevitable, however, ignoring an oncoming truck (i.e. a break of support) assuming you can swerve around it, is never a smart strategy!
This game is about knowing when to press forward, when to sit tight and watch, when to retreat and, most important, knowing when to change strategies if need be!
Source: Source: Kevin Lane, Fusion IQ, August 3, 2012.
Tags: Amp, Arrows, Bullish Sentiment, Consistent Levels, Cyclicals, Election Year, Exposure Levels, Iq, Lows, Mark Ups, Meaningful Support, Momentum, Non Farm Payrolls, Red Line, Rip Cord, Smart Strategy, Spx, Transports, Truckers, Ups
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Dow 30 Trading Range Screen (Bespoke)
Monday, July 30th, 2012
This screen allows users to quickly identify which stocks in their portfolio have upside or downside momentum, and which ones may be getting overheated or deeply oversold. For the Dow, 16 of the 30 members are now in overbought territory, although just two (KO and WMT) are in extreme overbought territory. Just three Dow stocks are oversold — AA, CSCO and HPQ. Of these three, CSCO still has downside momentum, while AA has seen a pickup lately and may have more upside. Of the stocks in Neutral territory, American Express (AXP), Caterpillar (CAT) and IBM currently have the most upside momentum, while McDonald’s (MCD), Pfizer (PFE) and United Tech (UTX) have downside momentum.
Bespoke Premium Plus members have the ability to run their portfolios through a number of screens that we provide. One of these screens is our trading range screen, which allows clients to view where a large number of stocks are trading from an overbought/oversold perspective on one simple page. Below we have run the screen on the 30 stocks that make up the Dow Jones Industrial Average. For each stock, the light and dark green shading represents oversold territory, while the light and dark red shading represents overbought territory. The Neutral line represents the 50-day moving average. The dot for each stock shows where it is currently trading, while the tail shows where it was one week ago.
Become a Premium Plus member today to have Bespoke run your portfolio through our trading range screen!
Copyright © Bespoke Investment Group
Tags: American Express, Axp, Bespoke Investment Group, Caterpillar Cat, Csco, Dow 30, Dow Jones, Dow Jones Industrial Average, Dow Stocks, Hpq, Investment Group, Mcd, Momentum, Moving Average, Neutral Line, Neutral Territory, Pfe, Pfizer, Shading, United Tech, Wmt
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U.S. Exports: A Lower Gear, but Still Cruising
Tuesday, July 10th, 2012
by Milton Ezrati, Lord Abbett
July 2, 2012
Exports have remained one of the few consistent bright spots in this otherwise subpar economic recovery. The growth of exports at times has added as much as two percentage points to the overall pace of the economy’s expansion and is a major reason why American manufacturing has staged a comeback in recent years—a “renaissance” some have called it. But of late, with the dollar rising against both the euro and the yen, and with growth overseas slowing or, in Europe’s case, falling, questions have arisen about the sustainability of U.S. export strength. Doubtless, the pace of gain will slow, but probabilities suggest that the growth will continue.
The American export boom actually took off in 2007, stood up remarkably well during the 2008–09 recession, and has generally picked up momentum since. As Table 1 shows, exports of goods and services jumped 13.3% in 2007 and continued to grow almost apace in 2008, even as the global financial crisis rocked world economies. Unsurprisingly, exports fell during the global recession year of 2009, but they rebounded into 2010 and 2011, despite the disappointing pace of the global expansion. Even more recently, as China has reduced its overall growth expectations and Europe has fallen into recession, export growth so far this year has actually accelerated. Because exports amount to barely 15% of all U.S. economic output, this performance, impressive as it is, could not turn a sluggish recovery into a rapid one, but it has been fast enough at times to add considerably to the pace of growth. In late 2007, net exports accounted for more than half the economy’s overall expansion. In 2010 and early 2011, they accounted for one-third of the economy’s overall growth.
The expansion of the global economy, especially the emerging world, explains some of these gains. The 2007 export jump, especially, reflected the booms in China, India, and other emerging economies that were proceeding at the time and that consumed industrial supplies and raw materials for which the U.S. economy, among others, was in a good position to provide. Of course, the global downturn in the late 2008/early 2009 helps explain the export drop averaged in 2009, but that picture quickly changed as the emerging economies resumed their rapid growth trajectories in 2010 and in the early part of 2011.
Also explaining the American export picture are the declines in the dollar’s foreign exchange rate, which cumulatively enhanced American producers’ price competitiveness. Between 2002 and 2007, for example, the euro rose about 40% against the dollar, while the yen rose more than 15%. These favorable (for exports) currency patterns continued through much of this more recent period too, further enhancing America’s competitive position. In 2007 alone, the dollar cheapened almost 10% against the euro and then rose only slightly since, at least until much more recently. The move against the yen was even more dramatic. Between mid-2007 and late 2011, the yen rose almost 40% against the dollar. Not only did the currency moves give U.S. producers inroads into the European and Japanese markets but, more significantly, they also gave a significant edge against the European and Japanese competition in faster-growing third markets, such as China, India, and Brazil.
There can be no denying, however, that the dollar’s recent gains, if they persist, will strip away some of this competitive edge. In recent weeks, for instance, the euro and the yen have each cheapened almost 5.5% against the dollar. But because previous dollar declines had given American producers such huge pricing advantages, even recent dramatic currency moves leave much of this country’s former global pricing advantage intact. According to calculations by the OECD (Organization for Economic Cooperation and Development), underlying measures of comparable pricing (what econometricians refer to as purchasing power parity), put today’s euro, at about $1.25, only just on a competitive par with dollar-based production. Comparable calculations for Japan show the yen still giving American producers a huge 35% pricing advantage against the Japan-based competition.
Though combined with slowing global growth, recent dollar strength will retard the future rates of export gain, but it should be clear that relative pricing advantages have hardly proceeded far enough to erase it. For one, trading arrangements are based on ongoing pricing and supply relationships built over long periods of time. Those that have developed in favor of American products during these past years of great American pricing advantages will take a long while to unwind. Given the American advantage implicit in the still pricey yen, it is doubtful that such a process has even begun or will begin for some time yet. If the euro is closer to competitive parity, it still offers no special pricing advantage that would prompt buyers to switch away from established American suppliers. On this basis, exports should continue to contribute to aggregate growth in the U.S. economy, albeit at a reduced rate, say, growing 8–10% rather than within the 14–17% range of the past three years.
Table 1. U.S. Exports of Goods and Services
Source: Bureau of the Census, Department of Commerce.
*Through April annualized.
+ Calculated from December through April and expressed at an annual rate.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
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Tags: American Export, Booms, Economi, Economic Output, Economic Recovery, Export Boom, Global Economy, Global Expansion, Global Financial Crisis, Global Recession, Growth Expectations, Lord Abbett, Milton Ezrati, Momentum, Pace, Percentage Points, Probabilities, Renaissance, Sustainability, World Economies, Yen
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Gold: Fundamentals Strong, Price Action Ugly
Thursday, May 17th, 2012
by Guy Lerner, The Technical Take
Until proven otherwise, central banks will continue to devalue their currencies and intervene in markets because if they didn’t “life as we know it would not exist”. This is the sole basis for understanding the positive fundamentals behind gold. Period. Economic weakness leading to lower interest rates is very gold positive. But sometimes the price action gets divorced from the fundamentals, and this appears to be the case with gold. Price is breaking down despite the positive fundamentals.
Figure 1 is a monthly chart of the SPDR Gold Trust (symbol: GLD). The pink labeled bars are negative divergence price bars. (The divergence is between price, which is heading higher, an oscillator that measures price, which is heading lower.) What we know about negative divergence bars is that their presence signifies slowing upside momentum such that price usually consolidates within the highs and lows of the negative divergence bar itself. The low of the most recent negative divergence bar is 154.19, and a monthly close below this level would imply lower prices. Based upon this analysis, the next level of support is at 145.20.
Figure 1. GLD/ monthly
Figure 2 is a weekly chart of the GLD. Price has gapped below the 153.12 support level. Old support is new resistance. Such breaks in the price structure are never good and imply further selling.
Figure 2. GLD/weekly
Figure 3 is a daily chart of the GLD. The red and black dots are key pivot points, which are the best areas of buying (support) and selling (resistance). Note the gaps in price as the 158.20 and 151.96 price levels were broken. The next area of support is at 144 to 145.
Figure 3. GLD/daily
In summary, the price action in GLD is ugly and incongruous with the fundamentals. As I see it, there are two ways to play this. You can buy into further weakness, and this would be the support level at 144.145. Or you buy into strength and that would be when price closes above the 151.96 resistance level.
Copyright © The Technical Take
Tags: Central Banks, Dots, Economic Weakness, Figure 1, Figure 3, Gaps, Gld Price, Gold Price, Guy Lerner, Highs And Lows, interest rates, Momentum, Nbsp, Negative Divergence, Next Level, Oscillator, Pivot Points, Price Structure, Sole Basis, Two Ways
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Goldman’s Jim O’Neill Frazzled That Reality Refuses To Go Away
Monday, May 14th, 2012
Just because it is always amusing to watch the cognitive dissonance in the head of a permabull, here is Jim ‘Soon to be head of the BOE… allegedly’ O’Neill’s latest missive to (what?) GSAM clients. Yes, the same O’Neill who week after week, letter after letter kept on saying that 2012 is nothing like 2011, finally being forced to admit that 2012 is, as we have been saying since January 1, nothing but 2011, as the central planners’ script writers prove painfully worthless at coming up with anything original. That, of course, and that the lifelong ManU fan had to suffer the indignity of interCity rivals picking up the trophy this year after a miraculous come back win against QPR. Oh, the horror…
Is it One of Those May’s Again?
Not another one, surely? It is almost too simple to be true. I have been saying to people all year that we would have a great rally into May. Then, it might be quite a challenge for the Summer and, like clockwork, we could come back in the Autumn to take the markets to fresh highs. I had expected that the S&P would get to the 1470-1480 area before the correction would set in. In this sense, it has happened quicker, because of the fact that “May” started in April, just as it did last year? While I have read a few articles recently trying to dismiss the “May” factor, the evidence is annoyingly persuasive that if the May to October months could just be 6 month holiday periods, and we picked up our investments as though nothing had
changed, the long term annualized return would be notably higher. Of course, it is difficult to find a coherent reason why this occurs so often. And, as some doubters correctly point out, it often doesn’t occur.
Anyhow, as can be seen in the attached chart, the momentum in the S&P has clearly turned lower, but interestingly, we sit just above trend line support (and well above the 200-day moving average). So, this is probably just a correction.
For some of us spoilt Manchester United fans, for the best part of the past 20 years at least, we have been able to take solace with the May issue, because around about this time, we are usually picking up the Premier League Trophy, and often there is a European Champions League Final to be thrown in as well as an FA Cup Final. Alas, this year, the cupboard might be empty and, of course, City could be picking up the League for the first time in 44 years.
Europe. Could it get any Messier?
I went to visit a rather weird play with my wife early last week, and I found myself thinking at one point “This is nearly as screwed up as the Euro Area.” I did warn last weekend that the French, and especially the Greek election, might have some impact this past week. It is quite ironic, as a couple of people pointed out to me given that I am always dismissing Greece’s economic relevance, that I suggested it might be more important in the short term than the French election. I shall discuss the French election issue more below, but given we all knew this was coming for months, and that Hollande won with the majority reasonably similar to the polls, I am not sure what was really new last week on this score (except for the German reaction).
Greece
Greek voters appear to now face another election in a few weeks with some simple choices. Do you want to remain in the EMU and stick with the commitments and support that your international allies have generously given you? Or, do you want to recreate the Drachma and run the risk of a massive banking collapse and lots of other unpredictable consequences? Polls appear to suggest the far left is likely to do well, so these questions are pretty real ones. As for the Euro, as I argued last week, it is not entirely clear to me that, once the dust settles, Greece leaving would be material either way. But we shall see.
French Election and Germany.
As I said above, there was not really a lot of new information about Hollande’s plans last week. Therefore, in some ways, it was all discounted. Quite a few contacts of mine suggested that, despite the rhetoric, France under Hollande will not do anything dramatic against the spirit of the Fiscal Compact, although they will push the issue of a supplementary plan for a Growth Pact. And as I reminded many of my colleagues, they are probably more fundamentally “pro Euro” than Sarkozy, which many people seem to have forgotten. Importantly, in this regard, this Administration is another one now in power in Europe that supports a true
Euro bond at the core of a more integrated Europe.
As I found myself thinking as the week wore on, this means that the German elections in the Autumn of 2013 are going to be really important. Anyone who wants to be in a coalition with either the SPD or Greens (or both) is going to have to support the idea also. I suspect Chancellor Merkel will be more than happy to support it. A number of meetings that I coincidentally had this week added to my confidence on this score.
Against this “big picture” background, the most interesting aspect of the French election is how German policymakers responded. Suddenly there is a fresh tone of what I would regard as welcome realism and open mindedness. First of all, Finance Minister Schauble talked about the need for higher German wages, which would help rebalancing within the EM. And a few days later, some Bundesbank officials acknowledged that Germany would probably have to accept inflation above 2 pct for some time. As one of the people I was referring to above put it to me, it would be through “gritted teeth,” but the reality is that they really have no alternative if the EMU is to persist following the shifting ground demanded by European voters. All of this should be good, and it will probably mean that the ECB will be less hawkish as a result.
Tags: Amp, Annualized Return, Autumn, Boe, Central Planners, Cognitive Dissonance, Coherent Reason, Goldman, Holiday Periods, Indignity, January 1, Manu, Missive, Momentum, Moving Average, O Neill, Rally, Rivals, Script Writers, Trend Line
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GLD: Remain Positive and Patient
Friday, April 27th, 2012
by Guy Lerner, The Technical Take
Despite the highs in gold being well over 6 months ago, I have remained constructive (see here and here) viewing the extended pull back as nothing more than a consolidation of the prior move. The fundamental back drop for gold remains strong as well. It is my belief (of course, supported by the data) that current economic pressures are gold positive as central bankers will continue to intervene in markets via their preferred vehicle of pushing interest rates lower.
Figure 1 is a monthly chart of the SPDR Gold Trust (symbol: GLD). The pink labeled price bars are negative divergence bars. As I have shown many times, the presence of negative divergence bars is more of a sign of slowing upside momentum. Furthermore, price tends to travel within a range defined by the highs and lows of the negative divergence price bar. The negative divergence bar printed 8 months ago. As expected, price remains within a range, and it is currently at the low end of that price range, which is at 154.19.
Figure 1. GLD/ monthly
Breaking the price structure down even further, we turn to a daily chart of GLD. See figure 2. The gold and black dots are key pivot points, which define the best areas of support (buying) and selling (resistance). The combination black and red dots are “super” pivot points — for lack of terminology — and are more selective in determining areas of support and resistance. Focus on the “super” pivot points (green up arrows). Prior to the current “super” pivot, there have been 10 “super” pivot points printed since 2005. 9 out of 10 these super pivot points have marked the low point for the subsequent up move that followed.
Figure 2. GLD/ daily
The “super” pivot at 158.20 is support, and within the context of positive fundamentals, this should represent a good buying point. A monthly close below 154.19, which is the low of the monthly negative divergence bar, would be reason enough to re-consider this trade.
Copyright © The Technical Take
Tags: 9 Out Of 10, Arrows, Belief, Consolidation, Economic Pressures, Figure 1, GLD, Gold, Guy Lerner, Highs And Lows, interest rates, Momentum, Nbsp, Negative Divergence, Pivot Points, Preferred Vehicle, Presence, Price Structure, Red Dots, Support And Resistance
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Being Prudent is Boring … but Prudent
Wednesday, April 25th, 2012
Even in a downtrend since late March, the market is not making it easy for those awaiting this pullback. Selling bouts are met with oversold bounces quite quickly, and the action is not consistent in one direction for that many days in a row. The S&P is back above the key 1370 level this morning, after breaking the key 1370 level yesterday. And since it’s key that is leading to a lot of choppiness. But bigger picture we continue to see a market under distribution, and what appears to be a ‘head and shoulders’ formation being created on the senior indexes. If you are unfamiliar with the term, please google it.
Yesterday I mentioned we had two key points of support – that was last week’s lows of 1365 and the previous week’s lows of 1357. Both came into play yesterday as the market ultimately bounced just above the latter level and finished just above the former level. If 1357 were to break, the next key level is 1340. But for now, as noted – the buyers keep pushing the market back above 1370 on each dip. However each rally is on light volume, while each selling bout is on heavy – hence all the distribution days.
I’d also point out that we are having a sector rotation under the surface even as the major indexes are down less than 5%. Just about the entire momentum growth stock universe is taking turns getting hit. And some of it is very random – take Ulta Salon (ULTA) today. I cannot find any news, so unless something pops up later today I have to assume some big boys are liquidating as volume is huge. But this is exactly the type of action that can rip away a lot of your money as you search for ‘relative strength’ – pile in, waiting for a bounce day like today, only to be punched in the face.
Today we popped a bit in the broader market on some housing data but in the big picture that data remains quite weak… I think it was more of an excuse to simply get an oversold bounce going. Yesterday’s gap (137.87) has not yet been filled but we saw the gap down post Good Friday took about a week and a half to be filled and then some chop, and then back down. So no one should be surprised to see a run to fill this gap later today or tomorrow morning (with Apple’s blessing). At this point with a long series of distribution days in the market we need to see a true change of character to feel like these moves up are anything but head fakes and frustrating moments for the bears.
Obviously key events are Apple earnings tonight and FOMC Meeting and Bernanke quarterly update Thursday. But Europe has not gone away, even though the market some days act like it after their markets close. I don’t think the path is much different than it has been repeatedly the past few years – things will downgrade, people will sit on their hands until it gets really bad, then people will panic as the situation worsens, and then Germany or the central bank will step in to kick the can. Markets will surge on the kick the can for however long that can stays in the air. We’ll rinse, wash, and repeat - until we do it again. It’s Groundhog Day as their system is broken due to lack of autonomy for each country or the ability to print their way out of messes ala UK, Japan, USA. See Iceland for an example – they defaulted on much of their debt, devalued their currency like mad and are back to growth. You never hear about them anymore since they had the independence to do such things.
Tags: Amp, Big Boys, Big Picture, Bounce, Bounces, Bouts, Choppiness, Day Like Today, Excuse, Google, Growth Stock, Head And Shoulders, Indexes, Light Volume, Lows, Momentum, Pullback, Rally, Relative Strength, Sector Rotation
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To “V” or Not to “V”
Friday, April 13th, 2012
Market participants have been struck with the consistency of a type of rally the past 3-4 years, that is the “V” shaped rally. Once a rarity it has become the rule. No one is sure exactly why it is – perhaps momentum based, computer driven, liquidity fed environments are the culprit but whatever the reason they are not something that happens one out of ten times, but now nine out of ten times. A market that stops going down, turns on a dime, and furiously “V” shapes up without letting those left behind in. So the question of the day across the land is, are we beginning to embark on another?
Yesterday morning I wrote about the “the most important line in financial markets” – that is the line connecting the lows of the dips from October 2011 til April 2012. That level had been breached Tuesday, and typically a market will come back to test that area before moving on to do what it normally does. Now, I had no thought that this level would be tested in 2 market sessions, but that goes back to paragraph 1 – there is no middle ground in markets anymore … either the world is going to end, or everything is hunky dory. I said the approximate level of this area is 1385-1390 on the S&P 500, and we finished at 1387 yesterday. (again I had no inclination we’d see that level so quickly)
So now the question is – to V or not to V? Was yesterday day 2 in yet another once rare V shaped rally? Or will things revert to a more traditional type of action and after this oversold bounce are we looking at a more serious correction in the days and weeks to come? Bulls will wish for a break through this 1385-1390 level and then a clear of 1400 and holding it, to make a charge at highs from last week at 1420ish. Bears will want to see a break of the 50 day moving average at 1376 and rising sharply every day.
Tags: Approximate Level, Bulls, Consistency, Culprit, Dips, Financial Markets, Inclination, Left Behind, liquidity, Lows, Market Participants, Market Sessions, Momentum, Moving Average, Nine Out Of Ten Times, Question Of The Day, Rally, Rarity, Turns On A Dime, Yesterday Morning
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