The Big Rotation

The recent rebound in the S&P 500 index is approaching a first area of resistance now. If it continues to roughly follow the 1962 analog which we have previously discussed (here is the chart), it should briefly back off, and then move slightly higher before rolling over again (we picked the analog because it featured a weak January open, and was preceded by a distribution phase in 1961 that looked very similar to the 2015 trading range; there is no other reason than pattern similarity, which has to be taken with a grain of salt).

 

nasdaq-cartel-calle

 

We have actually been remiss in that we have failed to mention that Frank Roellinger informed us that the Modified Ned Davis Model has covered its Russell 2000 short position on Friday Feb. 26, and has switched back to a 100% long stance – however, readers hopefully caught our remarks published on the very same day:

 

“[W]e believe that the current market rebound could easily go further. Not only are there a number of historical patterns which suggest that market weakness in January is usually followed by a multi-week recovery, but the current positioning and sentiment backdrop also indicates that stocks should manage to trade firmer for a while.”

 

Now that the rebound has actually gone a bit further, we want to discuss its quality. There has been an improvement in market internals – mainly because previously beaten down sectors (such as transportation, industrial and commodity stocks) have begun to outperform the broader market. We have already briefly discussed some of the suspected reasons for this at the end of last week (stronger money supply and credit growth in China, and the cheapness of commodities in relative and absolute terms, regardless of still weak fundamental conditions).

 

1-SPX dailyThe S&P 500 index is approaching a lateral resistance area – click to enlarge.

 

Improving internals have gone hand in hand with rotation: this time, previously strong sectors are actually weak and lagging, especially technology stocks (including biotech stocks). When the market began to turn down in late December/ early January, the main beneficiaries were initially defensive sectors like utilities and consumer staples. A little later, a further shift in preferences has taken hold, with buyers rotating into the previously biggest losers, many of which have been beaten down to prices that are historically quite low. Here is a chart that is illustrating this theme nicely – it shows the ratio of XME to PNQI, i.e., the ratio of base metal mining stocks to internet stocks.

 

2-XME-PNQI ratioXME-PNQI ratio – mining stocks have outperformed technology stocks strongly since mid January – click to enlarge.

 

We could have shown similar looking charts comparing e.g. steel stocks, energy stocks or transportation stocks to big cap tech stocks. The main point we want to make is that the recent improvement in internals is this time not supported by a revival in the formerly leading momentum stocks in the technology sector (the bull market upside leader that has held up the longest). Even compared to the S&P 500 index, big cap techs have begun to lag:

 

3-NDX-SPXNDX-SPX ratio: big cap tech stocks are suddenly underperforming vs. the broader market instead of leading it – click to enlarge.

 

Considering the valuations of the so-called “unicorns” trading in private markets in conjunction with the valuations accorded many of the leading Nasdaq stocks, we think it is fair to say that there has been another major technology bubble. This bubble may actually be bursting now. Its previously strongest sub-sector biotechnology has already become a downside leader, which is rarely a good sign.

The improvement in internals is in fact a bit uneven as well. For instance, the recovery in the new highs/new lows percentage has been weak, while the NYSE A/D line has been very strong of late. The number of S&P 500 stocks exceeding their 50-dma has jumped quite a bit (in fact, it looks now “overbought”), but far fewer stocks have managed to regain their 200 dma, creating a short term divergence in the process:

 

4-InternalsA few market internals: SPX NH/NL percentage, the NYSE a/d line, the percentage of SPX stocks above the 200 dma, the percentage of SPX stocks above the 50 dma – click to enlarge.

 

Taking a look at XME itself (which we use here as a proxy for all the beaten down sectors that have come up for air in the recent rebound), we can see that it is by now strenuously overbought and has experienced a blow-off in trading volume just as it crossed above its 200 dma line – in conjunction with a potential reversal candle (confirmation/ follow-through is still required to declare it one):

 

5-XME, dailyXME seems ripe to at least correct a bit soon – click to enlarge.

 

For all we know, this rotation may be the start of a new medium to longer term trend, regardless of what near term gyrations occur – it is difficult to tell at this juncture (commodities e.g. tend to bottom while their fundamentals still look lousy, so one cannot come to firm conclusions from their current fundamentals).

However, per experience it cannot be good for the big cap-weighted indexes in the medium to longer term when the largest tech momentum stocks are underperforming. Note that financial stocks, in spite of joining the bounce recently, still aren’t much to write home about either.

We remain therefore on “rally failure watch”. If the recently stronger sectors begin to correct and the technology sector concurrently remains weak, broader-based indexes will turn down again – though it might not happen right away.

 

A Mixed Sentiment Backdrop

It is difficult to come to conclusions about short term direction from assorted sentiment and positioning data. Some of them would suggest a likely continuation of the rally (such as e.g. futures positioning and small trader buying of put options), whereas others have reached neutral positions and yet others are already indicating that complacency has returned. One of the latter is e.g. the CBOE equity volume put-call ratio:

 

6-$CPCECBOE equity volume put-call ratio declines back to the 50’s level – click to enlarge.

 

How to best interpret a batch of mixed sentiment data depends mainly on one thing: whether the primary trend is up or down. Can the direction of the primary trend be discerned with certainty from what has happened recently? Probably not yet – similar to recent deliberations about the likelihood or timing of a recession, there is quite a bit of evidence that suggests the larger trend has changed, but there can be no apodictic certainty yet (from the perspective of the price trend, this would require all the indexes that haven’t broken below their previous reaction lows to do so).

There are many longer-term sentiment indicators that show the market remains at a dangerous juncture though. We have previously discussed margin debt, mutual fund cash and retail money fund assets in this context (the links lead to the respective charts), but want to look at something different today, namely the total Rydex bull/bear asset ratio. The important thing about this ratio is that it has indicated a never before seen surge in trader optimism in 2014/2015. Such extreme values often have long term implications.

 

7-Rydex bull-bearRydex traders have never been as enamored of stocks as in the 2014-2015 period, during which an enormous burst in optimism was recorded – click to enlarge.

 

Here is one more sentiment indicator published by sentimentrader that illustrates why sentiment data often work slightly differently depending on whether a trend is changing or depending on what type of overarching trend is underway. This one is the so-called smart/dumb money confidence spread, which compares an amalgamation of indicators that are traditionally associated with good, resp. bad market timers (mainly this involves hard data rather than opinions). We have picked a longer term chart and highlighted a few areas on it:

 

8-Smart-dumb money confidence spread-1As can be seen here, when “bad” market timers were excessively pessimistic in 2007/early 2008 and excessively optimistic following the 2009 low, they were actually correct. In other words, speculators were correctly betting on the overarching new trends, while hedgers were providing the liquidity to accommodate their bets. Hedgers are usually not betting on direction: they are hedged with the underlying instruments and are merely making money on spreads. It’s just that speculators are as group often wrong when they are predominantly betting on the same outcome – evidently though, this is not the case after major trend changes – click to enlarge.

We would conclude that if the market turns down again from resistance amid “mixed” sentiment data, it would be another negative signal increasing the chance that a major trend change has occurred.

 

Conclusion

It will be interesting to see if the market continues to follow the analogs we have discussed earlier this year (other occasions when stock markets were exceptionally weak during the normally seasonally strong period in January). We have so far no reason to believe that it won’t – very likely the current rebound will simply go as far as it needs to go to look sufficiently convincing. Obviously, this idea would have to be abandoned if previous highs are exceeded.

Here is one last chart that continues to suggest to us that an overarching longer term trend change remains more likely than a resumption of the previous valuation expansion:

 

9-Junk bondsJunk bond yields are currently correcting their recent advance as well, but remain extremely elevated – and are confirming the increasing deterioration in outstanding bank loans – click to enlarge.

 

Charts by: StockCharts, SentimenTrader, St. Louis Federal Reserve Research

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “US Stock Market Rebound – Closing in on Resistance”

  • Readers please note: at the time I write this, the first chart shows the DJIA of 1962 by mistake – it will shortly be swapped for the correct one showing the SPX of today with the resistance level highlighted (if you already see an SPX daily chart by the time you read this, simply ignore this message).

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
  • Unleashing Wall Street
      To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA –  Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive?   Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen   Oh,...
  • Boondoggles for the Swamp Critters
      Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running.   Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge.   Meanwhile... we’re coming to a deep...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com