Despite the volatility that occurred early in the session on Thursday and Fintwits’ instantaneous panic, markets remain in a firm position on the weekly charts. The weekly chart of the SP500 still posted a higher high and higher low in relation to last week’s bar, which was bullish follow- through from the prior week’s breakout.
The Thursday intraday blip brought about a lot of commotion but resolved itself quite quickly and very little damage was done. Bull markets do all they can to shakeout weak holders who chase momentum and tend to be reactionary in their movements. The main problem with human psychology in the stock market is that we seem to think every new high is the next top. Any movement away from that high and the top-callers come out of the woodwork with all their fear and scare tactics.
People treat rallies (especially this one) with a “one foot out the door mentality”. They want to participate in upside but the damage from the Financial crisis remains in the front of their minds; they are not going to get caught in the next big one and they are overly sensitive because of it.
A simple fact that most understand but can’t seem to tolerate in real-time is that if you want to stay with a market trend you must be willing to give back some gains you’ve accrued at the end of a rally. They understand this fact but when that red comes across their accounts they get emotional and sell, they try to end the pain. Most often we know that trends tend to persist and after a short period prices return to the highs.
Of course the next peak could be the top, but how many times have we heard that over the past 8 years? I know I’ve heard top calls since 2010 almost on a weekly basis. I tell you one undeniable fact about top calls, only ONE of them is correct. Every other attempt just ramps up participant’s nervousness for a short time, gets us to act outside of our strategies rules, and we regret being so undisciplined about a week later as the market makes new highs once again.
New Confirmed stops trail to the swing low of 2,405.70.
Major support is a 2083.70 and what I consider the “Trump low”. Should that level be violated there will be some very trapped bulls and the rally would be in pretty solid jeopardy. Whether or not the rally was caused by the election is not important. What is important is that investors have had to reposition after the results surprised many and it is a clear sentiment support for the market.
Objectives for the Double Bottom pattern have been acquired at 2365 and more Aggressive targets at 2,422. The new Bull Flag pattern projects possible extensions to 2,450 (acquired) and then 2,530 if the market really begins to run.
MACD – Momentum is trying to turn back higher with a crossover occurring this week. The previous instance we had been watching out for was a similar example in the middle of September of last year. Price was trying to turn higher but momentum continued to decline. We then saw a failed price move and further decline for another 6-weeks. During that period momentum never regained its bullish crossover. The fact that we are seeing that bullish cross now tells me this is not a similar setup and would suggest a more positive outcome to follow.
Volume was about average this week, seeing its most increase mid-day Thursday on the decline. In general this is not much of a warning sign at this time, but we will continue to monitor the action going forward.
The ratio of Consumer Discretionary relative to Consumer Staples sectors continues to suggest a strong underlying risk appetite for stocks. While some counter trend movement could occur in the near-term, the trend is firmly pointed higher for now and suggests an overweight equity posture is the best course of action.
As is the case following strong shifts in this trend (see 2012, 2015 as examples) often a “higher trend” will begin to form. It is not surprising to see the ratio continue to extend higher but then subsequent counter-trend pullbacks create a tighter and more steep trajectory.
All current indications show a strong underlying rotation in the market, until that evidence changes it behooves us to stay with the trend in place.
When this cycle is pointed higher, so are markets. It is very important to have a good read on what groups are seeing flows. Is more money flowing into economically sensitive sectors? As in are consumers more likely to have and spend discretionary income for travel, home upgrades, toys (for all ages). Or are they tightening their habits in anticipation of having less income due to an economic down turn? Meaning are they only buying items that help manage daily life, i.e. toilet paper, cigarettes, beverages, Band-Aids.
In a bull market we want to see Discretionary stocks outperforming compared to their Staples counterparts. When Home Depot, Priceline, Comcast, Amazon are performing better than Coca Cola,
Procter and Gamble, Phillip Morris, Walmart, it means people have more disposable income therefore suggesting the economy is not nearing a recession.
When this ratio is higher our odds of selecting winning trades increases. Currently the ratio has turned higher and is continuing that new trend.
Something I track weekly is the trend health of the biggest SP500 stocks. I use a simple set of rules: -Use 90 stocks (Top 10 Holdings of SPDR Sector ETFs, XLF XLY XLK XLI XLE XLB XLP XLV XLU)
-Must be trading above a rising 20 Week SMA
-Two lists: Stocks Above and Stocks Below
-Track the 90 stocks weekly based on their trend position (relative to its 20 Week SMA)
-When the number of uptrending stocks rise it suggests a strengthening, and more broad market rally. When the number of uptrending stocks declines the market leadership is thinning out and a pullback/correction is more likely.
-Readings >70 stocks trading above tends to be overbought and Readings <30 tend to be oversold.
-Ranges in uptrends tend to be between 70 and 30, while corrective markets show breadth ranges from about 50 to 10 stocks trading above their 20 Week moving averages.
This week’s reading was 57 (+1)
Breadth ticked higher this week and continues to hang out in a bullish range. There isn’t much to take away from this week’s reading except more of the same from what we have discussed for the last few weeks.
Two things are apparent to me here:
- Breadth is below its prior swing highs while prices are at new highs, suggestive of a divergence.
- Breadth is not overbought at all which leaves plenty of room on the upside for improvementshould we continue to see more stocks begin to participate with the market trend.
Following up on last week’s potential breakout watch, we saw some adverse reactions following what appeared to be fairly high-quality setups.
Last week price was retesting the prior highs after breaking through resistance. Early in the week there was strong follow-through on that move but then saw a reversal to close back below the resistance line.
This will be something to watch on the short-term to see if It was just a shakeout and prices will resume higher OR was that a false breakout that then leads to lower prices ahead.
These are the kinds of clues we watch for in determining the market’s mood. Again this is only being seen on the lower timeframes for now, so little has changed longer-term.
Don Freeman, BSME
Don Freeman is the Managing Director of Freeman Capital Management LLC, a US-SEC Registered Investment Advisor, specialising in portfolio management for expatriates, founded in 2002. Don holds a Series 63 and 65 U.S. Investment Advisor license.
Prior to starting Freeman Capital Management, Don worked as investment advisor for a major U.S. RIA firm in Portland, Oregon. Don enjoys assisting his clients to find solutions to complicated financial problems. Don has lived over 10 years as an expatriate, enjoys studying foreign languages and working with clients from all cultures and business backgrounds.