March 07, 2009BREAKDOWN!By Carl Swenlin
Carl Swenlin
At the end of last week the S&P 500 had declined to and had settled on the support created by the November lows. It was poised to either rally and lock in a double bottom, or break down. On Monday prices broke down through support, and by Thursday's close it could be said that the breakdown was "decisive". When a breakdown is classified as decisive (greater than 3%), it means that chances are very high that the market will not be able to gather enough strength to rally back above the recently violated support. Reaction rallies back toward the support are possible, but not guaranteed.
The monthly-based chart below provides a better perspective of the seriousness of the breakdown, and we can also see the location of future support levels. The next support is at 600, at the low of the medium-term correction in 1996. I do not consider this an important support level. The first important support I see is the line drawn across the 1994 consolidation lows -- around 450 on the S&P 500.
The market is now very oversold in the medium-term and long-term, but in a secular bear market this is not a cause for rejoicing. Bear markets can crash out of oversold conditions. Bottom Line: The S&P 500 has decisively violated important support, and the most likely consequence is that prices will continue to decline, with 600 on the S&P being the most obvious level for us to see a bounce of any significance. While we could see a bounce before then, I think we should be more concerned that the decline will accelerate into a crash. There are still investors who have endured the decline from the bull market top and who were hoping that the 2002 bear market lows would mark the end of the current bear market. Now that long-term support has been clearly broken, another round of panic selling could be just around the corner.
Posted at 06:29 PM in Carl Swenlin | Permalink
February 20, 2009RETESTBy Carl Swenlin
Carl Swenlin
The long-awaited retest of the November lows has finally arrived. The S&P 500 is still slightly above that support, but the Dow has penetrated it. Even though every rally since November has been greeted with intense hope of a new advance that would end the bear market, the market gradually rolled over into a declining trend after the January top.
The November bottom was also a 9-Month Cycle bottom. In a bull market we would expect the market to rally for several months. The fact that the rally failed so quickly, is a very bearish sign.
The longer-term view shows that the 2002 bear market lows are also being tested again, so the market is at a very critical point. Many people who are still holding equities (at a 50% loss) are counting on being bailed out by a big rally. If prices fall significantly below long-term support, we are likely to see another selling stampede.
The long-term condition of the market is deeply oversold, as demonstrated by the Percent of Stocks Above Their 200-EMA. This indicator has never been at these low levels for such an extended period of time. Normally, a rally is in the cards as soon as these levels are reached, but the market is flat on its back, and it is hard to say when it will recover. It is important not to get too anxious to get back in. We are in a bear market, and negative outcomes are much more likely than positive ones.
Also, remember that oversold conditions in a bear market are extremely dangerous. If the current support zone fails, a market crash could quickly follow.
The medium-term condition of the market is neutral. Note that the ITBM and ITVM charts below are mid-range and falling. This is not a level from which we would expect a powerful rally to be launched.
Bottom Line: The market is in the midst of a retest of very important support. Since we are in a bear market, I expect that the support will fail.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
Posted at 03:17 PM in Carl Swenlin | Permalink
February 07, 2009JANUARY FORECASTS A DOWN YEARBy Carl Swenlin
Carl Swenlin
Research published by Yale Hirsch in the "Trader's Almanac" shows that market performance during the month of January often predicts market performance for the entire year. The January "barometer" has been particularly prescient in odd years (the first year of a new Congress), with only two misses in 69 years (as of 12/31/2008). While the January barometer has a good record of prediction, I still put it in the "for what its worth" column, because I can't think of any sound reason why it should work, and in many years it seems that a correct forecast is simply serendipity.
As usual we think you should view charts of actual market movement before making decisions based on reported average performance. For example, in 1987 the January Barometer forecast an up year. Well, it was an up year, but what a wild ride! On our website we have an extensive series of these charts going back to 1920. It is worth studying the charts so that you have an educated opinion of how this forecast device really works.
Bottom Line: The January barometer predicts that 2009 will be a down year. Regardless of what the barometer says, I think it is wishful thinking to believe that 2009 will be a winner. Consumers, which are 70% of our economy, are scared to death for their jobs. Until unemployment stops rising I think investor risk aversion will remain high.
Posted at 02:21 PM in Carl Swenlin | Permalink
January 17, 2009RALLY FAILUREBy Chip Anderson
Carl Swenlin
In my January 2 article I pointed out that the stock market was overbought by bear market standards, but that the rally had plenty of internal room for prices to expand upward if bullish forces were to persist. There was a brief rally and a small breakout, but then the rally failed, breaking down from an ascending wedge formation. I wasn't really expecting a bullish resolution, but one must keep an open mind when appropriate conditions appear.
On the chart below you can see the short-term declining tops line through which the breakout occurred. Instead of a buying opportunity, it was a bull trap. At this point we must assume that the November low will be tested. Note also that the PMO has crossed down through its 10-EMA, generating a sell signal.
The weekly chart below gives a better perspective, I think. It shows how aggressive the current down move is compared to the price activity that precedes it. Also, the PMO has topped below its moving average, a bearish sign. Prices are once again approaching the long-term support drawn from the 2002 lows. A successful retest could set up a double bottom from which another intermediate-term rally could launch, but in a bear market we shouldn't bet on that outcome.
For many months I have been emphasizing that our analysis should be biased toward bearish outcomes because we are operating in the longer-term context of a bear market. The tide is going out and it is foolish to try to swim against it. In a much broader context, we are in the midst of a global debt collapse that is only in the beginning stages. I find it impossible to imagine economic circumstances in the immediate future that would be even remotely favorable to stocks.
Bottom Line: In a bull market overbought conditions most often result in small corrections, consolidations, or deceleration of the up trend. In a bear market overbought conditions are usually a sign that a price top is at hand. Because the most recent overbought event has resulted in a price top, I think we can safely assume that the bear has not retreated.
Posted at 08:20 PM in Carl Swenlin | Permalink
January 04, 2009HOW OVERBOUGHT IS IT?By Chip Anderson
Carl Swenlin
For the last few weeks the stock market has been drifting higher on low volume, and there is no doubt in my mind that the Fed/Treasury has been the invisible hand that has quickly moved in to squelch any selling that started. Under these conditions, I find it difficult to draw any solid conclusions from indicators that have been fed a diet of questionable market activity. Nevertheless, we must work with the information we have and accept it at face value until more normal market action increases our confidence in our conclusions.
Looking at the chart below we can see pretty much all there is to see in the medium-term picture. Breadth and volume indicators are clearly in the overbought side of the trading range. Based upon the range we have seen during the bear market, internals are very overbought, but, relative to the normal indicator ranges, the indicators have a long way to go up if the rally continues.
The PMO (Price Momentum Oscillator) is still below the zero line, but it is recovering from the lowest reading since the 1987 Crash, and, relatively speaking, it too is overbought. However, there is still plenty of room before a continued rally will move the PMO to normal overbought levels.
Looking at the price index, we can see the S&P 500 is coming out of a "V" bottom, and there is plenty of room for it to rally before it hits serious overhead resistance. A rally up to that resisitance would convince most people that the bear market was over, but it wouldn't be. And by then the market would be seriously overbought by any standard.
In the short-term the market is very overbought, as demonstrated by the CVI (Climactic Volume Indicator) chart below; however, CVI readings this high can also be an initial impulse that initiates a rally.
Bottom Line: By bear market standards the market is overbought and due for a correction, but there is plenty of room for prices and indicators to expand upward. The low volume associated with the rally dampens my enthusiasm for the positive signs that exist, and I wonder if investors are ready to forget the fear that has been generated by the severe beating they have been dealt by the economy and falling markets.
Posted at 05:03 PM in Carl Swenlin | Permalink
December 14, 2008TIME RUNNING OUT ON RALLYBy Chip Anderson
Carl Swenlin
Last week we looked at a descending wedge pattern on the S&P 500 chart that could have sparked a rally had it resolved to the upside. Prices actually did break upward, but volume was poor, and the up move stalled immediately. Now there is an ascending wedge pattern inside a declining trend channel. The technical expectation is for the wedge to resolve to the downside, but I should emphasize that it would only have short-term implications.
I am becoming more concerned with the medium-term prospects for the stock market. In late-October the market became extremely oversold by virtually every measure. This was a signal for us to start looking for an important rally. Since then, the oversold readings have been getting worked off as the market has been grinding sideways and lower. As you can see on the chart below, three of our medium-term indicators for price, breadth, and volume have been moving up and are relatively overbought (relative to their recent trading ranges).
On the chart of our OBV suite of indicators below, note that the medium-term VTO (bottom panel) is at overbought levels. The short-term CVI and STVO have also peaked in overbought territory.
Bottom Line: There has been a small rally out of the November lows, but volume has been weak. Deeply oversold readings have so far failed to deliver a rally of the strength and duration we would normally expect, and, with internals now becoming overbought, time is running out. The problem, I suspect, is that the only buyers are nervous short sellers. Once the shorts have covered, new buyers needed to continue the rally fail to materialize because nobody wants to buy this market.
Posted at 05:03 PM in Carl Swenlin | Permalink
November 16, 2008RYDEX RATIOS DIVERGEBy Chip Anderson
Carl Swenlin
Decision Point charts a couple of indicators that are useful in determining investor sentiment based on actual deployment of cash into Rydex mutual funds. The Rydex Asset Ratio is calculated by dividing total assets in Bear plus Money Market funds by total assets in Bull funds. The Rydex Cash Flow Ratio is calculated by dividing Cumulative Cash Flow into Bear plus Money Market funds by Cumulative Cash Flow into Bull funds. (A thorough discussion of these ratios can be found in the Glossary section of our website.) When total assets in a given fund increase/decrease, the cause is an advance or decline in the fund's shares; however, there is also a component of the amount of cash moving into and out of the fund. This is why we have the two indicators.
On the Assets Ratio chart below, we can see that the Ratio is deeply oversold, implying that sentiment is very bearish, and that an important price bottom is being formed. This oversold reading is a direct result of the severe market decline depressing bull fund prices and inflating bear fund prices. The next chart shows a completely different picture.
While the Asset Ratio is oversold and bullish, the Cash Flow Ratio below is overbought and bearish. It is telling us that investors are quite bullish, and that a decline should be expected. That the two Ratios have diverged so severely is a very unusual situation, so let's take a closer look at what happened.
The next chart shows that, when the market began to consolidate, cash flowed out of bear funds and into bull funds. I can think of no other reason except that Rydex investors were anticipating a rally and trying to pick a bottom. This is bearish. I should emphasize, however, that the Ratios reflect the activity of a relatively small percentage of total market participants. Nevertheless, these indicators have a good performance record and are useful tools.
Bottom Line: The current divergence of the Rydex Ratios leaves us in a predicament as to which we should believe. In my opinion, the Cash Flow Ratio shows what is happening beneath the surface of asset totals, and it should be the first to be believed.
Posted at 05:04 PM in Carl Swenlin | Permalink
November 02, 2008CHANGING WITH THE MARKETBy Chip Anderson
Carl Swenlin
When the market changes, we must change our tactics, strategies, and analysis techniques to accommodate the new market conditions. This is not a new idea, but it is one that is not very widely recognized, particularly when applied to the long-term. In recent writings I have emphasized that we are in a bear market, and that we must play by bear market rules. Overbought conditions will usually signal a price tops, and oversold conditions can often see prices slip lower to even more oversold conditions. When making these comments, my focus has been on the cyclical bull and bear markets. What I want to address in this article are the secular forces of which we must be aware.
On the chart below I have identified the five secular trends that have occurred in the last 80-plus years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a secular bull market that lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another secular bull market began which peaked in 2000 (basis the S&P 500). Finally, we seem to have entered another consolidation phase that could last another 10 to 15 years.
I began my market studies in the early 1980s, before the big bull market took off, and I learned from the guys who learned all they knew from the market action of the 1960s and 1970s. Applying those rules to the new bull market was confusing, frustrating, and unprofitable. While I didn't participate in those markets, it is easy to imagine the bewilderment of those who, educated in the bull market of the 1920s, took the elevator all the way down to the basement starting in 1929.
The long bull market after the 1932 bottom was missed by most of those traumatized by the crash, but it trained a whole new group of analysts who learned that the market always goes up . . . until everything they knew was proven wrong by a 20-year consolidation. Finally, the battle cry of the 1980s and 1990s bull, "this time it's different," was learned well by those who ultimately ate the 50% decline of 2000-2002.
Unfortunately, it takes time to unlearn the lessons of the heady 1980s and 1990s, and we can still observe people using bogus valuation models that only work in bull markets. We still see people trying to pick bottoms, and we still see people who think that a stock is under valued because it is down 70%. By the time this current secular market phase is over, people will have learned all new rules, that will not apply to the next 20 years.
Whether or not I have correctly identified the current secular market phase as a consolidation remains to be seen, but I am certain that we are no longer operating on the rules of the last secular bull market.
Posted at 05:03 PM in Carl Swenlin | Permalink
October 19, 2008VERY OVERSOLD MARKETBy Chip Anderson
Carl Swenlin
To say that the market is very oversold is not exactly breaking news because it has been oversold for at least a few weeks; however, the oversold condition has been steadily getting worse over that time, and we have perhaps reached the limit of how oversold the indicators will get without the market taking some time to clear the condition. Keep in mind that the condition can be cleared if the market merely drifts sideways while indicators drift higher toward neutral territory, but, considering the kind of volatility we have been experiencing, it seems that a rally is more likely.
Let's look at the chart below, which has some major points of interest. First, the PMO (Price Momentum Oscillator) and the Percentage of Stocks Above Their 200-EMA have reached their lowest points since the July 2002, which was the beginning of the end of the 2000-2002 Bear Market. Note that it took nearly nine months for this bottoming process to take place in the form of a triple bottom. Also, current prices have dropped into the support zone provided by that previous bear market bottom.
This all looks like a pretty good setup for at least a bear market rally of some substance. The first thing that has to happen is a rally the lasts more than two days, and we need to see if the bottom will be a "V" spike or a double bottom with at least several weeks between each bottom. The latter would be preferable because, the more work put into the bottom, the longer the rally is likely to last. A "V" bottom would beg for a retest.
Any rally that begins now should be viewed and played as a short-term event, because we have seen how quickly they have been running out of steam. The first indication that a rally may develop into something longer term will be if the Thrust/Trend Model generates a buy signal. On the chart below I have highlighted the two components of the T/TM that we need to watch -- the PMO (Price Momentum Oscillator) and the Percent Buy Index (PBI). When both these indicators have passed up through their moving averages, a new buy signal will be generated. Even though this is a medium-term signal, it should also be worked as a short-term event, because of the whipsaw we have experienced during this bear market. (The rally last long enough to trigger a buy signal, then fails.)
Finally, I am compelled to show you a chart of the 9-Month Cycles. My current projection for the next cycle low is October 22. As you can see, it is highly likely that the cycle low is already in as of last week, although we can never be sure except in hindsight. Nevertheless, the cycle chart is one more piece of evidence that we could be getting a sustainable rally at any time.
Bottom Line: The market is extremely oversold, and we have plenty of evidence that a rally is due. I do not for one minute believe the bear market is over, but it does not seem reasonable that the vertical descent will continue unabated. Reasonable? Perhaps that is not the best word to use in these circumstances. Let's just say that the technicals are screaming for a good sized bounce. Having said that, I will leave you with a reminder that we are playing by bear market rules. Oversold conditions are extremely dangerous and do not always present opportunities on the long side. Be careful!
Posted at 04:03 PM in Carl Swenlin | Permalink
October 05, 2008BUYING OPPORTUNITY?By Chip Anderson
Carl Swenlin
In my September 19 article I said: "Our indicators and price action suggest strongly that we are beginning a rally that should last at least a couple of weeks. I also think that this week's deep low needs to be retested, and I am not convinced that a retest will be successful." As it turned out, there was no rally and the expected retest and failure encompassed one of the worst one-day declines in history.
From top to bottom the S&P 500 Index has dropped nearly 30%, but as usual we can't turn on financial news without hearing somebody assert that this is now the "buying opportunity of a lifetime". I wish it were, but in my opinion it is not. For it to be that great a buying opportunity stocks would have to have extraordinary fundamental value, and that kind of condition has not existed for over 20 years.
Based upon 2008 Q2 GAAP earnings the P/E of the S&P 500 is about 21, which puts it slightly above the normal P/E range of 10 to 20, meaning that stocks are very overvalued (the exact opposite of being a bargain). To demonstrate, the chart below displays the S&P 500 in relation to its normal P/E range going back to 1925. The S&P 500 is the heavy black line, the red line shows where the S&P 500 would be if it had a P/E of 20 (overvalued), the blue line is if the P/E were 15 (fair value), and the green line represents a P/E of 10 (undervalued).
I have applied red arrows to identify the periods where stocks were truly undervalued, sometimes mouth-wateringly so -- truly buying opportunities of a lifetime. As you can see, current prices are very overvalued, and possibly near the selling opportunity of a lifetime. To those who think this is the time to buy, I must ask, based upon what? Clearly, prices can rise even when stocks are overvalued, but current economic fundamentals makes that outcome a long shot.
As for our market outlook, the next chart puts the decline in perspective. Prices are deeply oversold, as are many of our technical indicators, so it is reasonable to expect a rally to clear this condition; however, we are in a bear market, and I have no reason to believe that the recent lows are the final bear market lows. There is a 9-Month Cycle trough due around October 22, and it is possible that it arrived early at the recent lows. Otherwise, we should probably look for a bounce followed by a retest of the lows in late-October.
My view of the financial crisis is that it is going to last a long time, and that there will be no easy fix, even if we had some really smart people trying to solve the problem, which we do not. Three weeks ago most congress persons had no more awareness of the problems we are facing than the man on the street. How much confidence do you have that the very people who caused the problem are suddenly going to become smart enough to fix it? In my opinion, they are only going to make it worse.
Bottom Line: Stocks are way overvalued and the economic outlook is dismal. The only long exposure that should be considered is on a short-term basis when the inevitable bear market rallies occur.
Posted at 04:03 PM in Carl Swenlin | Permalink
September 21, 2008FINALLY A BOTTOM?By Chip Anderson
Carl Swenlin
In my September 5 article I said that I thought is more likely that we would see a continued decline, rather than a retest of the July lows. This week the market blew out the July lows and was very near to crashing on Thursday. Then prices blasted up out of the lows in a dramatic upside reversal. There was good follow through on Friday, and now we must ponder if a significant bottom has been made.
With historic levels of fundamental turmoil in the financial markets, and unbelievable volatility in prices, it is extremely difficult to keep a level head and keep focused on technical basics. I am reminded of my flying days and the primary directives for emergency procedures.
- Maintain aircraft control (don't panic and crash for no good reason).
- Analyze the situation, and take corrective action.
I have always thought of these rules as being appropriate for handling all of life's problems, and they especially apply to the current problems in the stock market. No matter what your current situation, you can't go back and start over. You are stuck with what you've got, so do your best to work through it.
Getting back to the charts, we can see below that prices are still in a long-term declining trend channel, which currently defines the bear market. The rally is approaching a declining tops line, and it will probably penetrate that resistance and head higher, possibly to test the bear market declining tops line. The most interesting feature is the positive divergence between the PMO and the price index -- while price made a lower low, the PMO made a higher low.
There are also positive divergences on our primary breadth and volume indicators shown on the next chart. These positive divergences are bullish.
Our indicators and price action suggest strongly that we are beginning a rally that should last at least a couple of weeks. I also think that this week's deep low needs to be retested, and I am not convinced that a retest will be successful. My cycle work projects that a 9-Month Cycle low is due at the end of October -- about the time a retest would take place -- and cycle forces could take us to a new price low.
It is worth mentioning that the unprecedented avalanche of failures and bailouts is likely to get worse before it gets better, and we must wonder if a meltdown is over the horizon.
Bottom Line: While we continued to be buffeted by one crisis after another, the best thing we can do is "stay on instruments" (keep our eyes on the charts). At present, the charts say the rally is likely to continue, albeit not at the current rate of climb. At the end of the day, we are still in a bear market, and we should expect that the rally will fail before prices can break out of the major declining trend channel.
Posted at 04:03 PM in Carl Swenlin | Permalink |
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