Monday, January 11, 2016

Trading Notes, Week of January 11, 2016

Friday, January 15th

*  Thursday's rally was short-lived, and that has been the outstanding feature of the recent downturn in the stock market.  As noted in the prior posting (below), we have stayed oversold for far longer than has been typical of corrections in 2014 and 2015.  The weakness in oil continued overnight and we've broken to new lows for the move following the data release this morning.  Selling bounces that roll over at lower price highs continues to be the winning strategy.

*  The chart below of one of my primary cycle measures is worth a thousand words.  Quite simply, this is a different cycle from those of the past two years and suggests to me that we've entered a different regime.  Using patterns from the recent past to extrapolate into the near-term future is hazardous to our wealth.

Wednesday, January 13th

*  Tuesday was the first day in which we saw the number of stocks making fresh new lows decline day over day.  To this point, it has been quite a broad decline, with fewer than 10% of SPX stocks trading above their 50-day moving averages and only about a quarter of the stocks trading above their 200-day moving averages.  Indeed, yesterday was the first day in nearly two weeks in which we've seen more than half of stocks closing above their 3-day moving averages.  That is unusually consistent weakness and is but one of the things leading me to believe that this is more than a mere correction in a bull market.

*  Below is a breadth measure I keep for SPX stocks, capturing the percentages closing above short-term moving averages (data from Index Indicators).  We can see that we have stayed oversold far longer than is usual in a normal correction.

*  Yet another look at market weakness is a running total of buy vs. sell signals for all NYSE stocks across various technical measures, such as Bollinger Bands (data from Stock Charts).  The quality of the bounce we can muster from these oversold levels will tell us a lot about whether this is part of a multi-year range or a first leg in a larger bear market move.  My cycle measures are at lower levels than we have seen during recent corrective moves, which once again opens my thinking to the possibility that we are in a different regime, not the rangy corrective mode of much of 2014 and 2015.  

Monday, January 11th

*  What is the secret behind the energy level of extraordinary performers?  This article tackles this most important topic.  Success is not about controlling your emotions, but rather channeling them toward ever-greater achievement.

*  Late weakness in U.S. stock index futures on Friday spilled over to early overnight trading before a reversal in European hours.  We are now quite oversold, with fewer than 10% of SPX shares trading above their 3, 5, 10, 20, and 50-day moving averages.  (Data from Index Indicators). Interestingly, where this broad weakness has occurred for the first time in a month (7 occasions since 2006), the market posted a lower daily close in all seven occasions within a five-day period.  Five of the occasions, however, posted a higher daily close within two trading sessions, with four of the five exceeding 1.5%.  Bottom line is that I'm prepared for two-way action and for volatility, with VIX closing Friday above 27.

*  One of my favorite overbought/oversold measures is in oversold territory, but note that the lows at October, 2014 and August, 2015 occurred at even more oversold levels.  Just because we're oversold doesn't necessarily mean we're at a bottom.  I prefer to stay open-minded.

*  Back to those seven occasions in which we saw fewer than 10% of SPX stocks trading above their 3, 5, 10, 20, and 50-day moving averages.  The dates in which those occurred included September and November, 2008; May and June, 2010; and August, 2011.  In all those occasions, we saw bounces but further price lows over coming months.  A major call traders need to make here is whether we're currently seeing a correction in a bull market or the unfolding of a bear.  I'm open to the latter and will be watching closely for the quality of bounces from here.