Download 1 Weekly Technical View April 18, 2016 Short Term High At Hand In

Weekly Technical View
April 18, 2016
Short Term High At Hand
In the last WTV on April 4, I concluded that the S&P was likely to hold up for a few more weeks based on
how the S&P has traded over the last 18 months. The three declines of more than 10% that have
occurred since September 2014 have been followed by a strong rally. The first rally lasted from October
14, 2014 until December 29, or 66 days. The rally from the August 24, 2015 low lasted 73 days and
ended on November 4. The current rally began on February 11, and made an initial high on Friday April
1, 72 days after it started. Time wise each of these rallies is very similar. The primary difference is that
after topping out on December 29, 2014 at 2093, the S&P held up for another 142 days until May 20.
Despite the extra 142 days, the S&P was less than 2% higher than on December 29, when it made its alltime high of 2134 on May 20. After the S&P reached its high on November 4 at 2116, it held up until
December 29, an additional 55 days. In this instance the S&P made a lower higher at 2086, about 1.5%
below its November 4 level. These prior rallies suggest a window that stretches from May 26, 55 days
after the April 1 high, to August 21, if the S&P holds up a similar 142 days.
Two factors support the market holding up for awhile: sentiment and market breadth. Despite the nonstop rally since February 11, bullish sentiment has remained muted. Based on the Investors Intelligence
weekly survey, the net percent of bulls has faded after jumping in late March, even though the S&P is
1.5% higher. One factor that has likely tempered investor’s bullishness is the outlook for earnings.
Although expectations have come down a lot, the reality is that earnings are still falling. Historically,
falling earnings has not been especially bullish for the stock market, unless valuations have been
crushed by a bear market as in 2003 and 2009. Beating depressed expectations can support the market,
but can lower earnings really support much higher valuations? I don’t think so.
The second factor is market breadth, which has been more healthy during this rally than the rallies after
the lows in October 2014 and September 2015. Last week, the advance / decline line exceeded its high
from last April. I think the A/D line is the most important technical indicator, but it too is not infallible.
1
During the 2000 – 2003 bear market, the A/D line bottomed in October 2000, and then began a gradual
but persistent uptrend. Despite the uptrend in market breadth, the S&P dropped from 1364 in October
2000, to a low of 776 in October 2002.
2
Granted, a big part of this divergence between the A/D line and the S&P was due to the 80% collapse in
technology stocks which represented 34% of the S&P in March 2000. Currently, there is no single sector
that is so over weighted in the S&P, so an unwinding like the technology stocks experienced between
2000 and 2003, or financial stocks between 2007 and 2009, is not going to happen. The ability of the
A/D line to exceed its high last April is a positive.
Since the February low, the S&P has posted higher highs and higher lows, so the trend is up. At a
minimum, the S&P will need to make a lower low and then a lower high, before the uptrend can be
considered at risk. The last trading low was on April 7 at 2033.
However, there are reasons why a short term high is likely soon. The DJIA closed above 18,000 today for
the first time since last July, the S&P is less than 6 points from 2100, and the Nasdaq Composite is less
than 1% from 5,000. These are all nice round numbers which often provide investors a reason to take
profits. The chart of the S&P can be counted as a complete 5 wave advance from the February 11 low, as
indicated on the chart below. In addition, the S&P made a new high today at 2094, but the RSI is lower
than on April 1 when the S&P closed 203 (67.0 vs. 71.4).
Although the A/D line has made a new high, the upside momentum of market breadth, as measured by
the 12 day average of net advances minus declines, has been posting lower peaks for several weeks.
3
As I have often discussed, in order for the stock market to decline, there has to be reasons for investors
to sell since the investment business is long only biased. The next hurdle facing the market is the Q1
earnings reports. Expectations have increased for better than expected revenues and earnings since
estimates have been slashed, and the dollar has fallen during the quarter. Now that the dollar is down
about 5%, analysts are also counting on better forward guidance. The bulk of earnings will be released in
the next 3 weeks, so we will soon know whether the dollar is a help or still a hindrance as I expect.
Over the past month, as hopes for a freeze in oil
production continued to build, I maintained
that a freeze was unlikely. “I will be surprised if
Saudia Arabia agrees to a freeze and allows Iran
to continue to boost its production at the April
17 meeting.” There was no agreement, but oil
prices did not plunge as much as expected.
Yesterday, Kuwaiti oil workers went on strike,
which lowered Kuwait’s oil production from 3
million barrels a day to 1.1 million barrels. This
outage is in addition to the loss of about
800,000 barrels a day due to pipeline problems
in Iraq and Nigeria. These pipeline issues will be
fixed and the strike in Kuwait will end. In the
short run, the supply and demand imbalance
that has roiled the oil market will be
temporarily improved. Longer term, the
imbalance will reassert itself and lower oil
prices will follow. At a minimum a decline under
$36 a barrel is coming, with a test of $32
possible in coming months. Producers and commercial speculators are still quite short, while the dumb
money large speculators are long, which suggests that the path of least resistance is lower.
The dollar index has held above the stop at
93.80, although it did dip intra-day to
93.62 on April 12, before closing at 93.94.
Today the dollar index closed at 94.46.
Negative
sentiment
has
increased
disproportionately in the past few weeks
relative to the amount of price decline,
which is why the dollar is likely close to a
good trading low. If the dollar does rally, it
would provide investors another reason to
take profits and do some selling in the
stock market. Ironically, the decline in the
dollar will embolden some Fed members
to consider raising rates since dollar
strength was cited as a reason not to raise
rates at the March meeting. Given the weakness in Retail Sales in March and in Industrial Production, I
can’t imagine that the Fed will increase rates at their April 26-27 meeting.
4
The rally in the stock market since the February 11 low has been fueled by central bank manipulation
(Yellen, Draghi, Kuroda, PBOC) and short covering in the oil market spurred by ‘talk’ of a production
freeze by Russia and Saudia Arabia at 35 year highs, first aired coincidently on February 11. GDP growth
was likely below 1% in the first quarter and earnings, even outside the oil patch, probably fell. All that
said, the market has been able to surmount the band of resistance between 2040 and 2060 that I
thought would cause at least a pullback to 1970 -1950. To confirm that a top of some significance has
been formed, the S&P will have to close below 2033, which was the low on April 7.
Tactical S&P Sector Rotation Portfolio Model
Relative Strength Ranking
The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major
Trend Indicator. As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation
program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the
Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.
The Major Trend Indicator generated a bear market signal on January 6, when the S&P closed below
1993, and was confirmed on January 14. The Tactical Sector Rotation program went 100% short when
the S&P closed at 1990.26 on January 6. The short position was reduced to 50% on February 8 when the
S&P closed at 1853, further lowered to 25% early on February 24 as the S&P traded under 1895, and
closed on February 25 when the S&P was 1942. The S&P’s average ‘cover’ price on the short trade was
1885.75. The short trade earned 5.2%. Past performance is no guarantee of future results.
The MTI crossed above its moving average on February 25, generating a bear market rally buy signal. As
noted in the Weekly Technical Review on February 25, I allocated a 25% long position in the Utilities ETF
(XLU) at $47.28, and a 25% long position in the Consumer Staples ETF (XLP) at $51.65. These positions
were liquidated on March 15 for a gain of .92%. Past performance is no guarantee of future results.
5
The MTI confirmed a new bull market on March 30, when the S&P closed at 2065. Another indication
that the market will be more vulnerable to a deeper correction will occur when the MTI begins to flatten
out as it did during November last year. The next few weeks have the potential to define the balance of
2016.
The Tactical Sector Rotation program is 100% in cash as I await a pull back to below 2033 and lower.
Tactical S&P Rotation
Ticker
XLU
XLP
XLK
XLI
XLY
XLB
XLV
XLF
XLE
Sector
Utilities
Cons. Staples
Technology
Industrial
Cons. Discr.
Materials
Healthcare
Financial
Energy
Rank
Relative
Strength
1
2
3
4
5
6
7
8
9
7.936
6.001
4.013
2.443
0.016
-0.347
-4.194
-5.655
-9.266
Last
Week
Rank
1
2
3
4
5
6
7
8
9
Jim Welsh
6
Last Week
Relative
Strength
8.239
6.333
4.108
2.153
0.113
-0.807
-4.542
-5.806
-9.139