Trend Check with Tushar Chande

Market Pops, Vol Drops -Russell 2000 Outperforms -Financials Rally -9 Top Stocks In Dow 30 Industrials -12 Top Europe ETFs

The market's rallied sharply on French election results, and confirmed the change in sentiment we had detected last Monday.  The Direxion Daily S&P 500 Bear (3x) ETF (SPXS), which reflects bearish bets on the market, crashed through the neckline of a head-and-shoulders formation we showed in that post.  This simply meant a big rally in the SPX, which was accompanied by new highs in the QQQ. More importantly, the Russell 2000 index outperformed both the senior indexes, helped by the very same Financials we identified last Monday as having displayed a positive divergence.

 

Chart 1: The Direxion Daily S&P 500 Bear 3x ETF crashed through the neckline this morning, after the SPX gapped higher at the open. We had identified this pattern last Monday, in plenty of time to take advantage of the moves.

 

Market Pops, Vol Drops

The rally began overnight, with a large gap at the opening of the futures markets, that lasted until the cash markets open.  The $VIX index crashed through the 11 handle, breaking its trend from last February.

 

Chart 2: Note the dramatic drop in the $VIX index, to below 11, and the trend-line since February.  We got a clue about this break last Monday, when the $VIX closed below its two previous lows as we noted in our post.

 

Risk-off Cookies Got Crushed

As I showed in my last post, Bonds and Gold provide traders sweet relief during risk-off periods. However, they get crushed during risk-on moves (see Chart 3).

 

Chart 3: The pop-up in the SPX pushed down Bonds (via the TLT ETF) and Gold (via SGOL ETF). Both opened with large gaps at the start of futures trading on Sunday night.

 

S&P 500 Rises Into Resistance

Monday's rally was an important breakout. First, the S&P 500 rose above its down-trend channel and into resistance (see Chart 4).  Then, the QQQ push to new highs, accompanied by many of its components and tech heavy-weights.  Thirdly, the Russell 2000 index, which had lead the weakness, pushed through its March-April highs, outperforming the SPX in the process (+1.31% vs +1.08%).  The $RUT rally was helped in no small part by a rally in the Financials sector (which forms a big part of the Russell 2000  index).

 

Chart 4: The S&P 500 rose above its recent down-trend channel, but into overhead resistance.  The 200-period StochRSI in the lower panel is still below 0.80 typical of new up-trends.

 

Chart 5: The QQQ rose to new highs, accompanied by stalwarts such as Microsoft (see lower panel). This is an encouraging sign for the continuation of this move.

 

Chart 6: The $RUT (Russell 2000 index) moved above its March-April resistance (lower-panel), helped in large part by strong moves in the financials sector (upper panel).  We had observed a positive divergence in the XLF last Monday.  Since the $RUT was weak going into this downturn, its strength now may help us come out of it even stronger.

 

Short-term Models Change Trend for SPX

The rally today took the SPX above its upper-band in the short-term model. The 5-day simple moving average, the signal line, is between the bands, the model has changed from short to flat.  If the SPX overcomes the resistance in Chart 4, then we can expect a change in trend again (see Chart 7).  The trend check carpet shows the Russell 2000 now turning bullish in the short-term (see Chart 8).  The improvement in the market's tenor is visible clearly in the market environment (see Chart 9) in which the short-term path of least resistance is almost turned positive.

 

Chart 7: The cross-over in the Aroon indicator last week was followed by a sharp move above the upper band. The 5-day SMA signal line is between the bands, so the current trend is neutral, moving up from trending down.

 

Chart 8: The Trend Check carpet shows two significant changes in the short-term (top row). The SPX is now neutral, and the Russell 2000 index is now bullish.  The degree of smoothing increases from top to bottom and the market breadth increases from left to right. 

 

Chart 9: The short-term environment has improved a lot today, and is now about to turn positive after the sharp rally. The intermediate-term outlook has also improved.  The long-term trend has remained higher throughout this downturn.

 

9 Dow 30 Stocks Firing On All Cylinders

Since we use four trend-following models with different levels of smoothing (as seen in the two previous charts), it is significant when a stock is trending higher in all four time frames, i.e., firing on all four cylinders.  We show the Dow 30 stocks positive on all four time-frames in alphabetical order: DIS, HD, KO, MCD, MSFT, UNH, UTX, V and WMT (see charts below).  All of them also score well on the Chande Trend Meter.

Chart 10: Dow 30 stocks firing on all cylinders, i.e., moving higher in all four time frames when measured by trend-following models.

 

12 Europe Focused ETFs

As John Murphy said in today's coverage, European markets had a strong day, having avoided an unpleasant outcome (at least for now).  We summarize the major iShares European ETFs below.  Most of them have Chande Trend Meter readings in the 90s, a sign of excellent absolute strength (see Chart 11).

 

Chart 11: We show a group of iShares ETFs focused on Europe.  They did well today, and have very good trend strength measured by the Chande Trend Meter.  The strength of the Euro, coupled with a strengthening economies (the ECB may cut short its QE programs) means these funds could do well this year.

 

Looking Ahead

A few sources of event risk remain, such as earnings reports, North Korea, budget battles in Washington, and the second round of the French elections in two weeks.  If we get green lights in all three areas, then we could have a rally on our hands: a breakout that began today, but showed its hand last week in our Monday post.

Enjoy!

Tushar

Vive la Volatilite (Or, Let Them Eat Risk-Off Cookies!)

The market chose to fret about French elections this week, because a string of recent elections have led to unexpected outcomes, even though US exposure to the French economy is quite small.  Earnings season helped risk-on sectors gain this week, and risk-off groups waned.  However, trader anxiety, doused early in the week, flared up again after the terrorist incident on Champs Elysees.  As a famous French historical figure might have tweeted today, "Let them eat risk-off cookies!" (Yes that rhymes with Biscoff cookies. More on that later.)

 

Chart 1: The market was put on a diet of French risk-off cookies this week, in anticipation of the first round of French Presidential Elections on Sunday, 23rd April. The ones in the picture are from Ikea.

 

Gold and bond are the traditional risk-off cookies traders reach for when their anxiety rises. We first look at the $SPX (S&P 500 Index) and its correlation to the $VIX index (see Chart 2).  Note that the 14-day correlation is negative: so as anxiety drove the $VIX higher, stocks headed lower.  During the same period, gold and bonds rose as $VIX rallied (see charts 3 and 4).  Thus, bonds and gold provide sweet relief for trader anxiety.

 

Chart 2: The S&P 500 index (top chart) is compared to the $VIX index (bottom panel) using the 14-day correlation (middle panel).  Notice that the correlation was negative during the recent selloff and during the consolidation earlier this year.  In other words, as trader anxiety rose, the market consolidated or sold-off.

 

Chart 3: The gold futures continuous contract had a positive correlation to the $VIX index, rising as anxiety rose. Note the negative correlation between stocks and $VIX in Chart 2.

 

Chart 4: The TLT iShares 20+ year Treasury Bond ETF has a positive correlation to the $VIX, quite similar to the correlation between gold and $VIX in Chart 3.

 

The S&P 500 Daily Bear (3x) fund roughly followed our outline from earlier this week for the head-and-shoulders pattern we identified on Monday, but still has not closed below the neckline (Chart 5).  As the bearish sentiment declined, risk-on sectors gained and risk-off sectors waned (see chart 6).  For example, CSX was a star on earnings, breaking out to new highs.

 

Chart 5: The SPXS ETF followed our head-and-shoulders template from Monday, but has not closed below the neckline in order to complete the pattern. (See updated chart here.)

 

Chart 6: Risk-off sectors (consumer staples, health care and utilities) declined, and risk-on groups (technology, industrials, materials and cyclicals) rallied.  

 

In another sign that risk-off stocks were losing steam, Phillip Morris (PM) fell sharply (See Chart 7).  I have marked two other important gaps-down that signaled key changes in market sentiment.  Observe that PM had moderate-to-high correlation to bonds (risk-off favorite) and it had a positive correlation to the $VIX index.  Thus, PM is a proxy for risk-off sentiment when it rises.  Thus, the sharp gap down this week is interesting.  PM must now fall through support at 108 to confirm the change in sentiment.

 

Chart 7: PM is a favorite during risk-off periods (note the positive correlation to bonds and $VIX), and the large gap-down this week may be a sign of changing market sentiment.  Only broken support at 108 would confirm the change to risk-on mode. (See updated PM chart here.)

 

Market's Path of Least Resistance and Trend Following Model Check

The market's path of least resistance remains lower in the short- to -medium time frame, and higher in the long-term time frame.  The intermediate-term is teetering on edge, and the trading next week will be important to see which side it comes down.

 

Chart 8: The roll-up of Russell-1000 stocks indicates negative sentiment in the short-and-medium term, with the long-term environment still positive.  The intermediate-term is delicately poised, and could settle either way, depending on trading next week.   Trend-following models are long bonds and gold in the short-to-intermediate term, and will not start to turn unless there are big moves next week.  The dollar is slumping, but that could change come Monday.

 

Chart 9: Bonds and gold are in risk-off mode along with the SPX and dollar is unloved.

 

Chart 10: The trend-check carpet shows mixed trends but overall weakness in the short-term, with long-term models still pointing higher.  The medium-term and intermediate-term models are mixed.  The degree of smoothing increases from top to bottom. Index breadth increases from left to right, from 30 to over 2000 stocks.

 

The Top-6 S&P 500 stocks ranked by Chande Trend Meter are shown in Chart 11.  The mixture is diverse, and driven by recent earnings.

 

Chart 11: The top trending S&P 500 stocks as measured by the Chande Trend Meter.

 

Looking Ahead


The market's reactions on Monday are impossible to forecast.  This week the market tried to move higher.  So, to be contrarian, we look at the down-side risks, and find that there are at least three ways to project good support around 2300 in the $SPX (see Chart 12).   If the market likes the results of the French election, then expect a push higher, with the QQQ  within spitting distance of new highs.

 

Chart 12: I found at least three ways to estimate substantial support for the $SPX round 2300, should the French elections produce an unpleasant surprise.   The breakout at 2300 is natural chart support, which also seems to coincide with Fibonacci pull-back levels drawn from two recent lows that traders are likely to use.  Ideally, the results will be benign, and the market will fall through the neckline in Chart 5 and risk-on roughnecks will rule. (See updated SPX chart here.)

 

A Brief History of Speculoos  Cookies

The Dutch East India company was formed in 1606, and became the first company to issue stock share certificates.  It opened the spice trade to the East Indies island of Muluku, and imported cloves, mace, and nutmeg for the first time.  These spices were expensive, and Dutch bakers used them to create extra-special spiced cookies for holiday gift exchanges, starting a priceless tradition. Only a few of the original recipes have survived.  The medicinal benefits of the spices from India and East Indies are well documented.  Even sugar has been shown to help reduce stress.  Is it any wonder that these cookies work like magic? 

 

Fear Index Drops To Lower Gear

The $VIX index closed below its prior two lows today.  It's 7-day RSI has dropped below 70.  In the past this has generally turned into an important reversal in the VIX index.  Today, key market indexes and sub-sectors, such as the NYSE composite and XLF held support and bonds (and gold) reversed.  A typical unwinding of the defensive selling ahead of the long weekend, a possibility I had suggested at the end of my previous post.  I look at a few charts to understand if the reversal could continue.

 

$VIX Closes Below Two Previous Lows

In my post this weekend, I had suggested that the event-risk selling should reverse if the weekend closed quietly.  Fortunately, that is just what happened, and the VIX closed below its two prior lows (see Chart 1).  This probably marks the start of a reversal away from recent lows.  However, note that there is an uptrend line from the February lows on the $VIX chart, hence it must close below 11 to reverse that trend.

 

Chart 1: The $VIX index closed below its two prior lows and its 7-day RSI dropped below 70 after first rising above 70.  In the past, this has marked a turning point.  However, note that the VIX has been rising steadily since February, and only a close under 11 will mark a reversal of that trend.

 

SPXS ETF Forms Head-And-Shoulders Pattern

Further support for the idea of a short-term bottom comes from the 2-hour chart of the SPXS  (Direxion Daily S&P 500 Bear 3x) ETF.  This ETF rises when the market drops, and represents a bearish bet on the market.  The very-short term chart suggests a head-and-shoulders pattern, with today being the right shoulder.  Clearly, SPXS must drop below the neckline in order to complete the pattern (see Chart 2).

 

Chart 2: The Direxion Daily S&P 500 Bear 3x ETF (SPXS) has formed a head-and-shoulders pattern on the short-term 2-hour chart.  Today's action potentially forms the right shoulder, but the ETF must drop below the neckline to complete the pattern.  

 

Treasury Bonds Pause Their Recent Rally

The third piece of data supporting a potential reversal is that the TLT (iShares 20+ year Treasury Bond) ETF has reached resistance at 124 and pulled back today (see Chart 3).  Clearly, the resistance at 124 must hold for the reversal to gain a firmer footing and for stocks to rally (since stock and bond prices are negatively correlated at the moment).

Chart 3: The TLT (iShares 20+ year Treasury Bond) ETF has met resistance at 124 that represents prior support from this time last year. 

 

Financials Hold Crucial Support

Financials as a group have borne the brunt of the selling in this downturn.  The Financial Select Sector SPDR held crucial support at 23 (see Chart 3), and on this 60-minute chart, one can comfortably draw a divergence using the 14-bar RSI.  The 200-bar stochastic RSI has still to recover, so more work is needed to establish the reversal.  If XLF could move above the down-trend line, that would be a positive for the market as a whole.

 

Chart 3: The all-important XLF SPDR ETF, representing one of the worst-hit sectors, held crucial support at 22.75-23.00, and one can even draw a small positive divergence using the 14-period RSI.  The 200-bar stochastic RSI is still below 0.20, so XLF needs to rise above 24 to confirm a short-term bottom.

 

Other Key Indexes Hold Support

The S&P 500 index held support, as did the more broadly based NYSE composite (see Chart 4).  The Dow closed above the previous high.  So, the rally was broad-based, and helped critical sectors such as Financials.

 

Chart 4: The broad-based NYSE composite held support at 11,325, but must work up to and push through resistance at 11,550 as the next important basing step.

 

Summary

A fairly typical relief rally after defensive selling going into the long weekend as I had suggested my prior post.  The action of the $VIX suggests the market could make the reversal stick. 

 

 

 

A Brief History of Post-Election Rallies (Or, could the "Trump Rally" go even higher?)

As dark clouds gather over the investment horizon this Easter weekend, the post-election rally in the US stock market (the "Trump Rally") seems to have faded just a bit.  Is the rally over? Or, can the recent history of US stock returns during the first year of a new presidential four-year term give us some useful guidance?  We explore this question, in the hope we will find an Easter egg after all, if not now, perhaps later this year. However, the really tough question this weekend is this: Should the Easter chocolate bunny be consumed feet first, or ears first? (More on that later.)

 

Figure 1: Kites riding a stiff breeze keep watch under stormy skies over vast fields of tulips just reaching their peak this weekend in the Great Northwest.

 

A Brief History Of Post-Election Rallies in the S&P 500

The first year of a new 4-year presidential term (whether first or second term) brings a new burst of energy to the governing processes of the USA.  Thus, it is reasonable to look at these as distinct events on the investment horizons.  If a major economic or military crisis continues into the new term, then those crises dominate the market's concerns.  Otherwise, the new governing agenda drives the market's expectations.  Hence, I will use recent first-year returns as a guide for my analysis.


I went back to 1952 (Eisenhower’s victory), and decided to use the S&P 500 index at the end of October before the election as my starting point, and set it to 100.  I then calculated the market's performance through the end of the following year (here the end of December, 1953), the end of the first year of the new four-year term. This gives me an interval 14 calendar months long, with the current 2016-17 period as the latest interval.  I then calculated the correlation between the Nov-16 to Apr-17 "six-month" interval (I know, April is not over yet) and the same intervals for the other sixteen terms (so the length of comparison  period is uneven).  I chose to focus only on those periods with a correlation of 0.68 or greater to current interval of interest. Parenthetically, ten of the sixteen 14-month intervals in my sample were positive (62.5%).


In Figure 2 I compare the current rally, to the seven previous terms with moderate to high correlation over the first "six" months of the 14-month interval starting October of the election year through December of the following year.  The figure is busy, so note that the current 2016-17 rally is in green. Second, observe that there is much scatter in the data.  Third, recognize that intervals which start off strong, tend to end well.  I show a simplified picture in Figure 3, in which I just show the current rally since October and the average of my historical returns with the greatest correlation to the current rally.  Clearly, the Trump rally could go even higher.

Figure 2: : I used a 14-month interval starting at the end of October of the election year through December of the following year, the end of the first year of the four-year presidential term. These seven historical intervals had moderate to high correlation to the S&P 500 returns over the first few months of the current presidential term.  The chart is busy, so I compare the actual current returns to the average of the comparable seven other terms in Figure 3 below.

 

Figure 3:  The current rally in the S&P 500 index since the end of October, 2016 compared to the average S&P 500 performance during comparable periods of previous first-year terms with the highest correlation to the current term.  This chart suggests that the rally could go even higher.

 

Figure 3 suggests that the market's optimism will be rewarded with a higher close at year end.  Of course, the comparison does not account for actual economic conditions, and assumes that the market has done that for us already.  Secondly, there is considerable variation in performance as we can see in figure 2.  So far, in this small sample, when the first few months were positive, the entire 14-month returns were also positive.   Of course, the market could close lower from here in December, and still have positive returns over the 14-month interval starting at the end of last October.  So, as usual, we do not know precisely what will happen, but there is good reason to be optimistic in the face of the gathering storm clouds (see Figure 4).

 

Figure 4: I plot one standard deviation bands around the average of the seven previous post-election rallies with the highest correlation to the ongoing post-election rally to give a sense for the range of potential outcomes.

 

The Market's Sour Mood

The market fell on event risk as I suggested last Wednesday.  The stocks underlying the major indexes have weakened this past week, and the path of least resistance could turn lower even on the intermediate-term should the selling continue next week (see Figure 5).  We have other measures of intermediate-term strength which are still positive, so this remains to be seen.  Our core trend-check carpet shows the mixed trading picture very well (see Figure 5).  The short-term trend has turned lower in the short-term (as it has been for some time), and that weakness is spreading to longer time frames.

 

Figure 5: The market's path of least resistance is lower in the short- and medium-term time frames.  The downside risk will increase another notch if the intermediate-term bias changes as well upon further selling next week.  These data are from applying our trend-following models to the Russell-1000  universe and rolling-up the data.

 

Figure 6: The side-by-side comparison is arranged in terms of increasing stocks in the index from left to right (from 30 to over 2000) and from short- to long-term from top to bottom.  The market breadth increases from left to right, and the degree of smoothing increases from top to bottom.  Thus, the models at the top react (change direction) most rapidly, and the ones of the bottom do so reluctantly.  The S&P 500 short-term trend has turned lower, and QQQ is now flat in the short-term.  Thus, the trend models are broadly in sync with the market's mood from figure 5 and also with Erin Heim's summary for the week.

 

On a lighter note...

A recent survey found that chocolate bunnies should be eaten ears first.  A delightful set of trivia on chocolate Easter eggs is available from Cadbury's chocolate.  A number of stories have appeared in the media covering the scope of the Trump Rally (for example, see here and here).  Lastly, this being a long holiday weekend, the selling ahead of it could be explained by defensive positioning to avoid event risk.  Should the weekend end quietly, a rally would be needed to unwind the defensive selling.

I've gone on too long already. Until my next post, remember, there is strength in numbers.

Enjoy!

 

Tushar

 

 

 

Dow 30: Less Vol Now, More Vol Later? -- Trend Checking Bonds and Dollar -- Market's Path of Least Resistance

We explore the implications of the very narrow trading range in the Dow.  Then we trend check bonds and gold.  The NLY chart caught our eye. I also annotate the market's path of least resistance.

 

Dow 30 Industrials: Less Vol Now, More Vol Later?

The Dow 30 is showing a 5-o'clock shadow.  They have traded in such a narrow range, that the shadows of the candlesticks are growing like whiskers (see Chart 1).  Since the end of January, about 70% of the closing percentage changes have been within +/- 0.25% of the previous close.  The narrow range makes the market vulnerable to event risk, as we saw in August, 2015.  Today the market spent most of the day below its 50-day average.  An outside event could easily stampede the market lower toward 19,750 and the 200-day average.  A raft of technical levels offer support in that area.  On the other hand, it could bob along, like an aircraft on autopilot at cruise altitude.  Geopolitics, the French elections and the earnings season are just a few of risk factors.

 

Chart 1: The Dow 30 has traded in a very narrow range for the past three weeks.  The Chande Trend Meter (lower panel) has trickled down into the trend-less region.

 

Well, the volatility is low now, but what could happen later?  To study this question, I looked at the 50-day average of the absolute daily percentage change (see Chart 2).  The current level is the lowest it has been since late 2006, which means that we are probably headed higher over the next few years.  Note that the volatility expansion has occurred during declines, so the chart is saying something about the future range and direction.  The chart also shows that it could take many months to expand the range: so enjoy the smooth ride while it lasts.

 

Chart 2: This is the 50-day average absolute percentage change in daily closes going back to early 2007.  The current level of volatility is the lowest since late 2006.  Such a low level is probably not sustainable for long.  Note that the volatility expansion has generally occurred during declines (2008), but builds up relatively gradually.

 

Bonds: A Trend Check

The weak unemployment report on Friday did little to help bonds, but the selloff earlier today in the Dow helps pushed bonds higher into overhead resistance (see Chart 3).

 

Chart 3: The broadly diversified Vanguard Total Bond Market ETF (BND) continues to dig into overhead resistance.  The middle panel shows it is trending nicely with a CTM at about 85.  The multi-period trend-following models are long in the short-to-intermediate term, but short in the long-term.  With chart resistance at the election night gap at 82, this is the classic counter-trend rally against a long-term down-trend.

 

Bonds climb a wall of worry, and as the lowest panel summarizing the trend-following model status shows, this is the classic counter-trend rally against a long-term down-trend, with resistance on the charts all the way to the gap at 82.  It is not clear what the bond market is worrying about, even as the Fed tries to shrink its footprint and the economy is humming along.   The bond rally is helping mortgage REITs as the following NLY chart shows very nicely.

 

Chart 4: The rally in bonds has helped REITs like NLY move along smartly, with the CTM enviably above 95.

 

Gold Tracks Bonds Higher

Gold has followed bonds higher.  We use the SPDR Gold Shares ETF (GLD) to show the breakout towards resistance at 124 (see chart 5).  Gold is trending with the CTM at 84.  The 100-day correlation between GLD and BND (see third panel) is high, at 0.86, which means that the two have tracked closely.  The trend-following models (lowest panel) are long from medium-to-intermediate term, and flat on the long-term (unlike short over the long-term for bonds).

 

Chart 5: The GLD ETF (top panel) has moved higher in lock-step with bonds, with a CTM at comparable level of 84, and the 100-day correlation (in the third panel from top) at 0.86.   The trend-following models are long from the short-to-intermediate range, and the long-term trend is now flat (unlike bonds).  The chart shows resistance begins at 124.

 

Market's Path of Least Resistance

The S&P-500 index is trending lower within a down-trend channel, approximately parallel to its down-trend in the summer of 2016 (see Chart 6).  We will need a close outside the channel to start turning the trend around.  We apply the trend-following models to the Russell-1000 universe and roll-up the data to find the path of least resistance (see Chart 7).  The broader market is also trending lower in the short-to-medium time frame, and is net positive thereafter.

 

Chart 6: The S&P-500 index is consolidating within a down-trend channel roughly parallel to its consolidation last summer leading into the election.  The Chande Trend Meter has dribbled into the trend-less region.  The trend-following models are flat in the short-to-medium term, and long thereafter. 

 

Chart 7: The roll-up from the Russell-1000 universe suggest the path of least resistance is lower in the short-to-medium time frame, and upward from there on.  The intermediate-term bears watching, as it is getting close to flipping its bias.

 

Summary

The narrow range in the markets makes them vulnerable to event risk.  Bonds have climbed an invisible wall of worry, and gold has closely tracked bonds.  The current path of least resistance is lower in the short-to-medium term, and higher at longer time frames.

 

 

 

 

Bonds Reach Resistance -- Market Environment Weakens Ahead of Jobs Report -- Top Trending Vanguard ETFs -- Top Trending S&P 500 Stocks

  • Bonds reach critical overhead resistance ahead of jobs report
  • Market environment weakens over short- and medium-term
  • Top-trending Vanguard ETFs rankings are consistent with strength in bonds
  • Top-trending S&P 500 stocks are led by McDonald's (MCD)

 

Bonds Reach Critical Overhead Resistance

Bonds have rallied into critical overhead resistance ahead of the jobs report (see Chart 1).  Oddly, the overall economy has been firm, with the third revision of 2016Q4 GDP now at 2.1 percent, and the Atlanta Fed GDPNow at 1.2 percent for the first quarter of 2017.  The February ADP employment report estimated that private sector employment increased by 298,000 and the Chicago Fed National Activity Index also ticked up in February. Thus, bonds have rallied in the face of firmer data, but with increasing uncertainty whether fiscal stimulus from Washington will arrive any time soon.  Thus, the upcoming jobs report might provide the impulse for the next move in bonds.

 

                                              Chart 1: BND - Vanguard Total Market ETF

Chart 1: The CTM shows the highly diversified BND ETF trending as it reaches overhead resistance from 81.25-81.50. The jobs report should provide the impulse for the next big move.

 

Market Environment Weakens In the Short-term

The NYSE composite turned negative in the short-term in our Trend Check Carpet for today.  Focusing on just the Russell-1000 stocks and applying the trend-following models to its components and rolling up the data helps us categorize the current market environment into a binary bullish/bearish sorting across different time frames (see Chart 2).  The market environment is mixed: bearish in the short- and medium-term, and bullish in the intermediate-to-long term.  This is consistent with other blogs on StockCharts.com.

 

     Chart 2: The underlying market environment for the Russell 1000 universe

Chart 2: Applying our trend-following models to the Russell-1000 universe allows us to compress the data into a market environment.  The market environment is negative in the short- and medium-term.  It is barely positive or bullish in the intermediate-term, but comfortably bullish over the long-term. 

 

Top (and Bottom) Trending Vanguard ETFs

We use the Stock Charts Scan Engine to apply the Chande Trend Meter to the universe of Vanguard ETFs.  The top trending Vanguard ETFs (see Chart 3) are related to the rally in bonds.  Clearly, the rally in bonds and the weakness in the trading environment noted in Chart 2 had driven bond funds and defensive equity funds to the top of trend strength rankings.  Conversely, the bottom of the trend strength ranks for Vanguard ETFs (see Chart 4) features small cap stocks, or funds heavy with financials.

 

Chart 3: The Best-Trending Vanguard ETFs Ranked by Chande Trend Meter

Chart 3: The top trending Vanguard ETFs are bond related or have defensive equities.

 

Chart 4: The Worst-Trending Vanguard ETFs

Chart 4: The bottom of the Vanguard trend strength rankings have small cap stocks and funds with large exposure to Financials.  Value players, take note.

 

Top Trending S&P 500 Stocks

We run the Scan Engine using the Chande Trend Meter to identify the best trending stocks in the S&P 5oo universe (see Chart 5).   The RRG chart for the group (see Chart 6) shows long green tails, and offers additional support for the CTM analytical process.

 

Chart 5: Top-Trending Stocks in the S&P 500 Universe

Chart 5: McDonald's, certainly a defensive stock, is the best trending stock in the S&P 500 universe, but the stocks in this table are from many sub-sectors within the index.  The code for the scan engine is shown at the top of the table.

 

Chart 6: The RRG Chart for Stocks in Chart 5 Above

Chart 6: We use the stocks in Chart 5 to drive this RRG chart, which shows most of top trending stocks have green tails as they gather strength relative to the market.

 

Summary

The next jobs report could provide an impulse to the bond market as it approaches overhead resistance.  As the bond market resolves its future direction, equities will adjust to accommodate fund flows and resolve the uncertainty in the market environment.

 

Engage More Closely with the Market (via the Trend Check Carpet)

NELSON'S LAST SIGNAL TO THE FLEET AT TRAFALGAR "ENGAGE THE ENEMY MORE CLOSELY"

 

The great naval battles of the 16th-18th century were fought with a large number of huge sailing ships all moving in a straight line, firing batteries of cannon broadside at each other at short range.  Hence, the biggest warships were called line-of-battle-ships. The commanding Admiral could only use flags to signal maneuvers to his fleet, through all the din and smoke, and hence information compression took on a whole new role (see more about Trafalgar later).  Naturally, the ship that bore the Admiral was called the flagship, and even today, the largest ships are called battleships. If I were to use flags, the name Trend Check would appear as shown in Chart 1.

 

Chart 1: There are so many rules on composing flag messages at sea, that I almost certainly have it wrong, but here I am trying to say "Trend Check".

 

At sea, signal flags compress information, just as information compression is a key theme of the Trend Check blog. Since we are still in the start-up phase, today I will introduce the Trend Check Carpet, in which we will summarize the trend status of key indexes across four time periods and market breadth varying from 30 to over 2000 stocks.  The purpose is to help you grasp what is happening in the market at a quick glance.  It will look complicated, and will take some time to become familiar, but if it makes you feel any better, even today, the NATO Navy Flag signal rules fill many 3" thick binders.

 

THREE-PHASE TREND-FOLLOWING MODELS

I want a three-phase model: one that can be long, flat or short, unlike moving average cross over models that are only long or short (i.e. two-phase).  First, we start with daily data. Second, we use Bollinger bands with band width of half a standard deviation. Third, we combine the Bollinger bands with simple moving averages (of the close).  When the moving average is above the upper band, the model is long. Conversely, when the moving average is below the lower band, the model is short.  So, it follows that when the moving average is between the upper and lower band, the model is flat.  Thus, we have a three-phase model, which can be long, flat or short.  One of the advantages of the 3-phase model is that we do not get whipsawed by repeated moving average cross-overs in a short period of time.  However, we become vulnerable to false breakouts, where the market moves enough in one direction to confirm a change in direction, only to promptly reverse.  Thus, the three-phase models have strengths and weaknesses, just like two-phase models.

We then have to choose the length and band widths for the models.  I chose completely arbitrary combinations of moving average and band lengths to define four models as shown in Chart 2 below.  In other words, these are not optimized in any way.

 

                                     Chart 2: The Specification of Trend-Following Models

Observe that for each time period, the length of the calculation period for the band is 5 times the length of the time period of the reference moving average.  The time period length doubles at each step from short-term through long-term.  Thus, the bands scale more or less consistently across time.  Besides, this allows us to use the 50- and 200-day time periods so popular across the charting universe.  Naturally, our classification of any particular length as short-term or medium-term is also arbitrary, and you might prefer some other designation. We can now apply these models across key indexes and summarize the data in a single chart or carpet.

 

TREND CHECK CARPET

Chart 3: The Trend Check carpet covers four time periods (from top to bottom).  Market breadth, or the number of stocks included in the indexes, increases from left to right, rising from 30 in the Dow Industrials to over 2000 in the NYSE composite index.

 

First, the four time periods are stacked from shortest at the top to longest at the bottom. Thus, in any vertical column, you can see how each index is trending from a short- to a long- time frame.  In any time slice, you can read from left to right how the market is doing as the number of stocks in the index (i.e., market breadth) increases.

We only classify the trend into long, short or flat, without regard for the trend strength.  At one extreme, the market could be falling across all time periods and index breadth.  At the other extreme, the market could be rising across all time periods and index breadth.  Most of the time, the market will be mixed.  As a strong down-trend begins to reverse, the uptrends will appear at shorter intervals and narrow breadth and spread throughout.  Conversely, after strong uptrends, down-drafts will first occur at wider index breadth and shorter periods and then diffuse through the picture.

As a user, you may choose to focus on just one given time period (say the long-term) or one market breadth (say the Russell 1000) as best fits your trading style or portfolio.

 

CONSISTENT WITH OTHER BLOGS

The market carpet is broadly consistent with other blogs on StockCharts.com.  For example, the Trend Check Carpet is similar to the Erin Heim's Decision Point Alert Scoreboard.  I cover one extra time period and few extra indexes in Chart 3, and the underlying models are three-phase versus two phase.  I just want to summarize the trend picture, rather than highlight individual signals.  As you become familiar with the layout and review it regularly, you will see the dynamics of the market play out before you.

The current summary is also broadly consistent with Arthur Hill's Art's Charts blog.  He recently wrote that he feels we are still in a corrective phase in the market.  The flat or down trend status for the major indexes (except QQQ) over the short-term and medium-term is consistent with the markets being in a corrective phase.  Here we can quantify the state of the market over time and across market breadth, to indirectly support his analysis. Tom Bowley wrote a piece why this is not 2007, and the summary in Chart 3 at the intermediate and long term time interval shows the indexes trending higher quite consistently across the breadth of the markets.

I have gone on too long already.  Until next time, remember, there is strength in numbers.

 

INFORMATION COMPRESSION AT TRAFALGAR

In the heat of battle of Trafalgar on 21st October 1805, Nelson first ordered his Signals Officer,  Lt. Pasco to hoist "England confides that every man will do his duty".   However, the word 'confides' was not in the code book, and each letter would have to be spelt out, taking time and precious space on the halyards.  Lt. Pasco asked permission to replace 'confides' with 'expects', a word that was already in the signal book.  Nelson agreed, giving us the unforgettable message, "England expects that every man will do his duty".   Admiral Nelson's final instruction had just three flags: the telegraphic flag and the numbers one and six, "Engage the enemy more closely".  How's that for information compression?

 

 

 

 

The Shortest Distance Between Two Points is a Crooked Line

"The shortest distance between two points is a crooked line."

Sure, that may be out of line with Archimedes, but it is perfectly in line with how markets work.  If nothing else, that's what two decades of trading the futures markets taught me. The title just means that we typically underestimate the randomness of the markets and overestimate our ability to predict them.

I am Tushar Chande and welcome to my first blog post on StockCharts.com.  I know many of you will question the wisdom of launching a new blog on April Fool's Day (trivia buffs: more on this at the bottom of the post).  But hey, I am used to market risk, since my "stock equivalent positions" exceeded many hundreds of millions of dollars as a CTA and hedge fund manager.

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