Thursday, October 17, 2013

Bearish Chart - Rising Wedge…Phony Hindenburg Omens…Time to Buy?

“When the media or so-called market gurus make scary predictions of crashes and bear markets, it is far better to dig beneath the surface to see if their claims have any validity. Digging beneath the surface to detect subtle changes in the market’s character is the purpose behind my weekly "Market’s Bill of Health" reports that come out on Friday, and currently I see no indication of a market top, let alone an approaching bear market.”  Read the full analysis and commentary at…

A few days ago I said that the advance of the S&P 500 was slowing.  That is true on a short term basis, when looking only at year 2013.  On a longer term basis (say the last 5 yrs.) we can see that the S&P is generally advancing at a normal pace and has not slowed.  One negative apparent on this chart is the volume on the lower graph.  It has been falling as investors begin to lose faith in the old bull.

Another negative: there is a rising-wedge that would indicate a bearish reversal ahead and I’ve shown that below on the 2nd S&P 500, 5-year chart. 

It remains to be seen how the bearish-wedge will play out.  You may remember a number of analysts (including me) pointed out the bearish rising-wedge at the beginning of 2013. (See “Rising wedge; Rising Concerns” at )                                                                    

I’ve shown the top of that prior wedge with a Green-dashed line below. Obviously, the S&P 500 simply broke thru that upper boundary early in the year and the bearish-wedge wasn’t confirmed.  This bearish-wedge may fail too, but sooner or later the market will drop back to the lower trend line and that would indicate a 20% correction on the above 5-year chart.  This wedge looks more likely to play out with some sort of correction, because the upper trend line is also the major upper-trend line and it is unlikely to be broken to the upside.  The timing of a possible breakdown is never clear and it could take a while for the S&P 500 to pull back.  It is possible that the market could make it to 1850 before a pullback occurs, but it could happen much sooner too.  (Sorry, I’m not helping much here.)   
Chart from Yahoo Finance

IBM reported more mixed earnings results on Wed. as Q3 revenue slid 4% year to year to $23.7 billion, though earnings narrowly beat Wall Street’s expectations at $3.99 per share…
...Analysts had warned in advance that the industry wide outlook for IT spending has not been a positive one between political instability and volatile currency rates. As the first “large IT vendor” to report Q3 results, Cantor Fitzgerald was expecting a canary in the coal mine type response. Right now that canary would be currently gasping for air.”  Full story at….

IBM was down about 7% Thursday.  The markets yawned, so IBM must not be the technology bell-weather that it used to be.

Thursday, the S&P finished UP 0.7% to 1733 (rounded) at the close.
VIX fell 8% to 13.48.  (That’s a stunning drop considering the S&P VIX was over 20 just 7-days ago.  Thank-you politicians!)

The 10-day moving average of stocks advancing bounced into positive territory to 56%. (A number below 50% for the 10-day average is generally bad news for the market.) 
New-highs outpaced new-lows Thursday, leaving the spread (new-hi minus new-low) at +308 (it was +218 Wednesday).  The 10-day moving average of change in the spread is plus 25.

Market Internals are now positive on the market for this short term indicator.

The overall long-term NTSM analysis switched to BUY at the close Thursday. 

I have been considering putting some funds back into stocks and this, seemingly, clears the way.  I remain cautious, though, because Sentiment was 65% at the close Wednesday and that is very close to a sell signal.  If Sentiment were issuing a sell now, the overall NTSM system would be Hold.  Further, if sentiment hadn’t been so high over the past few weeks, the system would have sold at the tops and bought near the bottoms three times in April thru September. That would have happened because the system is not designed for quick reversals and that’s what the S&P 500 has done as it made several new highs. 

The S&P 500 has made 4-closes to new highs over the past several months; but todays’ is only 1% above the new high made two-and-a half months ago on 2 August.  That really makes today a triple-top because there was another intermediate high in mid-September. That is very negative for the market unless it can climb significantly above the old highs.  So far, it has not on 3-tries.

Bottom line: I need some more positive evidence before I buy more stocks.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.