Monday, March 10, 2014

Stock Market Crash? Depends on who’s talking...RSI

“There is a fairly regular pattern to how the market behaves during what is called the "four-year election cycle." Typically, we get a peak in the spring, a bottom in late summer, and then a strong rally into the pre-election year…”  Full commentary at...
Some don’t even see a top at all…

NO MARKET TOP (Financial Sense)
“Richard Dickson, Chief Market Analyst at Lowry Research. Richard sees no current signs of a market top, and notes that there is buying coming into the market. Richard also points out there are no divergences in the Advance/Decline line as well. He believes that buying on the dips is still the way to go at this stage of the bull market.” From…
Perhaps he doesn’t see any signs; others do…

“A number of warning signals are flashing in the stock market, and while not indicative of an imminent crash, they’re telling investors to exercise caution, say market strategists…”
“…warnings signs: The indexes’ string of record highs; high levels of margin debt, or borrowings to finance stock buys; the slim number of prior bull markets that have lasted past this point; and valuations that are close to levels when stocks last peaked. Margin debt, which tends to spike alongside stock rallies and pullbacks, has been rattling investors for months . “As that debt goes up, the market’s foundation gets shakier and shakier,” said Brad McMillan, chief investment officer for Commonwealth Financial. “The correction could be deeper.”
I was astounded to find that U.S. Federal receipts from Student loans are 4-times the receipts received from U.S. taxes.  That’s one reason why you will hear many talking about a crisis in student loans. Kids are taking on huge debts that may not be paid back while the Government is counting on the payments to float the country.  Here’s an article on the subject from Doug Short:

“Tumbling stock markets and a big currency devaluation are delivering a blow to its faltering economy. ‘So far we've seen a major impact on the Russian economy and the Ukrainian economy, and some financial impact on countries that border that area,’ said European Central Bank President Mario Draghi. ‘The impact on the Russian economy is severe.’ Russia's central bank was forced to jack up interest rates to 7% from 5.5% on Monday [a week ago] in a bid to stabilize markets and counter the impact of a near 10% decline in the value of the ruble this year.” Full story at…
Monday, the S&P 500 fell 1 pt. to 1877 (rounded). 
VIX was up about 0.6% to 14.20    
The yield on the 10-year Treasury Note fell slightly to 2.78%. 
I have been looking at the Relative Strength Indicator (RSI). In simple language RSI is a technical indicator that shows the percentile of the size of up-moves compared to the size of all moves (up and down) over a given period of time usually 14-days.  As of Monday, the RSI (SMA) was 68 based on the 14-day simple moving average.   That means that the up moves are in the 68th percentile of all moves during the recent 14-day period and that is a strong value.

Here’s some info from
“Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers.” Further discussion at…

As I attempted to calculate RSI, I became a little frustrated, because I was unable to duplicate the value published in Yahoo Finance charts or in the charts at Google. Here’s a yahoo chart showing the S&P 500 and its RSI.

It turns out that these charts of RSI are based on the Simple moving average and are not front-weighted as proposed by Wilder nor do they use an exponential moving average as others do.  The simple moving average is based on an alternate system developed by Cutler. 

I’ve looked at the various ways to calculate RSI and so far, the simple moving average looks awfully vague since it’s peaks and troughs contain numerous values above 70 and below 30 so the above overbought and oversold values don’t give actionable signals.  On the other hand, the EMA system aligns peaks above 70 and troughs below 30 closely to the tops and bottoms of the S&P 500 index.  Unfortunately, there are still many false signals.  I’ll keep looking at this and perhaps something good will come from it.  Divergences of RSI trend vs. the S&P 500 may be of value.  So far it’s just a geeky academic exercise.

The 10-day moving average of stocks advancing dropped again to 54% at the close.  (A number above 50% for the 10-day average is generally good news for the market.)   New-highs outpaced new-lows Monday, but the spread (new-highs minus new-lows) fell to +63.  (It was +189 Friday). The 10-day moving average of change in the spread was minus-17. In other words, over the last 10-days, on average, the spread has decreased by 17 each day. The 10-dMA of up-volume is falling too.  Only 10-dMA of breadth (%-advancing) is positive.  Breadth is always the slowest internal to react.  The internals are neutral on the market, but are hinting at a downturn. 

Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. They are usually right, but they are often late.  They are most useful when they diverge from the Index.  In 2013, using these internals alone would have made a 16% return vs. 30% for the S&P 500 (in on Positive out on Negative – no shorting).  Of course, few trend-following systems will do well in an extreme low-volatility, straight-up year like 2013.

The NTSM system remained HOLD today, Monday. The most recent Buy signal was 28 Feb, although I’ve adjusted the Buy override (5-10-20 Timer + Market Internals).  With the adjustments included, the Buy would have been 13 Feb. 

I am about 50% invested in stocks because I upped my stock holdings by 10% on 12 Feb and another 10% on 28 Feb.  That’s fully invested for me at least as far as long term money goes.  This is a suitable stock allocation for a balanced portfolio for someone my age.  Since bonds are yielding very little now, I will consider adding more to stocks later if there is a buying opportunity.