Did the current oil crisis cause the stock market choppiness?...The Wednesday Update of the NTSM System

Several friends have suggested that the recent choppiness in the market (I can’t call it a correction anymore since this has not transpired) is oil related.  To that I respond, “It seems so, but perhaps not.” 

The NTMS indicators peaked 14 Jan 2011 when the S&P was 1293 and fell from there.  NTMS indicators deteriorated while oil was falling rapidly in early February and the S&P was still going up.

I conclude that while oil prices may have tipped us over the edge, the market was already showing significant issues relative to market behavior (sentiment, price, volume and VIX) a month earlier.  That is why I am not sanguine that a resolution of the “crisis” will create a sustained upswing in the market.  If the crisis is resolved, we could see a rally, followed by more a correction (or maybe even THE TOP), in relative short order.  Anyway, this is all conjecture – what I think; not what I see – so as always we’ll wait to see how this resolves itself.  What I see follows in our weekly summary of the NTMS indicators.

The Navigate the Stock Market analysis (NTSM) called a SELL on the S&P 500 on 22 February 2011.  That was the first change since the 2 July 2010 buy-signal. 

Since then we have bounced between a HOLD and SELL.  Today we had another HOLD signal.

SUMMARY OF NTSM INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is now 50%.  This is a middle of the road value for sentiment.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Neutral.  Price analysis showed significant improvement since its low a week ago.

VOLUME: Neutral.  More volume has been going to the upside, but not by much.  This indicator improved to neutral yesterday.

VIX:  Neutral.  Our VIX indicator is in neutral territory.  It is only slightly better than last week, but it now looks like it is in an uptrend and that is not good for the market.

The overall status for the Navigate the Stock Market system is HOLD. 

I think a down-trend has started and we’ll need a good move up soon to break out of that trend.  We should find out if I am correct soon - this prolonged foundering (like a shipwreck – not the fish) won’t last much longer.

No change in my invested position.

Whatever-it-is (correction?)

Except for the 2% drop in the S&P on 22 February, there hasn’t been much volume in the last 2-weeks.  Most days have been below the 20-day moving average.  That sort of action, when the market goes down, but the volume goes down too, is not usually found in a correction.  The theory is that if there is increased selling, some fear will creep in and we should see volume increase as the S&P goes down.

 

To further confound us poor fools who try to predict these things, the only 2-days during this whatever-it-is (correction?) when the volume exceeded the 20-day moving average, occurred when the S&P fell to its lowest value (1306). Now the theory there is that at bottoms, the volume should be low – so that metric is going in the wrong direction too.  Now to be fair, a 3% drop isn’t much of a bottom and trying to use that type of technical analysis probably isn’t valid here.

 

So I’ll look the charts and see if we can make any sense of this mess.  I hate charts so this is painful….but, we can see that since this whatever-it-is started, we have a descending line of lower highs.  At the same time we have a floor at 1306 that would seem to be an established low.  Since that low occurred on higher volume. I’m not buying it as a bottom…yet. 

 

We’ll just have to wait and see how the market turns from here.  Either we break the descending line and move higher…maybe tomorrow?...or we drop down to (or below) the 1306 line. 

 

All of the metrics in our Navigate the Stock Market analysis improved today, but unfortunately, that doesn’t really predict where we will go from here – we’ll have to wait for a Buy signal – or it may roll back over and issue a Sell.  Currently, we still have a HOLD, or neutral, reading from the analysis.

 

I’m currently 30% invested and have hedged with a 2x-short position in my trading portfolio.  If the S&P looks like it will close up tomorrow, I’ll close the hedge position. 

Correction?

At mid-day today the S&P 500 went down to 1304, slightly below the recent low of 1306 and then it rebounded to its close of 1310.  The day traders will say that was very important and bullish.  I don’t think it means much for me as I watch the correction/(whatever it is) play out.  It is completely meaningless for longer term investors.  To have a real bottom, we need to close a little below 1306 and have better market internals.  At this point I expect that we have a ways to go before it will be time to get back in the market in a meaningful way.  As of today, we are 11.5% above the 200-day moving average.  We could correct that far (11.5% drop from here)…or not; it’s anyone’s guess.

 

Our Navigate the Stock Market (NTMS) analysis improved a little today and it is now calling a HOLD. That doesn’t mean much since another down-day will push the NTMS back to a SELL signal. 

 

The average time between Buy or Sell signals has been 84-days for 2010 and 2011.  We may not have to wait that long though, because volumes have been low since the initial drop from the high on the 18^th of February.  That probably indicates little strength in selling and a shorter correction.  We’ll have to see if volumes go up because that would convince us we are going to have a real correction.  I am amazed that we have been flopping around with so little movement either way for 2-weeks.

 

I am still only 30% invested with a 50% hedge (2x-short position) in the trading portfolio.

The case for stocks this year…

Mark Hulbert had a good discussion concerning the Presidential cycle recently. 

(Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va.)

When he looked at the Presidential cycle he found that the 3^rd year in office is very positive for the stock market.  He went back to 1896, using Dow data, and reported the following average %-advances.

 

Year of President's term	Average Dow return
(9/30 to 9/30)         1	8.8%
2	0.4%
3	15.5%
4	4.1%

He also found that it didn’t matter whether the previous year had been up or down and made statistical checks for validity of the data. 

 

Mr. Hulbert reminded his readers that this phenomenon has been mentioned by many researchers before, so this is not a new finding.  The theory is that politicians will do anything to stay in office.

 

That is one reason many think this year will be a good one overall. 

 

Since I can’t tell what will happen this year in the market, I follow the Navigate the Stock Market analysis.   That gives me a view of what will happen in the near term.  By avoiding near-term pullbacks, I avoid the problems that may look like small corrections when they start, but become bear markets later.    

 

Regarding our view of the market…

The Navigate the Stock Market analysis (NTSM) called a SELL on the S&P 500 on 22 February 2011.  That was the first change since the 2 July 2010 Buy-signal. 

There is No change today.  The NTSM analysis still says SELL. 

"It’s hard to make predictions, especially about the future.”

As Yogi didn’t say, “It’s hard to make predictions, especially about the future.”  (Markus Ronner, 1918)

The S&P 500 was up 1.7% today.

My best predictions are in hindsight.  It should have been easy to see the potential for a big up-day today since we hit the previous low yesterday, didn’t go lower, and the volume was a little low.  A lot of people decided yesterday was a successful test of the prior low (1306) and the mini-correction is over.  We also had better than expected jobs data; who would bet on any more downside risk?

Well, me for one.   Those who have followed this site for a while know that I have done a lot of statistical analysis regarding big moves in the S&P, up or down.  Huge up or down days that exceed our statistical limits (and today’s move did) often set the upper or lower boundary for the trend. 

In plain English, the big move up today is bearish for the market in the short term. (There’s that pesky prediction thing again.)

A graph of the strength of only the huge up-days shows a declining, downward-sloping line.  That’s because the extreme upside moves have been getting smaller since 7 July 2010.  (Remember 2 July was the bottom last summer.)  Today’s big up-move did nothing to change the trend.

That had not been a problem for the market because the down-side moves had also been getting smaller.  Well, that pattern changed on 28 January 2011 when the downside moves started getting bigger.  As down-moves get bigger, they tend to pull the market down.  Unless this trend changes soon, we’ll see the correction continue – so at this point it still looks like the trend is still down.

The Navigate the Stock Market analysis still has a SELL rating on the S&P.

The Wednesday Update of the Navigate the Stock Market System

The Navigate the Stock Market analysis (NTSM) called a SELL on the S&P 500 on 22 February 2011.  That was the first change since the 2 July 2010 buy-signal. 

Since then we have bounced between a HOLD and SELL.  Today we had another SELL signal.

SUMMARY OF NTSM INDICATORS:

As of today’s close, our 4-areas of market analysis present the following picture:

SENTIMENT:  Neutral. %-bulls indicator is now 52%.  This is a middle of the road value for sentiment.  (Sentiment is a reverse indicator; a high %-bulls indicator is bearish for the market and vice versa.)

PRICE: Sell. The NTMS has recorded a clear deceleration in upside moves since the end of January and it got worse today…even though the S&P went up 2pts.

VOLUME: Sell.  More volume has been going to the downside…this indicator has been negative since the S&P topped.

VIX:  Neutral.  Our VIX indicator is in neutral territory.  It is not a bad enough number to call a Sell; but it is still on the negative side of the fence since it has been rising overall since the middle of February.

The overall status for the Navigate the Stock Market system is SELL.   (Our indicators are based on closing data so we generally wait until after the market close to update the system.)

RECENT CORRECTION HISTORY: During the 2-corrections over the last year, the time from the high on the S&P 500 to the low varied from 24-days to 62-days.  We had a “fake-out move” in Nov of 2010 that lasted 12 days from high to low, but our system didn’t call a sell in that case and I stayed fully invested.  Unless this is another fake-out, we should have at least a couple more weeks of choppy down moves ahead. 

Since the NTSM analysis could always be wrong, I am watching the volume of shares traded on the NYSE and the Market Internals.  Classical technical analysis says a Bottom will be signaled when the market makes a “successful test” of the previous low.  That happens when the S&P hits a value a little lower than the previous low on “lower volume and improving market internals”.  I may get back in the market based on that analysis rather than waiting for the NTSM system to make the call.  The decision will be based on the status of NTMS indicators at the time of the lower low.    

MY INVESTED POSITION: I moved to an all cash position in retirement funds on 23 February  and that makes my overall stock position about 30%.

Further, I took a 50% position in the Rydex Inverse Nazdaq 100 2x Strategy fund in my trading account.  This fund is a “bear” fund that doubles the inverse of the Nazdaq 100.  That means that it will go up twice as fast as the Naz 100 goes down…and vice versa.  (If I am wrong I’ll lose money twice as fast!)

 This moves me to a conservative position in terms of stock exposure; hedges some investments; and reduces overall risk considerably. 

REPEATING MY COMMENT FROM LAST WEEK: I am a little concerned that it has been about 4.2 years since the previous high on the S&P.  When we look at the 1966-Bear Market, a drop of about 25% in market prices (a 50% retracement) started at about the same 4.2 year point.  The difference is that in the 1966-Bear, the Dow made it back to the old high, so that comparison may not be warranted here.  (See the Page link at the side of this blog page, titled; “Compare 1966 Bear Market to the Current Bear Market.”  The major concern is oil price.  If the oil price remains at the current high level for too long we will likely see a significant drop in the markets.

Navigate the Stock Market analysis slipped to SELL again...

Quick update today as I head out the door early….

 

No surprise here, the Navigate the Stock Market analysis slipped to SELL again today as the S&P 500 fell 1.6%.  Volatility was up nearly 15%. 

 

I went to a stock discussion site this morning that urged its visitors to buy-buy-buy, because that has been the right move in this bull market.  The folks that took that advice may not feel so good this afternoon.

 

I wouldn’t be surprised to see a couple of quick down days soon.  Today should have the “buy-the-dip” crowd worried that this may be more than just a dip.  That may bring out some sellers.

 

We’ll see.