The Week Ahead: The Shrinking Wall of Worry

The Week Ahead: The Shrinking Wall of Worry

Many times throughout this bull market I have urged investors to ignore the “Wall of Worry” that many advisors were using to convince investors that the risk in the stock market was too high. At various points during the stock market amazing run since the 2009 lows there have been a wide range of concerns facing investors.

I recall a dinner in 2014 with two other advisers one of whom had made his name from his macro outlook on the markets. Our host asked each of us what we thought about the future of the stock market and his macro view was that he was avoiding stocks because of concerns over China.

For much of the bear market the possible breakup of the Euro zone and a possible Greek default were frequently the focus of the bears. One prominent TV analyst was so confident in 2012 that he discussed a trading strategy to profit from a Eurozone breakup.  On CNBC he focused on a split into the northern and southern Euro countries which he said “has to go this way”.

In my opinion any advisor who expresses certainty in their investment opinion by using terms like always or never should be avoided. Of course this coincides with my reliance on technical over fundamental analysis as in some ways the technical approach is based on the probabilities of success.

Fears of a new recession along with fears of a collapse of the Chinese economy have frequently been on the top of the wall of worry. In the first two months of 2016 there were many warnings about a new recession and a bear market.

In my February 27th 2016 Forbes article The Week Ahead: Should Investors Ignore "The Wall of Worry"? I pointed out that “The economic reports in early 2016 supported a cautious if not a negative outlook on the economy as several often quoted analysts felt that we were already in a recession. The weak data and recessionary comments spurred even more selling in the stock market.

Investors were also turning more negative as “According to Lipper for the week ending February 24th " U.S.-based stock funds posted $2.8 billion in outflows during the week ... this adding an eighth week to the funds' streak of outflows." According to AAII the bullish % the week ending February 11, 2016 was 19.64%.

This historically low reading was a bit better than the 17.9% reading from the previous month which was the lowest since 2005. The February reading coincided with bottoming signs from the daily technical studies.

The S&P 500 A/D line had formed a bullish divergence, line b, at the lows which corresponded to the monthly pivot support. This was confirmed by the move through resistance (line a) as new long positions were recommended to Viper ETF subscribers.

In April of 2017 many analysts were still worried about China and the US economy but I recommended that Investors Should Embrace The Wall Of Worry. The Spyder Trust (SPY) had closed then at $231.96 and with Friday’s close is up 15.3%. My positive outlook was consistent with further improvement in the economic indicators.

In last week’s readings the AAII bullish % hit 50.5% which is the highest reading since the 51.74% on January 15, 2015. As I pointed out to Viper Hot Stock clients these numbers sometimes peak just before a correction but often reach their highest reading well before a top.

On 11/13/2014 the bullish % hit 57.9% as the market moved higher into the end of the year it dropped to 50.9% which was below the early January 2015 reading.

The December 26th 2013 reading of 55.1% came just three weeks before sharp correction of 6%. This was the highest reading for almost a year as in early June the bullish % was only 44.7% and the sentiment continued to move lower as the SPY moved higher.

There was also a reading of 49% on May 23, 2013 as the stock market then began a five week decline.  This was preceded by the January 24th 2013 reading of 52.3% as the bullish % peaked but the market still moved higher for seventeen weeks.  The A/D line had broken out in December of 2012 so I was looking for a double digit yearly gain.

In 2012 the bullish % peaked at 51.6% on February 9th but the SPY continued higher for another nine weeks as it topped out when the % had dropped to 38.2%.  This was also the case on December 28, 2010 as the bullish % was 63.2%. This was the highest reading since January 22, 2004 when it reached 69.5%.

Two weeks later in early 2011 the SPY was higher but the bullish % had fallen to 55.8%. By the time the SPY peaked in early May the bullish % had dropped down to 35.5%. It is important to note that this double digit correction, like the others, were identified in advance by the A/D lines moving into the corrective mode.

In the past month or so there have been very few bearish comments by either the high profile fund managers or bloggers who have been warning about a bear market for many years. In fact many well-known bears have muted their warnings as they have allowed for more positive market outlook based on new data. In my experience this is not a good sign.

It appears that the hopes of many investors are tied to the promised impact of the tax plan, new economic efforts by the Trump administration and/or even more robust earnings for the 4th quarter. There are signs that cash levels are low as Wall Street analysts keep raising their targets for the S&P 500. This was not a concern last summer but is more troubling as we head into 2018.

Though the “wall of worry” is much lower now than it was a year ago I am confident that during the first quarter there will be a resurgence in bearish market commentary. I believe that following the technical studies is the best way to sidestep the next market correction but as these examples illustrate high bullish % readings are not a reason to sell.

Based on both the weekly and daily analysis of the S&P 500 A/D lines there are no early signs yet of a correction. For the last two weeks the SPY has closed above its weekly starc+ band and this week it stands at $269.05.

Based on data through last week the tentative 1st quarter pivot is at $262.03 with initial quarterly resistance at $273.96.  The rising 20 week EMA is at $255.21. The weekly A/D line has made a new high each of the past six weeks. The weekly on-balance-volume (OBV) has been even stronger as it has moved to impressive new highs.

The daily chart of SPY shows that a doji was formed on Monday which with Tuesday’s close triggered a daily doji sell signal.  There is next support in the $265 area with the rising 20 day EMA at $264.41.  The spike low at $259.55 on December 1st represents key daily support. The daily A/D line made a new high Monday and is well above its clearly rising WMA. The daily A/D line broke through resistance ( line d)  on November 24th which was bullish.

The tech stocks were hit by some profit taking last week but the chart of the PowerShares QQQ Trust (QQQ) shows a fairly normal pullback to the late November highs, line b.  The 20 day EMA is at $155.98 with more important support at $152. The tentative 1st quarter pivot for the QQQ is at $153.69.

The upper boundary of the trading channel (line a) and the daily starc+ band are in the $160.42 area. The monthly pivot resistance is at $160.12 with the weekly starc+ band at $161.63. The daily Nasdaq 100 A/D line has pulled back from the new high but is still well above the rising WMA. The weekly A/D line still looks very strong.

The small cap iShares Russell 2000 is still lagging the other major market tracking ETFs. It needs a strong close above $155 to complete the daily trading range and project a move to the 4160 area. The daily Russell 2000 A/D line shows a similar formation.

The A/D line that tracks the SPDR Dow Jones Industrial Average (DIA) also made a new high on Monday and is holding above its WMA. The weekly A/D line made a new high a week ago.

Still as I have commented in the past two months the Dow Industrials is the most overextended of the major averages. With Friday’s close at 24,754 it is well above both the 2x and 2.5x starc+ bands for December (see chart). It may close the month above the January starc+ bands  and could be the most vulnerable once the market corrects.

The yield on the 10 year T-Note moved sharply higher last week and barely surpassed the late October high.  This could be important for the market in the first quarter as it may precipitate some movement out of the bond market.

This is the last Week Ahead column for 2017 but I will return in 2018 and I can be followed on Twitter for comments during the holidays. Remember if you have some nice profits from 2017 it’s a good idea to take at least some partial profits.  It is much easier to sell when the market is moving higher than when it is declining.

If you are interested in my brand of technical analysis I hope you will consider the Viper ETF or Viper Hot Stocks reports.  Specific recommendations are sent out twice each week and each report is only $34.95 per month.

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