The stock market has its best start to a New Year since 2006. It was the best weekly gain since the week ending December 9, 2016 when the Spyder Trust (SPY) rose 3.1%. Last week it was up 2.4% while the Nasdaq Composite was up 3.4% and the Dow Industrials rose 2.33%.
The highlighted section isolates the December 2016 rally which was also accompanied by a surge in the S&P 500 A/D line. The rally peaked a few days later in 2016 as the market corrected about 2% into the end of the month.
The small cap Russell 2000 is still lagging as it was only up 1.6% but the weekly NYSE A/D numbers were the best is some time as there were 2016 stocks advancing and just 1025 declining. All of the weekly A/D lines except the Russell 2000 made new highs last week.
Just before the holiday my column “The Week Ahead: The Shrinking Wall of Worry” pointed out the surge in the bullish % from the AAII survey as it had reached 50.5%. It has gone even higher in the past two weeks with readings of 52.65% and then last week I Tweeted that the latest bullish reading was 59.75%.
In the past fifteen years it has been even higher as in 2010 it was 63.3% while in 2004 the peak reading was 69.5% . This followed up the reading of 71.4% in 2003. The bearish % last week was 15.6% but it hit 10.1% and 8.6% respectively in 2004 and 2003.
The survey readings still do not seem as over the top as some of the analyst comments in the financial media. Seems like many are competing for the “most bullish” title though some had recently been warning about the too expensive market. Even some of the perpetual bears threw in the towel last week. Jeremy Grantham, who has expressed his concerns over the market for several years, commented last week that markets were in “a bubble” but that the rally could still continue for some time.“ He is known as a value investor but surprisingly commented recently on the positive readings from the A/D line.
Some are even making the argument that things are different now because of the tax plan. Even though it will clearly have an impact on many companies it does not make any guarantee that their share price will rise a certain amount as the stock market is not always in sync with the fundamentals.
One now very bullish analyst warned last May that we could see a 15-20% drop in the stock market based on the Dow Theory. In my experience calling for such a correction based on one method is a poor approach. He also now thinks one could buy Bank of America (BAC) and put it away for five years. That is certainly not a technical approach and I heard several value investors say the same thing in early 2008.
In this week’s Barron’s Jason Goepfert, president of Sundial Capital Research, pointed out that “ the S&P 500 has now gone 385 trading days without falling 5% or more from its 52-week high”. He also noted that there have been only three times, 1965, 1994 and 1996 when the S&P has gone 370 days without such a drop.
I was curious to see that happened in this three years. The S&P 500 chart of 1966 shows that it peaked at 94.72 in early February and on February 25th the NYSE A/D line dropped below its WMA, line 1, after forming a negative divergence at the highs. The decline lasted until October as the S&P dropped close to 24%.
The decline from the highs in 1992 was not nearly as severe but in early 1994 the S&P 500 spiked to a high at 482.85 and ten weeks later hit a low of 435.86. Coincidentally the NYSE A/D line again dropped below its WMA on February 25th (line 2). From high to low the S&P lost 9.7%.
So how does one combine the bullish technical indicators with the overpowering bullish sentiment and not risk too much?
I think what some individual and professional investors don’t realize is that the stock market can sometimes rise on bad news and fall when the news is very good. The current high level of bullishness is likely to keep the market moving higher in early 2018 but at some point the buyers will all be invested.
There are no signs of a correction currently as the daily A/D lines would typically take several weeks before they could form divergences consistent with a 3-5% correction. The Spyder Trust (SPY) moved above its daily starc+ band late last week so a pause is possible over the near term.
The daily S&P 500 A/D line made significant new high last week as it is well above its support (line a) and its WMA. A decisive drop now below the December low is needed to signal that the market trend has weakened. The A/D line has long term support at line b.
A full list of the new quarterly pivots (QPivot) will be sent out this weekend to all Viper ETF subscribers. They are used as important trend indicators since as long as the ETF does not have a weekly close below its quarterly pivot the trend stays positive.
In last week’s article “Taking The Emotion Out Of Investing” I discussed how the PowerShares QQQ Trust (QQQ) has been above its quarterly pivot since November 11, 2016. The new quarterly pivot for QQQ is at $153.15 and is at $262.25 for SPY.
The QPivots can also act as a good level of support when a market is correcting. The Vanguard Energy ETF (VDE) was recommended to Viper ETF investors on October 12th (see chart) as I was looking for a pullback with the 4th quarter at $90.60. Keeping the risk under 5% can avoid seriously damaging your portfolio.
On Friday October 27th VDE had a low of $89.57 but closed at $91.15 so there was no change in the trend. The weekly chart shows that is staged a major breakout three weeks ago as the resistance at line a, was overcome.
The NYSE Composite closed well above its weekly starc+ band with 1st quarter pivot resistance at 13,333. The QPivot is at 12, 626 with the 20 week EMA at 12,434.
The weekly NYSE A/D line has turned up more sharply and is now further above its WMA. Before a more serious weekly divergence could be formed the weekly A/D line would probably have to drop below the November lows. If this occurred than new price highs could cause the formation of negative divergences. This process generally takes several months as the drop in August 2007 set the stage for the failing rally in October.
The economic data remains strong and my favorite composite indicator, the Leading Economic Index (LEI) shows no signs of topping out. It historically has peaked out well before the start of a recession as shown in this chart from dhsort.com.
The market is expecting earnings to get even better now so the upcoming earnings season will be the next test. It is possible that the rally could last until May without a correction but I have been telling clients not be complacent and continue to monitor your portfolio.
An increase in inflation could certainly dampen the stock market rally and though there are no warnings yet from economic data it is clear that commodity prices have been rising. The chart of the Cash CRB shows that the downtrend from the 2011 high, line a, is now being tested. A strong close above the 2016 high, line b, would complete the bottom formation.
The risk on any new ETF or stock purchases should be carefully examined. There are many more stocks that look favorable in terms of risk and new longs are continuously being recommended to Viper Hot Stock clients.
Viper ETF investors are long technology, energy, health care, materials, industrials and financials. The most recent additions were made in some of the global and country ETFs like iShares MSCI Canada (EWC). They are covered regularly and last week’s action has presented some new opportunities.
If you are interested in following someone who has stayed bullish since the spring of 2009 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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