The first four weeks of 2018 have turbocharged the interest in the stock market as the fund flows have broken records. Since the start of the year $58 billion as moved into stock mutual fund and EFTs according to Bank of America Merrill Lynch.
Of course Bank of America commented that this data had generated a sell signal as they are looking for a 6% drop to 2696 in the next two months (the S&P closed Friday at 2872). The CNBC article touts that the Bank of America ‘Bull & Bear” indicator has a “perfect track record”.
The last sell signal was in March 2013 when the S&P 500 had a range of 1485-1570. By May it had reached a high of 1687. There was then a 7.5%, five week correction, before it again turned higher and it never dropped below 1536. It finished the year at 1841 as it gained over 17% from the end of March so I am not sure that qualifies as a good sell signal.
When I see someone talking about a good buy or sell signal I often take a look at that market using the on-balance-volume (OBV) which plays key role in my analysis. Below the S&P 500 I have added the OBV in red with the WMA is green.
The OBV moved above the September 2012 high, line a, in January 2013 (point 1) . This was a bullish sign as the OBV often leads prices. The OBV continued to make new highs (line b) well into 2014 as the uptrend stayed intact.
The US was favored by the new investors in early 2018 but it there were also serious flows into the European and Asian stock markets. In my bullish March 25th 2017 article “Is The Stock Market Now On Thin Ice” I commented that “the global markets are now looking more attractive and a few weeks ago the iShares Core MSCI EAFE (IEFA) was recommended to Viper ETF clients. It has a yield of 2.8% with 2528 holdings and an expense ratio of 0.08%.”
The weekly chart of iShares Core MSCI EAFE (IEFA) shows that the OBV moved through multi-year resistance, line b, in February 2017 and it has been leading prices higher since then. At the end of April IEFA moved above the 2015 high at $58.38 ( line a) which completed a significant bottom. In addition to the strong technical outlook I liked the fact that IEFA had 61.4% in greater Europe and 37.3% in Greater Asia.
Does that mean you should be buying IEFA now? Though it could be 5-10% higher some time in 2018 but what is the risk at current levels? For some I fear that the global stock market euphoria is causing some to alter their investment or trading plan.
With IEFA trading now at $70.80 what kind of risk are you willing to take. A 5% drop could take it down to the $68.50 area but would that frighten you enough to sell? Since IEFA has been trading above its weekly starc+ bands for the past four weeks it is now in a high risk buy area.
Or if you bought it at $70.80 and it dropped to the 20 week EMA at $66.12 the position would be down 6.6% and that might be enough for you to sell just before it turned around. It is my opinion for that a stop would need to be placed at least under the $65 area in order to stay with the major trend. That would be a risk of over 8% which is too high in my opinion.
In last week’s “Focus On The Entry Risk” I discussed my observation from training students around the world that too many do not pay enough attention the risk. This often results in too high an entry level and if the position starts correcting then the fear factor and lack of a disciplined strategy causes them to sell the position. Often times it will be back to where they bought it or higher in just a few weeks.
So what do I look for? I of course favor buying once I see that a long term bottom has been completed but more often I look to buy during a correction or a period of consolidation after the market has rallied. The Vanguard Consumer Staples (VDC) is a good example as it was recommended to Viper ETF investors on January 8th.
The weekly chart shows that it had broken out of its trading range, lines a and b, in early December. The weekly OBV had overcome its resistance (line c) a week earlier. After the rally VDC moved sideways for three weeks but the OBV stayed strong which was a sign that this was just a pause in the uptrend.
A stop was suggested at $139.23 (see chart) which implied a potential risk of 4.5%. Of course now that VDC has moved above $150 the stop has been raised to lower the potential risk.
Given the market’s recent strength it is a bit more difficult right now to find ETFs with attractive risk reward profiles but attractive new stock positions are easier to find. My weekend scans generally turn up a number of new buy candidates. In addition to looking at the weekly and daily technical studies the risk is analyzed closely before any recommendation is made.
One has to be selective during earning’s season as I generally do not hold long positions through the earning’s reports unless I have already sold part of the position. Double digit swings in a stock after its earnings are more common now and stocks have dropped sharply even though they beat their earnings’ estimate,
For example Viper Hot Stock traders had been long Starbucks (SBUX) since the end of November but by January 18th the divergence in the RS analysis (see arrow) had me concerned so I sold half the position. I tried to sell the rest of the position at higher levels but instead was stopped out last Wednesday. If not I would have sold before the close on Thursday. Their earnings triggered a decline of over 6% during Friday’s session.
Clearly the bullishness is extremely high as the market bears I have been complaining about for many years are in hibernation. In fact as noted by CNBC “the difference between bullishness and bearishness among professional investors is at its highest since April 1986, according to the Investors Intelligence”. That peak occurred six months before the October 1987 crash but as I pointed in a previous article (see chart) as the A/D line analysis turned negative in September.
The individual investors were less bullish last week as in the latest AAII survey the bullish % dropped 8.7% to 45.5%. It is well below the early January high of 59.5% even though the S&P 500 has averaged a gain of over 11 points per day for the past eighteen days.
The relentless rally has not stopped fund managers from jumping into the market with both feet as many fear they will be left behind again. One client who just started investing in September (Correction Over — What & Where To Buy?) was recently so excited he wanted to get even more invested.
He was looking for several new buy candidate even though he had almost met his yearly profit gains in just four months. I wanted to know if his risk tolerance had changed in the past five months and whether he was an investor or trader?
Before he bought I suggested he determine the lowest price the stock or ETF hade made in the past three months. By calculating the difference between that price and the current price level one should be better able to assess the risk of buying now.
Let’s look at the PowerShares QQQ Trust (QQQ) that was up 2.75% last week again closed well above its weekly starc+ band as it has for the past four weeks. If you use 3xATR instead of my normal 2xATR the starc+ band for next week is at $172.89. The developer of the starc bands, Manning Stoller, estimated that 3 ATR should contain 98-99% of the price activity.
The November low for the QQQ was $150.46 so as of Friday’s close it is up 13.6% from that low and while a drop back to this low is unlikely a potential loss of 13.6% would seriously impact the performance of most portfolios.
The sharply rising 20day EMA is at $164.58 with the current 38.2% support level at $163.11 which are the current downside targets for a correction. Of course as the QQQ moves higher these support levels will also move even higher.
Both the weekly and daily Nasdaq 100 A/D lines made new highs last week and show no signs of an imminent correction. The weekly OBV broke its downtrend, line a, in October and has been positive ever since. The weekly OBV made another new high last week.
Another measure of the current risk is demonstrated by the fact that the 5 day MA of the % of Nasdaq 100 stocks above their 50 day MA closed the week at 87.10%. In late 2014 it peaked at 87.51 and reached 89.91% in April 2016.
It did hit 90% in January of 2013 and that was a great year for stocks. It should be pointed out that the current high reading does not mean that stocks have to top out soon but it is an indication that one needs to be more selective in their stock purchases. Extremely low readings below 20% often coincide with great buying opportunities as it did in February 2016 (point 1).
Last week both the Dow Industrials and S$P 500 were up over 2% while the small cap Russell 2000 was only up 0.65%. The big loser was the Dow Transports which dropped 1.59%. Health care was the leading sector up 3.8% and the Viper ETF favorite Vanguard Health Care (VHT) was up 3.75%).
The small cap iShares Russell 2000 (IWMK) has been lagging the other major market indices since the A/D lines broke out to the upside on November 21st. It is up 6.73% versus a 13.56% gain in the SPDR Dow Industrials (DIA). It has lagged the SPY and QQQ by 3-4%. It would take a week or more of IWM leading the SPY before the RS analysis could indicate that IWM was a market leader.
The plunging dollar dominated the news and political commentary last week. It has helped crude oil prices push even higher as the weekly analysis continues to look strong (see Tweet). The daily studies will need to be watched this week for signs of a short term top.
The CRB Index closed above strong resistance last week, line a, which is a bullish sign. The next major resistance is in the 235 area, line a. The CRB is still almost 50% below the high made in early 2014.
Las Friday’s GDP was a bit weaker than expected and this week there is manufacturing data on Thursday and the monthly jobs report on Friday. The long term strength of the economic indicators is a sign that it will take more than one or two bad numbers to alter their trends.
For the week ahead I will be monitoring the market internals for any signs that the market is approaching a correction.
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