Insights

A Data Review

Market chop continues, despite recent new highs in the SPX.

The weight of evidence suggests higher stocks this year whether we start from this level, or even from a ten percent correction.

For context, off the 2020 bottom, we saw a Wayne Whaley thrust of up 10% over 5 days.

Previous occurrences saw bull markets that lasted for 5 yrs 2003-2007, 7 yrs, 2009-2015, 3 yrs. 2016-2018

We are just over a year into this one.

 

 

Net new highs are a lagging indicator, but also have history of setting the stage for advances.

Marty Zweig said that without new highs, the tape can’t ignite.

We were waiting for a long time so see this expansion in new highs and have now matched levels seen in 2003.

 

 

Another perspective on new highs is the High Low Percent.

We want the cumulative HLP line to be above the 10 day MA.

We can see that, despite the lag, 3 of the 4 below were either clearly below the 10 DMA or heading there fast.

Lagging, but still a good heads up.

Currently, there is no strain evident.

 

 

Another view of the High Low Percent.

Not cumulative, the histograms show the actual percent in bar form.

We want to see new highs exceed 10% to confirm the trend.

It also did a very good job of showing how the selling power was dropping a week before the 2020 bottom when we wrote our Market Watch “Setting the Table for a New Bull”

Again, currently no evident weakness.

 

 

Tim Hayes from Ned Davis Research looks at Net New Highs relative to the total on a weekly basis.

Above 8.8% confirms the bull.

It provided some decent signals too, aside from two head fakes in 2018 shown by the dashed lines in the chart.

Though we don’t usually add oscillators to other indicators, I found by adding the RSI(14) to Hayes indicator, it gave additional information.

Marginally helpful as it breaks down below 50, it does a very good job of indicating bottom when the RSI of Haye’s indicator drops below 30.

 

 

Here is an alternate view of some PTI components.

The High low Percent lines are superimposed on the S&P500 so you have a different view of the negative cross in 2020.

Below that is the Advance/Decline Line, which did not help in warning about the 2020 top.

However, the Percent of stocks below the 200 day moving average, and the UP Down Volume Percent both were clearly diverging before the 2020 market top.

 

 

Below is an indicator that interests me.

Plotting the Equal Weight SPX relative to the S&P500 (main pane) with the RSI (14) of that relationship, shows that when the SPXEW gets very oversold vs. the SPX

It often markets a significant warning sign.

This is demonstrating that the small players, just have no gas, and are not supporting the market.

The signal in late 2008 looks late, but the first quarter of 2009 saw the SPX drop another 27%. Also, there was the preceding 2007 signal.

2011 looks questionable as the signal came near the bottom of the 20% decline, but then the market recovered strongly after that.

No indicator can be perfect of course, otherwise it would be easy right? However, this measure does a pretty good job of showing when internal support has left the building.

Also, the market generally doesn’t top when the RSI is in the current range above 50.

 

 

 

Market Regime indicator:

Below we see a price only chart of the JNK, a major High Yield Bond ETF.

When plotting it against it’s 200 DMA, we can see that the market environment is constructive when JNK is above it’s 200 DMA, and not when it’s below.

Despite the fact that our equity model grew over 20% in 2015, the indexes were negative and most people would have loved to sit that period out in bonds or something else.

The chart is cut off at 2019 because of some administrative adjustment to the chart as plotted without the distribution.

 

 

Once the adjustment has assimilated and we have a “new” 200 DMA (red line) we can see the current status of this indicator below. Positive.

 

 

Below is a quick look at the percent of stocks above the 200 Day Moving Average (DMA) for the Large cap S&P500, Mid cap 400 and Small cap 600.

All gave clear warning before the 2020 top, and all are clearly positive at this time.

 

 

Macro Charts.com produced an interesting chart today re: Options activity.

“Speculative options activity remains extremely pessimistic. Despite the uptick in the Nasdaq Index, with Put activity still in the stratosphere. It’s a full-tank “Wall of Worry” – still miles away from euphoria. At this pace, buyers will eventually have to chase *much* higher prices.”

The actual Put/Call  ratio of small investors is currently at 38%, so still somewhat passive but a low P/C is normal at start of rally. (P/C was 0.37 Nov 9 after similar rally initiation).

“Other sentiment mixed = even neutral or down this year. Momentum:”

 

 

Important for me is that individual names, which were hit the hardest in March, including a lot of  tech and growth stocks, appear to be holding bases and approaching a positive change in character. This is key.

Below is a quick screenshot of some key indicative names on our watch list.

 

 

Reasons to sell? Not many:

Note how Unemployment rate trend changes/trend breaks lead the markets trend changes at market tops in 2000 & 2007.

Obviously 2020 completely messed up that indicator, which I was waiting for, but economic expansion continues (US) and last week’s employment numbers were very good.

 

 

Note that the S&P Cyclicals Sector ETF ( XLY) is a leading indicator at market tops as it traces out a divergence from the S&P 500.

Unlike the S&P 500, it does not make higher highs and begins to break down before the market as a whole.

 

 

Note that the Industrial Production Index seldom changes trend but when it does, it is significant. It is a coincident indicator & when it does break trend, the markets react accordingly with a significant trend change of its own.

The Dib that we see for Jan is temporary. Through March, ISM Manufacturing numbers came in at a high 64.7%. Industrial production in the US remains strong.

 

 

FACT… Earnings and emotion drive the Stock Market. Earnings reinforce an uptrend in the S&P. Declining earnings seem to decrease the likelihood of developing an uptrend in the S&P Price chart.

Just focus on the bottom pane. S&P500 EPS is now rising again and should see significant growth for the rest of 2021,

 

 

Historically there has been an inverse relationship between volatility and the markets.

$VIX is known as the Fear Index because it is based on put & call options and often referred to as such by the media.

Generally, as the volatility decreases, as it did from 2003-2006, the FEAR in the markets is said to be also decreasing & the markets move up.

Conversely, when the volatility increases at it did in 2002-2003 & 2007-2008, the market becomes susceptible to downturns.

For the first time since March 2020, the VIX has dropped below the important 20 level.

 

 

Historically when the Average True Range of the markets price action begins to expand, it suggests that the consensus of value between buyers and sellers is becoming less clear & therefore tends to precede a market turning point.

I have applied a 185 day moving average to smooth the noise out of the ATR indicator.

Note how expansion of ATR in 2007 preceded the 2007-2008 market collapse.

Basically CALM is good and RANGE EXPANSION is bad.

The ATR is only now starting to reset to historically average levels suggesting a trend towards less volatility, and possibly more growth.

 

 

Compression of these Moving Average Envelopes historically signals a significant trend change.

For more detailed information please go to Daryl Guppy’s Trend Trading website as he is the originator of this visual trend following technique.

At the moment, there is no pressure on the moving averages which remains supportive of stocks.

 

 

 

 

 

 

Share on linkedin
Share on facebook
Share on twitter
Share on print
Share on email

Recent Posts

The opinions contained herein are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Wellington-Altus Private Wealth. Assumptions, opinions and information constitute the author’s judgement as of the date this material and subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. All third party products and services referred to or advertised in this presentation are sold by the company or organization named. While these products or services may serve as valuable aids to the independent investor, WAPW does not specifically endorse any of these products or services. The third party products and services referred to, or advertised in this presentation, are available as a convenience to its customers only, and WAPW is not liable for any claims, losses or damages however arising out of any purchase or use of third party products or services. All insurance products and services are offered by life licensed advisors of Wellington-Altus. Wellington-Altus Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. All trademarks are the property of their respective owners.