Health of the Market
The charts will be updated by
every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or go to
Charlottesville's The Center Investors' Forum.
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S&P 500 hit an all-time high
on Wednesday 2/19/2020. Then a steep 23-day drop of 35% occurred putting the market
into bear territory with a low point on 3/23/2020. It is now down 3.4% from its record high. The
indicators for the equity market show an up
market within a bull cycle in a bull
trend, and in a bull market. (see definitions on Longer
The bull market was signaled by the move of the Nasdaq composite index to an all-time high on Wednesday 6/10/2020.
The S&P 500 index closed up 1.73%% last week. The Nasdaq index
was up 3.69%. The small caps were up 0.88%.
58.8% of S&P
500 stocks were above their 200-day exponential moving averages, down
slightly from 59.8% the week before. 71.8% of these stocks were
above their 50-day EMAs, down from 77.8% the week before. 57.4%
Nasdaq stocks were above their 50-day EMAs, down from 62.2% the
before (see chart). [NC]
okay, okay, we get it. Avoid the beaten-down stocks. But you certainly
wouldn't chase the strong stocks after this huge rally, would you? What
about that retest of March 23rd lows?" We're not retesting
the March 23rd low, it's not happening. Everyone is calling for it and
that makes it much less likely to happen. I've been saying in recent
weeks that you will not see the S&P 500 at 2191 ever, ever again in
your lifetime. To answer your first question, yes chase the leaders. If
you think you'll see them back at March levels, I have a bridge I'll
sell ya. The leaders are leading because they have been able to adjust
to this crisis and still grow their earnings. -- Tom Bowley 5/9/2020
The Leading Economic Index was up 2.0% from May to June. This is encouraging.
The CNN Fear & Greed Index
gives an interesting perspective on the internals of the market. The
trend of the components of this index are important to gauge the trends
of the market.
A Health Buy Alert
on small-cap action occurred on Monday 5/18 -- three days after the Sell Alert. (see chart below). A VIX Buy Alert,
based on the volatility of
large-cap action, occurred on Wednesday 7/1 (see Status page).
percent moves by some primary
funds are shown ranked by their 5-day gain. In addition to the one-year
return, the one-year maximum draw down is included. The Profit Factor
is a risk-adjusted return as defined below.
(Chart from FundBuster.com.)
A measure to
determine if the price is too high relative to the underlying
earnings is the Shiller price to earning ratio. This is the current
price divided by the 10-year average of "real" (inflation-adjusted)
earnings. This ratio corresponds quite well to the peaks of price
as shown by charts on this site.
John Murphy of StockCharts.com asks "Why do
look at charts? - They provide the most up-do-date information on
state of the stock market. They may also be telling us something about
the fundamental reports we won't be getting until early next year.
Charts track forward-looking markets, while fundamental data is
backward looking. It's always safer to look out of the front window of
your car while driving to see where you're going. Not the back window
that shows you where you've already been."
A chart from 1870 that shows the
relationship between the market and its long-term regression line can be seen here. It is way
above the line, which means it may at some time revert back to that
A Bull Cycle began on 6/1/2020. A chart showing the relationship
between the stock and bond markets is on the Market Cycles
page. The stock market is favored over the bond market, although both are doing well. A new bull market is considered to have started (by me) when the Nasdaq Composite index made a new all-time high. This occurred on 6/10/2020. The
charts for the fourth year
of the presidential cycle are shown on the Cycles page. September
is typically a poor month in the fourth year or in general.
The Power Zone,
the favorable time of the year, is over with the Circuit Breaker Sell Signal on 2/28/2020. Another Circuit Breaker Sell signal occurred on Thursday 6/11/2020. The Power Zone typically starts sometime in October
ends sometime in May. See the Market Cycles page for more. The
long-term BullHeal System
went to a buy on
10/23/2019, but the recent market action caused it to go to a sell on 3/6/2020. [NC]
falling dollar has a positive influence on the U.S. market, especially
large cap multinationals as prices for our customers overseas are less
expensive. However, the weaker dollar makes product imports (some in
the supply chains) get more expensive. This has a negative effect on
The dollar ($USD) and the 10-year Treasury rate ($TNX /10) are shown in a 6-year
chart with weekly closing prices. Since
late March 2018, with a few dips, the dollar increased in value
with respect to a basket of other currencies, but now is dropping. The 10-year Treasury rate
rose to a peak on 10/5/2018 and again on 11/8 closing at
Ed Yardeni in the 2/9/19 Barron's
stated that, based on his 40 years of experience, he has never found
that supply-versus-demand analysis helped much in forecasting bond
yields. It's always been about actual inflation, expected
inflation, and how the Fed was likely to respond to both.
Also shown is the CRB Commodities
Index, which is a measure of inflation. This index is an unweighted
geometric average of prices across 17 commodities including energy,
grains, industrials, livestock, precious metals, and agriculturals. A
rising dollar hurts commodity prices.
The price of gold has risen dramatically as shown. The gold and silver miner ETFs (GDX and SIL) have gone up even more.
[NC] The international bond market is provided
by the WSJ. See the Income tab for a chart of U.S.
stock markets in other countries are quite well correlated to
the U.S. market. To participate in these markets, the U.S. dollar
can be hedged out. Click to check out the country hedged ETFs and the un-hedged ETFs. Note that BSE SENSEX is an
India index, CAC 40 is France, FTSE 100 is a UK index, Nikkei 225 is
Japan, Hang Seng is Hong Kong, DAXK is Germany, and Shanghai is, of
Sector investing via
exchange traded funds (ETFs) is popular. The traders rotate
between sectors. To see how some popular sector ETFs are
doing, click here for the Candle Glance of two-month
charts. The charts include the StockCharts
Technical Ranking (SCTR). The sector ETFs used in the Candle Glance
Here is a map of popular ETFs arranged in significant groups. This link gives gain or loss
in a week with a small chart when you hover over the group.
The S&P 500 index is shown with its gray Bollinger
Bands below. The
bands are two standard deviations above & below a 20-day simple
moving average. When the price goes above or
near the edge of the upper Bollinger Band a downswing in price
is likely as the market is overbought. Similarly, when the
price goes below the lower band, the market is oversold, and an
upswing is likely. The 14-day RSI is a measure of the price momentum. Above 50 is positive momentum. A divergence with price (see Nasdaq chart) is an indication that the price trend is likely to change.
correction of the extreme
downswing has occurred with the index just above the second consolidation
area.. The index is way above its 50 and 200-day MAs, which did act as
support in June.
Russell 2000 small-cap index (shown by IWM) hit an all-time high of 170
on 8/31/2018, and it hit that again on 1/17/2020. Then the small cap
dropped much more than the large company stocks, and the
correction to that drop has been more powerful. Now a second
consolidation is occurring with a breakout above its 200-day MA.
technology-heavy Nasdaq composite index made a new all-time high on
Tuesday 7/21. The index is moving back toward the resistance area with a strong rally on Friday.
[NC] Below is the Russell 2000 small-cap
index that tends to lead the overall market both up and down -- as the
small-cap stocks are generally more risky than large cap stocks. This
index is shown with high-low-close bars. It's 50 and 200-day simple
moving averages are included. The 200-day moving average often
acts as support or resistance to price movement as many traders
[NC] The Health Alert is based on the
momentum of the small-cap Russell 2000, the Nasdaq
breadth data, and the Nasdaq 52-week new highs and new lows.
The thresholds are described below. The green buy and
red sell 'alert' poles on the chart show when these
alerts have occurred.
A Health Buy Alert
occurred on Monday 5/18 as all three indicator are above their
thresholds (as shown by the green arrows). If the RSI drops below 49, a Health Sell Alert will occur.
small cap stock ETF is used here as small-caps have tended to
lead the market both down and up.
[NC] The second pane is the Relative Strength Indicator
(RSI) for the Russell 2000 ETF, a measure of momentum
the small-cap market. This is the relative strength of the Russell 2000
it's not relative to any other index. Above 50 shows positive momentum
over the last 21 days. The latest plot can be seen by clicking here. The
green arrows indicate a positive change in momentum as the RSI crosses
above 50; red arrows indicate downward momentum when the RSI
crosses 49. The threshold of 49 is used to give a more definite
indication of the start of a down-swing.
[NC] The third pane
has two plots. The first is the Nasdaq
McClellan Summation Index, $NASI, (red) and it's 5-day exponential
MA (blue). This is a running sum of the difference of two moving
averages of the number of advancing issues minus the
number of declining issues. A 19-day and a 39-day
exponential moving average (EMA) are used. This shows whether a market
move is broad based. Arrows show the change in trend.
second plot in the third pane is
McClellan Oscillator, $NAMO. When it is above zero, the Summation Index
is moving up. When below zero the index is moving down.
Alexander Elder in his book Trading
for a Living says that the 52-week New Highs
minus New Lows Index is "probably the best leading
indicator of the stock market". This display for the Nasdaq market shows the this index
in pink. The 3-day MA of the NH-NL index is shown in blue. A green
arrow is placed if the 3-day MA of the NH-NL index goes positive for
three consecutive days, or a red arrow is placed if the MA goes
negative for three consecutive days. To see a chart of the NH-NL numbers, click here. When a green
buy arrow is put on the price chart, it indicates a Health
'buy alert', if the other indicators concur. The red sell arrows
here are not used in the determination to place a sell pole on
the price chart, due to the lag.
[NC] The Health Alert acts as a
confirmation and does not do well as a stand-alone signal for
buying and selling. After a long trend, it works well to signal the end
of the trend.
[NC] The Federal Reserve controls the Federal Funds
Rate, which is the interest rate at which banks lend reserve balances
to other depository institutions overnight on an uncollateralized
basis. It also tends to effect longer-term rates. This chart gives the recent history of rate changes.
chart below gives an overview of the
situation. The market had done well since the termination of the QE3
Fed bond buying, until the last half of 2015. The 10-year
Treasury rates moved down as the Fed raised the over-night Federal
Funds Rate in December 2015. There have been a total of nine 1/4 point
rate increases, the last one in December of 2018. The Fed cut the rate
at its July 2019 meeting, and more cuts followed that as shown above. A chart of
various Treasury yields
since 1962 are shown on the Income tab.
Fed had been
reducing their inventory of bonds, which is quantitative tightening
(not shown on chart), but terminated this. On October 9, 2019, the
Federal Reserve announced a resumption of quantitative easing (QE). Fed
Chairman Jerome Powell went to great lengths to make sure he
characterized the new operation as something different than QE. Like QE
1, 2, and 3, this new action involves a series of large asset purchases
of Treasury securities conducted by the Fed. The action is designed to
pump liquidity and reserves into the banking system. Since the drop
that started the bear market the Fed has been flooding the market with
money that acts as liquidity.
The source of the
charts is located on the upper right of the chart. This page
is for amusement only, and should not be taken as advice to buy or sell