Technical Nuggets: Buckle Up; this Thing is Just Getting Started

The financial markets like to surprise the majority of its participants, which is why in my last installment of this column two weeks ago I made a strong contrarian case for a possible rally in stocks based on the very negative sentiment in the market after nine straight days of selling. I turned out to be correct, as far as that goes. So now that we are nearly two weeks clear of the election I want to see if stocks have any bounce left in them by examining the overall seasonal tendency for prices during the November-January period, the overall market’s sentiment, and finally, the price charts. But as I point out in my conclusion (spoiler alert), if the election is any guide and the new Trump vibe is now incorporated into the market, anything is possible. 

‘Tis the Season

Let’s look at the overall seasonal behavioral tendencies of the stock market. At some point in the next few days the talk will turn to the “Santa Claus rally” where stocks tend to rise in the month of December, especially toward the end. And yes, there is some historical evidence to back the Santa talk. Traditionally, according to The Stock Trader’s Almanac, the best three consecutive month period of the year for stock prices is November-January. During presidential years, however, November tends to be a laggard, although the pattern seems to return to normal at some point during December and January. Furthermore, there is a traditional tendency for the market to deliver some quiet gains during Thanksgiving week and a stronger tendency for the market to rally in the last five trading days of the year between Christmas and New Year’s Day. Based on this historical perspective, things don’t look too bad.

Checking the Market’s Feelings

Now, let’s look at the market’s sentiment. Prior to the election, the gloom and doom was so extreme that I noted “it would not be surprising that” the big selloff in stocks “could become a historic intermediate term buying opportunity. And although the stock index futures sold off on election night, things reversed dramatically during regular trading hours. And so far, for investors who have been in the right sectors of the market, the last ten days have provided decent returns. But because the rally, as I will show in the chart review below, has not fired on all cylinders – in fact it’s just awful in many ways – it’s a good time to compare the pre-election sentiment climate to the post election situation. Here is what the numbers show:

1) The CBOE Put/Call ratio on Friday, November 18 was 0.94. The average for the ten days of trading after the election was 1.04. The November 4th reading was 1.37 and the reading on 11/7/16, right before the election, was 1.22. The average reading for the ten days prior to the election is 1.10 and the average for the ten days after the election is 1.03. Under normal circumstances any single ratio above 0.9 is considered at least short term bullish. The current readings are nowhere near bearish but certainly have come well off of their peaks. This would suggest that the market still has some upside left.

2) The latest poll from the American Association of Individual Investors shows that 46.7% of investors are bullish and 26.6% are bearish.  This is a reversal from the final survey prior to the election where only 23.6 of the association’s members were bullish while 34.3% were bearish. The number of bulls in the current survey can still climb, but a number above 50% is often predictive of at least a short-term trend reversal. This indicator is closer to predicting a top than a bottom.

3) The CNN Greed and Fear Index is reading 61, considered to be an indication of Greed which often predicts a market top. Prior to the election this index had investors at a near panic levels with a reading of 14 falling from a level of 49 (neutral) a month earlier and 72 (greed) a year earlier. Fear readings are often bullish signals while greed readings often signal a major market top. This indicator says that we are closer to some sort of market top than a market bottom.

4) The CBOE Volatility Index (VIX) closed the week of 11/18/16 at 12.85, considered a neutral reading. On the Friday prior to the election the VIX closed at 22.51, a reading that is considered extreme on the high side. This indicator is neutral. The major market bottom of February 2016 was preceded by two readings above 30. The highest reading ever on VIX was above 80 which coincided with the bottom that marked the current multi-year bull market.   

Charts Show Sloppy Market

In my last column I described the market as being “droopy.” After looking at the most recent batch of data to produce this column, I am thinking that ‘very concerning’ is accurately describes the current market. The post-Trump victory rally was based on an oversold condition in the stock market as the S&P 500 had fallen for nine straight days before rallying on November 7 and continuing over the next nine days. But the rally’s current behavior suggests that it was based purely on technical grounds. And the outlook for the market, based on chart analysis, seems to be tepid at best.

SPX 2016 11 18

Figure 1 – The S&P 500 (SPX)

The S&P 500 (SPX) has not made a new high after the election, and the rally has not been built on a positive volume base. The On Balance Volume Indicator (OBV, top panel), which topped out in August, has bottomed but there has been no upward spike indicating strong interest from a majority of market participants. In fact, volume over the most recent trading week has been falling. This has led to a flattening out of the MACD Histogram (MACD blue bars, middle pattern) which measures price momentum.

Finally, the steep drop in the Standard Deviation indicator (STDDEV, lowermost panel) and the widening Bollinger Bands (green lines above and below the price candles) suggests that the uptrend may head into some sort of consolidation. Note a similar pattern in STDDEV and the Bollinger Bands in late July, when the Brexit rally fizzled.

A Market Close to Needing CPR

This market reminds me of a patient who is getting close to being on life support. The S&P 500 has bounced off of its recent short-term bottom, but the NYSE Advance Decline line (NYAD, upper panel) is still stuck in a downward channel highlighted by two down trend lines. This indicator topped out in mid September and predicted the pre-election swoon in stocks and is diverging from the S & P 500’s price trend. Thus, unless this condition is quickly reversed, the NYSE AD line seems to be predicting a failure of the post-election rally. This indicator has a nearly perfect record of accuracy over the years in predicting market tops.

But that doesn’t mean that there will be a crash or a severe downtrend, at least not all at once and maybe not right away. The Federal Reserve’s interest rate decision on December 14 may be a game changer. And any significant political developments that happen from now until the end of the year could have an effect. Other outside events such as terrorist attacks, some sort of major conflict breaking out, or environmental catastrophe could also be influential. However, if the market becomes a reflection of Trump then anything is possible given his ability to create volatility and defy the odds. The best advice may be to heed the words of Vice President Mike Pence who reportedly told Republican law makers during a post election meeting: “buckle up.”

NYAD 2016 11 18

Figure 2 – The NYSE Advance Decline Line compared to three major indexes

The AD line’s precarious nature is further highlighted by the fact that it is below its 50-day moving average (blue line above line) and well above its 200-day moving average (red line well below line). This tells us two things: The downward pressure is fairly significant because the line is in a falling channel and because it is below its 50 day moving average, and even more daunting is the distance between the AD line and the 200 day moving average which is how far it may fall before this down trend is resolved.

Small Stocks are the Exception

The S&P 500 (SPX) has moved higher after the election and is within reach of a new all-time high. The Nasdaq 100 Index (NDX) is well off of its highs and looks as if it could roll over any minute. That’s because stocks like (AMZN) and Alphabet (GOOGL) that are heavily weighted in the index have taken a beating after the election. The small stocks in the Russell 2000 index (RUT, lower panel) are bucking the trend. This is a big positive because if the small stocks can continue to rally the larger stocks may just move sideways and continue their consolidation without a big decline. 

Tricky Times Lie Ahead

Mr. Trump’s victory may lead to some major changes in the U.S. and the World. But the stock market’s rally in response to his success has been much less convincing than any bull, regardless of party affiliation, could hope for. The overall tepid technical picture suggests that the pos-election rally was just an oversold bounce and that the odds of more selling are above 50%. This could all change rapidly if investors who missed the first two weeks of the rally decide to play catch up. But if there isn’t some sort of rapid increase in interest, we could well test the recent lows fairly rapidly. As a result, the best approach remains to expect the unexpected and to monitor each position in any given portfolio on its own merits.

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David Miller

David Miller

The recent earnings report for CSIQ was $.26 does that change the 4.4 P/E ratio quoted before earnings. Would you use the earnings year to date to get that ratio.

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