Tag: S&P 500

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Dow and S&P 500 bullish, but Nasdaq cautious

Dow Jones Industrial Average broke resistance at its previous high of 16600, signaling a primary advance to 17500*. Recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure. Reversal below 16500 is unlikely, but would warn of a bull trap.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 is testing resistance at its previous high of 1900. Breakout would confirm an advance to 1950*. The 21-day Twiggs Money Flow trough above zero indicates long-term buying pressure. Reversal below 1850 is unlikely, but would warn of a bull trap (and correction to test primary support at 1750).

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) at 12 indicates low risk typical of a bull market.

VIX Index

The Nasdaq 100 broke 3600, suggesting another advance, but only breakout above 3750 would confirm. Bearish divergence on 13-week Twiggs Money Flow and a cross below zero warns of selling pressure. Reversal below 3400 is unlikely, but would warn of a down-swing to the primary trendline.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

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Is the market overpriced? Episode III

US markets look pricey when we compare market capitalization to GDP. Why is the market ignoring this?

The S&P 500 is trading on a reasonable forward Price-Earnings Ratio (PE) of 15.17, but this forecasts a 23% jump in earnings over the next 12 months. Current as reported PE of 18.64 also assumes strong earnings growth.

S&P 500

Margins are growing:
S&P 500

But sales growth close to zero warns that earnings may falter:
S&P 500

Book value is surprisingly growing faster than sales, suggesting that corporations are hoarding assets rather than distributing profits to shareholders:
S&P 500

Causing asset turnover (sales/book value) to fall:
S&P 500

Which is why the valuation metric of Price to Book Value remains within reasonable bounds:
S&P 500

If management are unable to improve asset turnover — through improved sales or new investment — stockholders will start clamoring for higher distributions. Which may be one reason for high stock prices.

The second reason is that, with interest rates, tax rates and real wages at historic lows, corporations are likely to make fat profits over the next few years and stocks remain reasonably buoyant. But at least one of these factors can be expected to change in the next decade: recovery of the housing market would cause the Fed to lift interest rates; a revision of the tax code by a President who can work with both sides of the House; or a dramatic fall in exchange rates placing upward pressure on (real) wages as manufacturers regain export markets. The impact of any change will depend on how well the economy has recovered.

I will be watching sales growth, profit margins and asset turnover with interest over the next few quarters to see how this plays out.

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Selling pressure rises

S&P 500 displays little direction while bearish divergence on 13-week Twiggs Money Flow continues to signal selling pressure. Reversal below 1850 would warn of a correction to test primary support at 1750. Breakout above 1900, however would signal an advance to 1950.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

The primary trend remains upward and CBOE Volatility Index (VIX) below 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 is struggling to break 3600 and reversal below 3400 would warn of a down-swing to the primary trendline. 13-Week Twiggs Money Flow below zero warns of selling pressure, but breakthrough above 3600 would suggest another advance.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The Russell 2000 is testing primary support at 11.00. Follow-through below 10.80 would confirm. Small caps outstripped large caps over the last 18 months, but now appear to be faltering. A 13-week Twiggs Momentum cross below zero would also warn of small cap reversal to a down-trend. A small cap down-trend would not necessarily mean large caps will follow: large caps significantly outperformed small caps for more than 3 years leading up to the 2000 Dotcom crash.

Russell 2000

Canada’s TSX 60 is retracing, but unlikely to break support at 820 and the rising trendline. Rising 13-week Twiggs Money Flow, with troughs above zero, indicates long-term buying pressure. Respect of support would suggest an advance to the 2008 high of 900.

TSX 60

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S&P 500 follows through

S&P 500 follow-through above short-term resistance at 1880 strengthens the case for an advance to 1950. Breakout above 1900 would confirm. A 13-week Twiggs Money Flow above zero would signal long-term buying pressure. Reversal below 1850 is unlikely, but would warn of a test of primary support at 1750.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) below 14 indicates low risk typical of a bull market.

VIX Index

Nasdaq 100 breakout above 3600 would suggest a fresh advance. Follow-through above 3750 would confirm, offering a target of 4000*. Recovery of 13-week Twiggs Money Flow above zero would also be a bullish sign, while respect of resistance at 3600 would be bearish.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The primary trend is upward and none of our market filters indicate elevated risk.

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Medium-term selling pressure but long term bullish

Summary:

  • Medium-term selling pressure is strong, warning of a secondary correction
  • But the primary trend is up and VIX remains low
  • Long-term prospects remain bullish

The S&P 500 continues to encounter resistance at 1880 and bearish divergence on 13-week Twiggs Money warns of medium-term selling pressure. Breakout above 1900 would signal a primary advance, but a secondary correction is more likely. The primary trend, however, remains upward.

S&P 500

VIX below 15 continues to indicate low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 displays stronger selling pressure on 13-week Twiggs Money Flow. Respect of resistance at 3600/3650 would be cause for concern, breach of support at 3400 completing a head and shoulders reversal with a target of 3100* at the primary trendline. Recovery above 3750 is unlikely at present, but would offer a target of 4000.

ASX 200

* Target calculation: 3400 + ( 3700 – 3400 ) = 3100

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S&P 500 and Nasdaq selling pressure

The S&P 500 is testing resistance at 1880 and follow-through above 1900 would signal another primary advance. Bearish divergence on 13-week Twiggs Money, however, continues to warn of selling pressure and another secondary correction remains likely. But the primary trend is up.

S&P 500

VIX below 14 suggests low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 is testing resistance at 3600/3650. Breakout would suggest another advance, while respect would be cause for concern. Reversal below 3400 would complete a head and shoulders reversal with a target of 3100* at the primary trendline. 13-Week Twiggs Money Flow below zero indicates strong selling pressure.

ASX 200

* Target calculation: 3400 + ( 3700 – 3400 ) = 3100

I would suggest that even a Nasdaq fall to 3100 would not disrupt the bull market. Penetration of the primary trendline at 3100, however, would be cause for concern.

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S&P 500 recovery

The S&P 500 recovered above 1850, suggesting an advance to 1950. Breakout above 1900 would confirm. Recovery of 21-day Twiggs Money Flow above its descending trendline indicates that selling pressure is easing. Reversal below 1840 is less likely, but would warn of a test of primary support at 1750.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) retreated to 14, indicating low risk typical of a bull market.

VIX Index

The Nasdaq 100 found strong support at 3400 on the weekly chart. Recovery above 3600 would suggest an advance. Breakout above 3700 would confirm, offering a target of 4000*. Recovery of 13-week Twiggs Money Flow above zero would be a bullish sign. Respect of resistance at 3600 would be bearish.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The primary trend continues upward and none of our market filters indicate elevated risk.

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Markets warn of correction

Before we examine the US and Australian markets, please take a look at the two charts below and tell me whether the trend is up or down. If you have a five-year old or six-year old handy, try asking them.

S&P 500

And the second one:

ASX 200

The trend on both is clear. If we invert the charts, you will recognize the S&P 500:

S&P 500

The S&P 500 breach of support at 1840 warns of a secondary correction and a sharp fall on 13-week Twiggs Money suggests selling pressure similar to the correction in late 2012. But the primary trend is up.

Likewise the ASX 200. The index retreated from 5500 and follow-through below 5380 would warn of a secondary correction. But 13-week Twiggs Money Flow oscillating above zero indicates buying pressure and the primary trend remains upward.

ASX 200

Momentum stocks are experiencing a sell-off, but our strategy is to hold existing positions. Attempting to time entries and exits in secondary corrections erodes performance. None of our market filters indicate elevated risk and we are confident that this is a bull market.

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Are we in a bull market?

A simple reflection of the weekly trend on major markets using Ichimoku Cloud. Candles above the cloud indicate an up-trend, below the cloud indicates a down-trend, while in the cloud reflects uncertainty. From West to East:
S&P 500
S&P 500
Footsie
FTSE 100
DAX
DAX
ASX 200
ASX 200
Nikkei 225 is testing primary support at 14000 and looks a bit weaker
Nikkei 225
While China is holding above primary support at 1950/2000 but shows no clear trend
Shanghai Composite

Overall, there is a strong case for a bull market.

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Market sell-off despite improved job numbers

The market experienced a strong sell-off Friday, despite signs that the Winter slowdown in job creation is over. Nelson Schwartz at the New York Times writes:

The latest numbers are likely to be revised significantly as more information flows into the Bureau of Labor Statistics. Even so, they suggest that the economy is not achieving what economists call escape velocity, something that policy makers have long sought. Neither is it falling into the rut some pessimists feared was developing early in 2014.

The S&P 500 retreated below its latest support level of 1880. Follow-through below 1840 would signal a correction, while respect of support would suggest an advance to 1950*. Bearish divergence on 21-day Twiggs Money Flow continues to warn of medium-term selling pressure and reversal below zero would strengthen the signal. An early correction (without a decent advance above the January high) would be a bearish sign, indicating that long-term sellers outnumber buyers.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) at 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 indicates long-term selling pressure, with a sharp fall following bearish divergence on 13-week Twiggs Money Flow. Breach of the (secondary) rising trendline and support at 3550 warns of a correction to primary support at 3400. Recovery above 3650 is unlikely, but would suggest a bear trap.

Nasdaq 100

* Target calculation: 3750 + ( 3750 – 3550 ) = 3950

The primary trend remains upward and none of our market filters indicate signs of stress.

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