Tag Archives: stock market rally

Weekly Commodity Strategy Review 11/21/2014

Monday’s corn analysis for TraderPlanet couldn’t have been more timely. Our mechanical swing trading programs picked up the highs being made in the grains as a short selling opportunity that bore fruit right through yesterday’s exit. We discussed the Commitment of Traders report’s importance in determining resistance levels as defined by the commercial traders’ volume and execution prices.

Read, “Corn Rally Stalls Short of $4.”

Continue reading Weekly Commodity Strategy Review 11/21/2014

S&P 500 Rallies .5% Per Day, Sustainable?

The S&P 500 has rallied more than 12% in 24 trading sessions. This isn’t a terribly rare occurrence. Writing up a quick indicator shows me that there have been 18 observances of rallies traveling more than 10% in any rolling 24 day period. Restricting the filter to 12.5% still provides us with 9 observances while bumping it to 15% drops the return to 5 examples. The last 10% rally was in January of 2012 and the last 15% rally was in November of 2011. These last two observances were clearly during the churning process as the market had not made new all-time highs, yet.

The 18 total examples gained an average of .92% in the S&P500 futures one month later. The largest gain was 6% while the largest loss was 10%. Finally, the market ended up higher one month later exactly half of the time.

Continue reading S&P 500 Rallies .5% Per Day, Sustainable?

Who is Pushing the Stock Market?

We turned bearish on the stock market rally near the end of August, as a result, we’ve missed out on the last leg of the rally from 1400 to 1450 in the S&P 500. The August highs presented us with a fundamental picture that was becoming increasingly bearish and combined with the European unrest, stepping aside seemed like the appropriate action. The primary analysis simply stated that the forward returns didn’t justify the added risk necessary to capture them. The fundamental picture hasn’t changed and recent metrics suggest most of the big money is also seeking the safety of the sidelines.

Nothing has changed, fundamentally to cause me to change my mind. In fact, several measures of sentiment are becoming increasingly bearish. First of all, the general public continues to support this rally. The Market Vane bullish consensus, Investment Insiders consensus and Consensus, to which I’m a contributor, are all near or, at their highs for the year. Fortunately, it does appear that they’ve finally taken some money off of the table in the last week. In spite of this, they still hold a larger position now than they did at the beginning of the year.

Ideally, the markets would see a shift in open interest, which measures the total degree of involvement, from owning the stock market to selling stock index futures. The further the market rises, the more selling pressure small traders should put into the S&P 500 futures. This would allow them to lock in some gains while still holding their stock positions. Thus, not incurring any capital gains taxes or, missing any dividend payments. The holding pattern as it currently stands looks like it’s ready to leave the small investors holding the hot potato.

Deeper analysis from Barron’s shows that stock market insiders, those who are buying or, selling the stock of their employer has increased to its most bearish level since February of last year. Barron’s insider ratio now stands at 40 sellers to every buyer. This type of selling comes from individual employees and corporate officers understanding that their respective companies cannot continue their bull runs. Recent filings of insider transactions include sales of Allied Nevada Gold Corp., Tiffany & Co., General Mills, Capital One Financial Corp. and Franklin Resources. This type of broad based selling needs to be noted.

Barry Ritholtz published a chart this week detailing the relationships between the business cycle peak and the market peak. There were fourteen occurrences between 1929 and today. The common words of wisdom have always been, “The markets lead the economy by 6-12 months.” His research shows that the average is actually just less than four months. This means you may not have as much time to manage your finances as you thought. I’ll also throw a chart published by JP Morgan this week on market inflection points into the cycles mix. They looked at the ’97, ’02 and ’09 bottoms. All three bottoms saw the S&P 500 double from its lows followed immediately by a 50% decline. The current S&P 500 rally is 113% off the ’09 lows.

Finally, I’d like to translate the metrics we’ve used into real world trading by discussing the behavior of the commercial traders at this critical juncture. Despite the market’s rally, large traders and commercial traders are both pulling money out of the market. Money flow in the Dow Jones is negative for the month and commercial traders began exiting the market in earnest after the first week of September. In fact, commercial participation in the market is the lowest it’s been since August of 2011.

Their declining participation leads to declining market volume. Declining market volume leads to an end of the move. Home runs are hit by sticking with the trend. Clearly, the trend is up and I turned a home run into a ground rule double. Fortunately, the S&P 500 is setting up a chart pattern that may help us cross home plate. The weekly chart shows consolidation at the top accompanied by declining volume. Technically, that’s a setup for a pull back. The trade is to place a sell stop at last week’s low of 1424. This order becomes a sell order only if the market trades that low. Your profits continue to run unless the market trades down to 1424. This also allows a short entry prior to testing support at 1395.

Take heed of the fundamental and technical levels we are approaching in the S&P 500. Use it as a benchmark to compare your other holdings. Many people have been lulled into a false sense of confidence that the market always comes back. I’d like to remind you that the rallies back from the ’02 and ’09 lows were fueled by more and more economic stimulus. Whether you believe that more is on the way or, not wouldn’t you like to protect yourself from the next 50% decline?

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Bear Market Debt Ceiling Rally Should be Sold

Trading the stock markets has become, as much about guessing what the next news piece will be from the European Central Bank or the White House as it has market knowledge. News driven markets are notoriously tough to trade. This can be seen in lower trading volumes as market participants wait on the sidelines for things to sort themselves out and then rush in all at once when they think the market has given them an answer. Patience is the better part of valor. Successfully trading news event driven markets means having a sound strategy waiting to be put into action once the dust begins to clear. I think this is one of those times and this is the plan I’ll be implementing.

The debt ceiling and the Greek debt problems are hanging like a black cloud over the stock markets. Many believe that a resolution of these issues will lead to a reactionary stock market rally. I hope this is true because I’ll be selling stock index futures based on the assumption that a post debt ceiling resolution rally will be short lived and that the sell side of the market will be the proper side to trade from.

There are a few reasons for this. First of all, I believe that we have been in a secular bear market since the financial meltdown of ’08. Starting with that assumption, we have seen corporate profit margins soar since the market bottomed. However, most of this has been due to cost cutting of both labor and financing. As a result, corporate earnings are at their highest margin since their peak in ’06. This means that it is unrealistic to expect corporate profit margins to continue to rise.

Secondly, if we consider this a bear market rally, which I do, we have measurable statistics that say the stock market has NEVER rallied four straight years within the context of a secular bear market. We are in the third year of a rally, which already puts us into the 17% probability area. Furthermore, the average gain for consecutive up years in a bear market rally is 42%. The Dow is currently trading around 12,500. This is a cumulative gain of 43% from the ’09 close on a year over year basis. This puts us at the tail end of a bear market rally by historical measures.

Thirdly, we face structurally high unemployment here in the U.S. We need to average 115,000 new jobs every month just to maintain 9% unemployment. We averaged 78,000 per month throughout 2010. We are slightly ahead of pace in 2011 averaging 124,000. However, to lower the unemployment rate by 1%, we would need to average 240,000 per month for an entire year. The best decade ever for job growth was the technology driven 90’s when we averaged 181,000 per month for the decade.

Declining tax receipts based on lower corporate profits, lower employment numbers and disgruntled consumer sentiment combined with legislatively burdensome small business policies leaves little room for new hiring and small business growth. The last twelve months has seen the weakest small business growth in more than a decade.

Without another technological revolution or the mass renovation of our countries’ infrastructure, we will continue to fall behind developing nations.

These are the fundamental forces at work behind the constant news reports of who’s to blame for the last failed debt ceiling proposal and why I’ll be looking to sell the market. Therefore, when it is finally resolved, and I believe it will be. I expect the market to rally as a sigh of relief brings fresh money to the market like lambs to the wolf.

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.