I like buying stocks that are going up. If there is anything that the market has taught us over the past hundred years is that market prices trend. The major averages, individual sectors, stocks, commodities, currencies, interest rates, they all trend. Sometimes these are uptrends that last years or even decades, sometimes they’re downtrends, and sometimes there is no trend and it’s just a sideways mess. Remember, recognizing a lack of trend is just as important as the first two. What I like even more is while a stock is going up the sell side likes it less and less. It’s completely counter intuitive to us who specifically look for trends to follow. They don’t think like us as market participants because they have different motivations. [Read more…]
When you talk about the most important sectors in the stock market, financials certainly have to be near the top of the list. Technology is the largest sector in the S&P500 by market capitalization, but bull markets need participation out of Financials. For argument sake, we’ll chalk these up as the two most important sectors in the market together representing over a third of the entire S&P500. Today, we’ll focus on the Financials and why I think they are now breaking out. [Read more…]
One of the most valuable tools we have as technicians is the ability to go through every single stock in the Dow Jones Industrial Average and every sector and sub-sector in the S&P500 so that we can weigh all of the evidence. It might take some time, but I promise you that there is no better way to gauge the strength or weakness in a market, than by going through them all. Since most people don’t have the time to do this work as regularly as I do, my annotations and notes can easily be referenced in the Chartbook.
Today I wanted to share some of my conclusions after running through all of the Dow Components and S&P Sectors on both weekly and daily timeframes. This analysis consists of over 120 charts and all of them have been updated today in the Chartbook. [Read more…]
Fibonacci Analysis is one of the most valuable and easy to use tools that we have as market participants. I’ve studied supply and demand behavior for over a decade, and I find myself using Fibonacci tools every single day. These tools can be applied to all timeframes, not just short-term but longer-term. In fact, contrary to popular belief, technical analysis is more useful and much more reliable the longer your time horizon. Fibonacci is no different. [Read more…]
When you talk about the U.S. Stock Market, a solid argument can be made that Financials are the most important sector. We always look to this space as a leader, as scary as that might sound these days. You can argue that Technology is technically more important because it has a slightly higher correlation with the S&P500 (0.97 vs 0.91) and also a little bit of a larger weighting in the Index (20% vs 16.6%), but for the purposes of this conversation, we’ll agree that Financials and Technology are without a doubt the most important sectors in the market.
Today we’re taking a look at Financials using a top/down approach. If we can get a good idea of where they’re headed, in all likelihood the broad markets will follow. The way I look at it, this sort of analysis can only help form a bigger picture thesis.
We’ll start with a longer-term look at the big boy $XLF which is made up of names like Wells Fargo (8%), Berkshire Hathaway (8%), JP Morgan (8%), Bank of America (5%), Citigroup (5%) etc etc. This is a weekly bar chart showing Financials rallying all the way up to exactly the 61.8% Fibonacci retracement of the entire 2007-2009 crash. Is this where we want to be buying? Or is this a level we want to be fading?
Looking shorter-term, here is a daily line chart showing prices trading below a downward sloping 200 day moving average. Assets in uptrends down trade below downward sloping 200 day moving averages. In addition we have a failed breakout in July that couldn’t hold for more than a couple of weeks. Long time readers know how much I love those. They suck in the last buyers that just through in the towel, whether they were on the sidelines or covering short positions, and then boom, the breakout fails. When you have these combined with a bearish momentum divergence, as is the case here, sharp declines tend to follow:
Notice how on the recent decline momentum hit oversold conditions after failing to hit overbought conditions on the breakout in July. Assets in uptrends don’t fail to get overbought. Assets in uptrends don’t get oversold. Also look at the uptrend line from the lows early last year that also broke. We now have overhead supply from all of that broken support from the past year as well as trendline resistance that broke last month and a downward sloping 200 day moving average over head.
The weight of the evidence here suggests that 1) this is not in an uptrend and 2) we want to take any strength as an opportunity to sell into. How low can we go? I think we can see prices down near $17-18 and it wouldn’t be out of the ordinary. This area was former resistance in 2010-2011 and also represents a cluster of Fibonacci retracements which include the 38.2% retracement of the entire 2009-2015 rally as well as the 61.8% retracement of the 2011-2015 rally:
Now looking at the relative strength, in other words comparing Financials to the overall market, this is in a clear downtrend since midway through 2013. I often hear about Financials are outperforming, but the data suggests otherwise, particularly from an intermediate-term perspective. In fact, Financials attempted to breakout relative to the market this Summer and failed badly. You can see a false breakout and swift reversal above the upper of these two parallel trendlines defining the downtrend channel from the past couple of years. “From failed moves come fast moves in the opposite direction”, and this is precisely what we have here:
So what needs to happen for Financials not to have a correction of this magnitude? To me it’s time. There is a lot of damage that has been done based on the combination of a failed breakout and now prices below overhead supply and a downward sloping 200 day moving average. This isn’t good short-term and suggests fading strength is probably our best bet for now.
I always like to keep an open mind. I take the weight of the evidence and build a thesis. But along the way I constantly make counter-arguments against my conclusion and try and come up scenarios where the market will prove me wrong. For me, the counter argument here is pretty simple. If prices can consolidate sideways from some time, perhaps another month or so, without making new lows and then break out to the upside of that 2 month sideways range, it would allow the downward sloping 200 day moving average to flatten out and prices can continue to absorb that overhead supply. This could set things up for a larger base and ultimate breakout in the first quarter next year. This is certainly a possibility that I am open to. I just think it’s the lower probability outcome based on the weight of the evidence that we have today.
I think financials are heading lower. I want to be selling into any strength.
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Tags: $SPY $XLF $BRKA $WFC $C $BAC $JPM $GS
A big theme that we’ve been focusing on lately is the rotation into Energy stocks and out of some of the early cycle sectors. Today I want to specifically point to last month’s breakout in Energy vs the Financial sector ($XLE vs $XLF). After several years of underperformance, it’s now the Energy names leading the way and making new highs while each of the Financial components break down one by one. They’re dropping like flies these days.
Last week, Bank of America gapped lower on Monday morning after news of some accounting error or something. The media likes to blame that for the sell-off, but technicians know this stock had already been selling off well before that announcement (see here). This week we come into the office and it’s JP Morgan who’s gapping lower to start the week, closing Monday near 6-month lows. Who knows what the excuse is for this one, maybe the weather or Ukraine or something. Regardless of the “reasons”, all of these banks, one by one are getting crushed.
Meanwhile, Energy stocks are hitting 52-week highs and even all-time highs in some cases. It’s this late cycle sector that’s making the big moves lately. Here is the chart showing the XLE breaking out vs XLF last month and following through nicely to start May:
I don’t care how you draw your trendlines; Energy is breaking out above all of them. Notice how this was all happening as momentum had been diverging positively all year long.
Here is the same breakout but from a different perspective. This chart shows both the Energy and Financials relative to the S&P500 since the end of March. One of them has gone straight up and the other straight down:
Energy is by far and away the best sector over the past 5 weeks up almost 6% while financials are by far the worst during the same period. I think based on this breakout in the first chart above, this trend is likely to stay.
There are a few things we can gather from this action. #1 and most obvious is that Energy is clearly where we want to be, especially on a relative basis. Financials on the other hand are a sector we want to be fading on any strength. #2 is that money is flowing heavily into late cycle sectors and out of the early cycle names, which is overall bearish for stocks as an asset class. And finally #3 is the answer to why the S&P500 is holding up better than the other US stock market averages. The market capitalizations for these Energy names are some of the biggest that we have (think Exxon, Chevron, etc). This rotation has helped the averages avoid this whole gravity problem.
The last thing I wanted to mention is the lack of correlation between Crude Oil and Energy stocks. People are obsessed with comparing the two for some reason. The numbers, on the other hand (the truth), don’t add up. The 1-year correlation coefficient between $XLE and Crude Oil is the same as Bluto Blutarsky’s grade point average: Zero Point Zero. If you want to go back a little further, the 5-year correlation coefficient between the two is also zero point zero. So be careful who you listen to. Oil has done literally nothing for years now while Energy Stocks are at all-time highs. One thing has nothing to do with the other.
We can definitely see this energy rally continue, but I just want to reiterate that the real action here is on a relative basis. We’re not just seeing Energy breaking out compared to the S&P500, but most importantly vs the early cycle sectors. There’s a lot of information we can take from this. I hope this adds some value to what you’re already looking at.
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Tags: $XLE $XOM $CVX $SLB $OXY $EOG $COP $XLF $WFC $JPM $BRK.A $BAC $C $AXP $USB $USO $CL_F
Today I want to focus on an interesting chart that we haven’t brought up in a while. This is the relative outperformance we’ve seen from the growth stocks compared with the value names since the Fall of 2008. History might show that the US Stock market bottomed out in March of 2009. And if you only look at the S&P500 or the Dow Jones Industrial Average, this might be true. But let’s not forget that the majority of stocks bottomed out in the Fall of 2008 and the internals and breadth of the market improved well before March as well.
One of the improvements that we saw internally before the indexes themselves bottomed out was clearly seen as money went back into Growth and out of Value months before the market bottomed out. Today, unfortunately, we are actually seeing the complete opposite. We are now witnessing the shift back into Value and out of Growth.
Here is a chart showing the relative performance of the S&P500 Growth Index (red) compared with the S&P500 Value Index (blue). The S&P500 itself is held constant in green:
I hate to say this, but it looks clear to me that the reversion process has begun. We’re seeing money flowing out of the Growth names and into value. Some of the big components that make up the Growth Index ($IVW) include $AAPL $GOOG $MSFT $JNJ $QCOM and $AMZN. As money flows out of these guys on a relative basis, they are buying up the Value Index names ($IVE). A few of the top holdings are $XOM $GE $WFC $JPM $CVX and $BRKB.
Now remember, this rotation we’re seeing is strictly on a relative basis. This is S&P500 Value over S&P500 Growth. They can both go down together, it’s just that one will outperform the other. The way I see it, when money started to flow into growth over value, the internals of the market were improving in the 4th quarter of 2008, warning of an impending bottom. Today we’re seeing that spread peak and start to flip back into Value and out of Growth. Are we getting a similar warning about what the S&P500 will be doing soon?
I think so. We’re seeing similar bearish developments in the Bond Market and some potential topping patterns in the Nasdaq. The rotation into Energy lately is very typical of late cycle strength and also points to an end to this bull market in stocks. I’m a weight-of-the-evidence kind of guy. So I’m not of fan of the US Stock Market Averages up here.
I’d be careful being long only in the stock market. I think at best we should be positioned much more neutral in that particular asset class. I like the reversion trade here. Look at the list of Energy stocks, specifically the big integrated names. These are big components of the Value index and should continue to outperform going forward.
I’ll try my best to follow up on this chart soon.
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Tags: $IVE $IVW $SPY
There seems to be a lot of commotion these days over this head and shoulders top in one of the most important companies in America. JP Morgan has been putting in what most technicians would consider a pretty text book topping pattern since early May. Now, whether or not $JPM breaks the neckline and confirms is still unknown, but the potential is certainly there.
This is a daily bar chart of JP Morgan Chase & Co going back to the Spring. The left shoulder was put in towards the end of May, the head in July and most recently a really weak right shoulder in September. What stands out to me here is how short lived the most recent rally was. Take note of how much lower the September peak is (right shoulder) when compared to the May highs (left shoulder). This is further evidence that the buyers are just tired:
As we can see in this chart, nothing has been confirmed yet. Once the neckline is broken to the downside, we can then look for potential targets. In this case, you’re looking at about a 7 point height from the top of the head down to the neckline. These 7 points should take you down somewhere between 43-44 depending on whether you’re using closing prices or intraday extremes.
There is also a 200 day moving average right here at neckline support. So I’m not sure how easy it will be to break below these key levels. But something else worth noting is the rollover in momentum. With the new highs in $JPM this summer, the relative strength index has been making lower highs – this is seen on multiple timeframes, both daily and weekly charts.
So bottom line, I don’t think $JPM just starts crashing from here. I think it will probably take some time to break this big support. But when we’re looking at a stock that has been underperforming the market for 4 months, momentum has been rolling over on multiple time frames, and a text book topping pattern has been forming, I would be really careful. Also, since the company, and it’s sector, is critical to this market, I think we can look at this one as a bellwether for equities as an asset class.
Tags: $JPM $SPY $XLF