Greenback on the Ropes

I haven't commented on the US Dollar in outright index terms in quite sometime. So lets take a quick viewpoint of the greenback. In short, things at the moment are precarious. If the trendline drawn on the chart, using the end of Octobers data is broken and closed below by the end of November, I would argue that the dollar is heading for another challenge with the previous lows. Obviously if this is the case, then we are about to see the lousy Euro revers course and scream higher, stocks shoot past the 1200 level resistance and gold probably trade towards the 1800 range. In other words, it would be a market moving event.

In terms of the two other metrics shown on the chart, the ultimate oscillator at the moment is holding the midline or basically the line that I use to help in defining an uptrend or downtrend. Below the 50 and the bears lead while above is the bulls time to shine. A break of the trendline to the downside would tip this model over - a bounce would obviously do the opposite. In terms of the B%, it is residing in a downtrend but also holding the 25% level. A support though the price action needs to turn strong to the upside to reverse the downward trend in the indicator. Taken together, these both reside at support along with the trendline.

But while the chart is very compelling, I have to ask how much of a bounce would follow if it successfully holds. In short, if the Fed does not come through with the $1 trillion of bond purchases as the market would prefer (essentially monetizing the entire deficit in 2011), then the market is likely to take the dollar higher and attempt to take out the 80 level. Each bounce off this trendline has lead also to a challenge of the previous high. That would imply then a 10%+ move in the dollar and probably a nasty correction in risk assets.

via StockCharts.com
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• Dollar Slumps on Speculation Fed Easing Will Debase Greenback (businessweek.com)
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• CANADA FX DEBT-C$ firms as greenback falls, bonds mixed (reuters.com)
• CANADA FX DEBT-C$ rallies 1 cent as greenback tumbles (reuters.com)
• Canadian dollar rises, greenback resumes fall (ctv.ca)

Renko has Resistance

I noted last week that the S&P was at a key junction on the chart. Momentum had slowed and the price action needed to accelerate to the upside to reverse this downward trend. So far, the markets have responded "so so" since the note. Now the renko chart, is showing a momentum slowdown as well as resistance in the current range. A breakout above 1200 will nullify this I believe but if I were a bear looking to short the market, I might find suport in this chart, regardless of how the elections end up on Tuesday or what the Fed says on Wednesday.

Overall the trend of the equity markets remains higher and teh bulls have the ball but of late the warnings signs have been popping up all over the place. Also the fact that October basically did not see a correction of any sort worries me a bit about how November plays out. However, in terms of seasonality, December looks like we will be strong so we'll see how this plays out.

Related articles

• Fibonacci Chart Says S&P 500 May Reach 1,350: Technical Analysis (businessweek.com)
• A Chart Update on the Dow Jones and Transports Near Fresh New 2010 High (afraidtotrade.com)
• September Momentum Starts to Build (thestreet.com)
• Sorry, Gold Isn't Verging On A Massive Rally (businessinsider.com)

Stocks vs Bonds...go with Stocks

I have not posted this chart to the site before so lets review it before giving its current perspective. Basically it is a ratio of an 80% long stocks model to a 80% bonds model. When it is rising stocks are favored over bonds and vice versa. As you can see from the chart, it turned down in the spring of 2007 arguing that there was trouble to the bullish stance on stocks. Sure enough, things unraveled in the summer. On the other side of the spectrum, the model had a bullish reversal to the upside in Feb of 2009.

In looking at the current view of the chart, things are sort of rolling over following the crash in early May. However, as things are drawn, you can there is a double bottom which argues for a move to the top of the range. If it is moving to the top of the range and stocks are bullish, then bonds will suffer as a result. Thus this chart supports my bullish stance on stocks and bearish one on rates.

In looking at the components, momentum A and momentum B both argue that bonds are in favor. The oscillator A, used both as a trend indicator as well countertrend model, has been bullish since late 2009. So of formatting of the chart is bullish with a double bottom off the trading range and the oscillator model is bullish. Thus basically the model is neutral. However, given the current formation of the model, I expect it to trade toward the previous highs.

Related articles

• To find opportunity, go against the grain (theglobeandmail.com)
• 9 Rallying Stocks With Bullish Options Sentiment (fool.com)

Rates are Going Up

Over the past month, ever since the CRB broke out, I have made the argument that inflation is alive and kicking and rates would suffer as a result. Well, the 10 year note chart here shows that the buying frenzy could be over which should open the door for a move in the rates towards the 3.25% level at the least. From this perspective, never mind the viewpoint that rates are heavily overvalued versus stocks or the fact that the Fed's current policy is way too easy (arguing for a return to the mean), the 10 year note yield broke through the bollinger band while oversold as shown. As you can see from the breaks of bollinger bands in the past, each time a return to the 20 month moving average has become the target. Since I believe inflation is a problem, I don't believe this will contain the movement and ultimately 4 to 5% will be the target.

If stock earnings continue to climb along with a rise in inflation pressures, then rates could be moving beyond this range towards the 6% range. I remain bearish on bonds with the 2 year currently overvalued by roughly 150 basis points relative to fair value. Just as a side note, when TIPS are auctioned at negative rates, one has to believe there is a frenzy in the sector.

Related articles

• "For First Time In History, Inflation Bonds Are Sold With Negative Rate Of Return" and related posts (patdollard.com)
• Here's How Rich People Benefit From Both Inflation AND Deflation (businessinsider.com)
• Treasury prices drop after negative yield auction (money.cnn.com)

For the VIX, "I Fallen and I can't get up!"

I evaluate the VIX index in a variety of ways. I recently reported on my NDX 100 versus VIX model that has been very reliable over the years and it showed that the NDX continues outperform the VIX - a key variable for a bull market. Another model I use is one that measures the VIX using the 13 week MA along with a range level setup every 5 points - in other words a break through 25 to the downside is a bullish move for stocks and vice versa. For the most part since the 2009 lows, the 13 week MA has been in a falling trend with the exception of the spring of this year that featured the high volatility event of the decade thus far - the flash crash! Once things in the marketplace calmed down this summer, the index resumed its move lower and is now closing in on support on average around the 20 level.

This is where the rubber meets the road so to speak. A break on average through the 20 level could send stocks much higher than the 1300 level limit that I think is possible for the year. During the 2000-2002 period, the average never broke through the 20 level for the most part with fireworks showing up each time. As we approach the end of October, a month historically known for fireworks, perhaps things are now setting up for that break lower. A break lower could create a more methodical move higher for stocks than the one we saw from September onward - or participants are pricing such a fall in volatility in based on the constant buying in the markets? Tough call. All I can say at this point, when combined with my NDX/VIX Model, volatility is trending lower.

In terms of positioning, I unloaded some VXX last week on the dive lower and sold the rest today on the rally. I continue to hold some VIX futures positions but I have shifted my hedges to shorts in the indexes outright.

Related articles

• Trading the VIX (investingwithoptions.com)
• Market Volatility: The New Normal Or The Calm Before The Storm? (businessinsider.com)
• Is the Market Ready to Roll Over? These Signs Say Yes (dailyfinance.com)
• Reading the VIX: What the 'Fear Index' Is Saying Now (dailyfinance.com)

Gold Update

In September, I noted that gold would look very bullish on a break through 1270 looking for a move to 1400 to follow. Well, gold came very close over the past few weeks but has since failed falling back below the important 1350 level (of the 1350 to 1400 range). In looking at a PF model update, there could be some reason for concern with gold but that concern is limited at the moment for one major reason - the contract, using GLD, is sitting on support of a range projection using the GLD. On the chart you can see two blue lines and then two green lines. The blue lines define the previous trading range. A breakout from that range occurred taking the metal past its first projection and towards its second. As it failed to get to the top of the range (around 136), it has since fallen back towards the first projection point at our around 130. As long as this level holds, then a test of the next projection is in the cards as far as I am concerned.

In regards to the rest of the model, lets review the other parts. First, in terms of the momentum A end of the model, it has hit overbought for the first time since November of last year. Following that time period, the metal backtracked to the 20 month MA. If the same repeats this time around, then the supports at 130 will give out and a test of the breakout point, around 122 will come into play. In terms of momentum B, it is not in the same position as a year ago - this implies then that the contract is not fully overbought and thus there is more upside momentum left to push this metal higher. The oscillator below momentum B though is tilting to a breakdown which supports momentum A overbought stance. And the PF model, showcased at the bottom is extended and some selling would do it good to bring it back into line.

So this is how I am playing things. I took a long in gold today in the futures around 1334. This happens to go against my long dollar viewpoint at the moment but I am holding the trade to see if it can trade up to 1350. Any trouble in that area and I will jettison the position. A break by the GLD through 129 and I will probably join the short side of the trade looking for 122. A break above 1350 solidly in futures and I will be looking for the 1400 target to come into play.

Related articles

• Gold fails at $1350 again (forexlive.com)
• Metals Stocks: Gold futures fall as much as $7 on Globex (marketwatch.com)
• PRECIOUS-Factors to watch on October 25 (reuters.com)
• September Momentum Starts to Build (thestreet.com)

China on the Run

I last reported on the Shanghai comp in early August at the time arguing that the index was still consolidating and had not broke out yet. Well, 2 months later, if the current levels are held through month end, we finally have that breakout. And with the breakout, 2 major factors now come into play. First, if you look at the yield of the long bond below, it has been correlated to the moves in this index over the past few years - thus higher index equals higher yields. Second factor is also important...a rising shanghai comp should push the US markets higher as well and argue that global growth is once again accelerating. Accelerating global growth takes QE2 off the table in my opinion.

In terms of the technical support, that has not really stepped up yet. The two momentum models at the moment are showing some promise but momentum B is still really range bound. Momentum A bounced from major support around the 40% level and now looks like it is setting up a date with the 60% level. The next major hurdle comes with the price action itself - a move past 3400 argues for a sprint higher. Based on a simple range projection of the technical formation shown on the chart, 4400 would be my target.

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TSE 60 On the Move

One index that I watch from time to time is the TSE 60 Index up in Canada. It has been a solid performer in 2010 and broke out in September on the back of the global rally in stock shares. This rally was supported by the move in crude oil though over the past month, with crude moving sideways, this index has continued to climb higher.

In terms of the momentum ends of this model, accompanying the breakout in the candles above, both momentum indicators also also making cycle higher highs. In terms of momentum A (top model), the move past the 60% level argues that the more impulsive end of the move is about to arrive. With the momentum B model below regaining momentum, overall momentum is picking up steam.

In terms of a target, I am looking for the index to trade now towards the 13,200 to 13,700 level next.

Related articles

• Canadian markets to get their own "fear index" (reuters.com)

Housing Shaky

It has been a month since my last report on the housing market. Yesterday morning I gave an update of the housing end of things via my economic model - one that was not too strong a support, via the numbers, for the housing market with production for new homes remaining weak and the supporting factors to buy a home, earnings and job growth, remaining stalled out and losing momentum for the most part. Falling momentum does not remove the problem that plagues the real estate market as a whole; too much supply and not enough demand. The Fed can go ahead and print all day but if nobody wants the money, then that money is useless.

As the chart here shows, housing, from the stock market perspective is equally weak. If you notice the housing indexes bounced pretty good from the first QE in the spring of 2009 (along with the rest of the markets). Since the bounce though and then the crash following the markets disintegration last spring, housing has not recovered. In terms of the economic model, I mentioned that the flash crash and the high volatility in the marketplace was not helpful to the economy as a whole and from looking at the charts here, the evidence is very clear. The shock that the flash crash brought us has also tipped downward the relative performance of the HGX (Philly Housing Index) versus the S&P. The last time this occurred so violently (and not shown on the chart) was in 2006 right before the housing market and the economy went into a dive. However, back in 2006, the lower chart was also falling lower in a very steep fashion. This time around, the HGX is basically stalled out. This counters the first chart in essentially saying that the rest of the economy is growing but the housing market is not.

So the story for housing basically remains this; stability with some warning signs. If the HGX starts to break to new lows, then the Fed will probably have no choice but to dome some more things to prop up housing. Conversely, perhaps the housing market needs to just crash and then we can work off the excess supply that has overwhelmed demand for 4 years now....and counting.

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• Goldilocks in the Housing Market (fool.com)
• What next for house prices? (telegraph.co.uk)

Euro at the Junction

Last week I received a note from my good friend "the broker" concerning his team buying the Euro on a positive turn from the 13750 level on the dive last week. When I viewed the note I was skeptical because I believe the Euro belongs near parity - not near the 1.50 level! However, beliefs are normally a recipe for destruction so I had to take a look at the "picture" of the Euro through the lends of my PF model. Before proceeding, lets just cut to the chase; like the S&P note from earlier today, the Euro is at a very key junction on the chart. The candles, using the FXE (as I get volume figures on this end) is on the verge of either breaking lower or breaking out - how is that for sitting on the fence!

In terms of the components of the model, lets review. First, if you look at the candle chart, when a given security is overbought via the oscillator on the bottom (currently turning lower from the 80 level as you can see), I look for other variables to confirm. First, if you look at the Pforce model, there has been an enormous volume spike over the past 2 months leading to an almost opposite move of the downward move in the summer. The major assertion to take from this is simple - The Euro has climbed hard to the upside but it took 6mm shares to get it to 1.40 but took 7.5mm shares to fall from the highs in the 1.50s to the lows in 1.20s. In other words, relatively speaking the volume is telling us that there is a majority that are willing to drop this bullish viewpoint and go back to the short side given the amount of volume just to get back to these current levels. Thus volume is telling us that the market is susceptible.

In addition to this, if you look at the momentum models, they are both residing at resistance. Momentum A is important because as part of the "trender model" that I showed earlier with the S&P 500 because it argues if a market is nearing resistance from a trend perspective or has more room to run. Based on the current view above, the Euro is right at resistance and a failure here argues that it moves to the bottom of the range of this trender model. Momentum B as you can see also supports the resistance story and a failure here would support heavy selling in the Euro. So on balance, momentum while rising on the A side is at resistance and B is stalled as well at resistance.

Taking the momentum, volume and oscillators together, I would argue that the Euro is stuck at major resitance and due for at least a correction to lower levels. I think dollar bearishness is way too high anyhow and a bounce back by the greendback is looking more likely to this writer than a breakout to the upside in the Euro. Thus I am bearish on the Euro in the short term.

Related articles

• Euro Gain Versus Yen May Stall on Ichimoku: Technical Analysis (businessweek.com)
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• Euro Gain Versus Yen May Stall on Fibonacci: Technical Analysis (businessweek.com)
• FOREX-Dollar snaps five-week losing streak (reuters.com)
• Dollar set to snap 5-week losing run as shorts trimmed (reuters.com)
• Euro May Extend Gain to April High of $1.35: Technical Analysis (businessweek.com)

S&P at Key Junction

As I have shown this chart many times lately for the S&P, I argued and fought for the bulls as the markets found support around the 1000 level a few months ago (trend remained higher) and has since rallied roughly 18%. As you can see from the chart, we are not at a key junction near the previous candle closing levels from the spring. While the wicks are also very visible, you will notice that the markets did not close over the 1200 level on a monthly basis but in fact around the 1185 level (we closed at 1183 on Friday). With the end of October fast approaching, a close over the 1200 level would argue a breakout is now in the cards and the next level of resistance is roughly in the 1300 range (which also happens to be my fair value for the S&P).

So is this move going to happen? Well, that is a very good question young man. The momentum at the moment, via my "market momentum model" has actually rolled over for the first time since early September. Generally speaking that means we are in a correction zone and given the close proximity to the end of October, this would put the overall breakout posture in trouble. At the same time, since this momentum turned down last week, the S&P has only risen higher - basically moving against the rubber band. The only way for this condition to unwind is two ways. First, the market sells off violently as the rubber band shoots backward or the market stalls out and does nothing (very similar to 2006). Given the very close movement between this market and that market in 2006, I think it will be the latter and from November onward, the markets will be very strong through year end.

Supporting this posture is the two components of the trender model. Range momentum is close to breaking out and I think will breakout if the markets successfully close above 1190. A a breakout in the range momentum adds sustainability and support to the move. On the trend momentum side, that has already broken out to new highs. When combining the two, the bulls have the ball and all the control. IN other words, the bears fighting this trend might be on the wrong side of the ledger, even though the economic variables are weak. And that is where the "compelling" bearish story resides; in variables that are not necessarily correlated to PE expansion or dividend yield growth - both key drivers of stocks at the moment.

Overall, my stock model remains bullish - both on a fundamental basis and from a chart perspective. While I have argued for a correction over the past week (fighting it unfortunately in the S&P), these markets are moving higher over the longer term. The continued unwind of the "bubble in bearishness" continues.

Running Through the Numbers

Each weekend I will take some time to review my very long term models. They are nothing revolutionary but do give me an idea of what is occurring in the "long term" for the markets as well as the economy. I learned a long time ago that in determining my economic viewpoint, I should stick to a limited amount of stats because the more stats I viewed, the more confused I became! So lets call this the first installment of the "economic view of the financial markets." 

Before delving into the numbers, one phrase can describe things at the moment - slowing down. If one looks across the variables which include some manufacturing surveys, some employment indicators and some retail metrics, the slowdown is in full force. Meanwhile, on the monetary side, it appears that a pickup is occurring with lending and credit both expanding. So to use an analogy, the runner is still moving along in the race but his pace is slowing. At the same time, his metabolism and his heart rate are pumping strong and improving. Does this imply then that the foundation for the economy is now building because it appears that the body is now finding support? Could be. Lets look at the stats.

• On the earnings side of the ledger, the current earnings yield of the S&P 500 is around 6.5% using trailing variables. This level is the highest that I can find since late 1994 right before the markets exploded to the upside and ended in a ball of flames in 2000. If you add in dividends, it is around 8.5%...a level last season in you guessed it, 1994. So on balance, the markets have not been this cheap in over 16 years. Perhaps, as I tweeted this past week, PE expansion is now in the cards with predictable falls in both of these yield levels to follow. In looking at corporate profit levels, while rise, those seem to be leveling a bit which argues that while PE expansion can occur, it might be limited to 13x (earnings plus dividends) or somewhere in the 1300 range. Overall I would argue though given the upward trend in corporate profits plus the relatively healthy levels for the yields, the stock market is in good shape and a positive leading indicator for the economy.
• In terms of the economic indicators I follow on the services and manufacturing side, the stock market crash in May through June definitely disrupted things in the economy as the surveys I follow all turned down following the may problems from a momentum standpoint. As of September, they have not changed this downward momentum. Now if the stock markets were to continue higher, perhaps sentiment would change. However, these shocks that we have had, in May as well as the fall of 2008, are not helping the economy. Also not helping things is the stagnation on the small business side - without small business expanding, innovation will not expand and this will be a pressure on profit margins and essentially growth for the economy. Overall, I would then argue that these measures are a negative for economic growth at the moment.
• On the employment side, this picture is ugly with some signs of improvement - offset by some signs of deterioration. First in terms of improvement, the labor force is again expanding which is bullish and the participation rate has leveled off around 64.7% and has basically remained here for 4 months. This argues that the conditions for employment are not worsening but since they are not rising meaningfully, this also argues that employment growth is stuck in a rut. Services employment is improving on balance while manufacturing employment is weakening though still above the growing line. Average hourly earnings are rising but the momentum has not been this low since 2004 and before that 1987. The median duration of employment bounced back upward this past month which is troublesome and generally leads to a shrinking of the workforce as people give up looking for jobs. On balance, these measures overall are weak and I would argue a negative growth factor working against the economy.
• On the retail spending side, the net consumption levels are rising indicating an improvement in momentum on that end. Retail sales ex auto is also continuing to rise which is a positive as well. If you taken into account the moribund wage growth as well as anemic employment growth, they are offsetting factors. In terms of the numbers on the market side, net revenue figures for the retail companies that I follow are in a rising trend with the discounters actually slowing (arguing people are moving back up the Leger). This is bullish and argues that confidence is returning to the consumer.  So outside of the anemic employment end of things, the consumer is spending again and this is a positive support for the economy
• The last variable, but not least, is my housing models and they remain weak with one major caveat. If housing demand rises, there is a very good possibility that there will not be enough housing supply out there in a few years based on the fact that permits remain weak and new home starts are just dire (with NAHB confidence lousy as well). When trying to find a happy medium for prices, one must balance supply and demand; if the future supply is not rising, then we only need to work off the current supply. The opposite side of this is simple though - is there enough demand to work through the current inventory problems at current price levels? I don't believe so and this as a result is a negative headwind for the economy.

So on balance, we are looking at a weakening industrial and services sector, an improving market perspective given high yields on earnings and dividends, a flat employment picture, retail spending that is rising and housing that is stalled out to lower. Overall, I would argue that the picture is weak and while I have argued against the merits of QE2 which is the rage these days, I would be very careful to argue the economy is growing at any sustainable rate at the moment, given the variables. 

Taking Some Time

This site is taking a few weeks off. Will be back in late October.

Risk Aversion Wavers

Yesterday on the close, as I added shorts in the S&P 500 futures, my risk averse measure fell into negative territory - more specifically, risk taking on balance broke out yesterday. Shorting on the turn in one of these indicators is not always a bad thing as the market will normally correct a bit before resuming the drive higher. As I write this am though, the market is ignoring the correction mindset as the futures rise almost 10 points. So with the risk taking measure on balance now rising, what does this mean?

Well, first and foremost, the market very well drive well beyond the highs from this spring. Using a simple range projection, 1250 would not be unreasonable. The support for such will be the declining interest in risk averse assets though on balance, I think gold continues to move upward. As I mentioned yesterday, I am firmly in the higher rate camp supported by a turn in the money momentum, the breakout in the CRB and the breakdown in the long bond. With the break from 134 yesterday, 132 does not look unreasonable. Further, as I showed yesterday, the bond did not make a lower low in yields which argues now we should see a higher high.

So in summary, I am probably on the wrong side of the trade in the long term. A correction though would not surprise. Also and this is a big also, if 1150 is taken out in cash, the 1250 level comes off the table. That would imply a false breakout and a return to the bottom would not be unreasonable. Based on the available evidence and all the bullish charts I have shown in the past few months, I put a low probability on such a breakdown occurring.

A turn up in INTC?

After earnings today, I mentioned on the feed that I thought Intels earnings were "suspect" because while they reported very sizable numbers year over year, they missed the guidence (originally that they lowered) back in August. Earnings are but one of the variables though - trends are the other and Intel actually looks interesting on the long side, at least according to my "trender" model.

First in looking at the price action, I put on the chart a trading range of the past 6 years where the stock has gyrated about. The stock took a dive in August following the guidance but inline with the market it has bounced higher as the value players jump in on the picture pushing the stock up. If you notice, the turn occurred right on the trendline, actually drawn from the 2004 lows. That period of time saw the stock move higher through 2004 peaking out at the top of the trading range near $26 - a period that has contained every rally since. So on balance, this argues that the stock has put in a turn higher which is bullish.

On the trender side of things, both elements of the model were ready to roll over following the dive in August only to be saved. The bounced in model A towards the 60% level argues that resistance is directly ahead. The model b level is right on the cusp of moving lower. In other words, for Intel to hit the top of the range, it must start moving higher at a quicker rate than the past. If not, model b is going to roll over and this very well could lead to a turn in the stock through the supports of August.

Going back to valuation, it is trading at 10.5x earnings....not really that expensive. But that does not always figure into the trading.

Related articles

• Intel Beats The Street! (INTC) (businessinsider.com)
• Intel Gives All-Clear Sign Ahead, Of A Sort (INTC, MU, AMD, SMH) (247wallst.com)
• Intel (INTC): Screaming to Be Bought? (bloggingstocks.com)
• After Hours: Intel, CSX to release results in late session (marketwatch.com)
• Earnings Guidance & Outlook To Dominate Intel Earnings (INTC, AMD, SMH) (247wallst.com)

Crude Reality Down?

I tweeted earlier that I had taken a short in crude. Part of the reason is the short term chart was rolling over but this chart also shows that the contract is having issues with a trading range. A move under $82 could indicate that we are moving down to the bottom of the range through November. That would not necessarily be a good thing for stocks.

via StockCharts.com
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CRB Breakout Continues

In mid September, I posted this chart when it was in its infancy - in short, the CRB was breaking out from the 270s. Today it resides around the 300 level which is a strong move. Interestingly, when I posted that note, my argument was that inflation was now going to be a problem and the bond market had to take notice. If you look at the new addition to this chart, the long bond yield, it is not making new lows like the rest of the UST curve - it is paused and if it continues to follow the CRB, the next move higher for the bond should be developing now (yield wise). I stand behind my bearish call on bonds.

The downside of course to a skyrocketing CRB and bond yield is probably some downward pressure on stocks. At the same time, given the abnormally low PE of the S&P on a forward basis, perhaps this move upward in bonds is now priced in. 

Related articles

• More Fed help for economy now just a matter of time (latimesblogs.latimes.com)
• How to Prepare for the Bond Market Bust (money.usnews.com)
• Front-running the Fed (ftalphaville.ft.com)

Volatility Update - Nasdaq Still Leads

One of my favorite indicators is the ratio of the Nasdaq 100 to the VIX. This measure has been very powerful over the years in saying that trouble was coming for a bull market was forming. As you can see from the chart, this manipulated ratio (using moving averages) rolled over in early 2007 following the dive by the Shanghai comp. The S&P would bounce but it indicated trouble was coming. The ratio also turned up in July of 2009 confirming the other indicators that showed a bull market was in full force. Recently the indicator dipped but has since turned following the most recent move higher in stocks. A higher high was registered on the indicator which argues that volatility is either stuck in the mud to lower and stocks are either stuck in the mud to higher. IN any event, it argues that the bull market is still in force.

Related articles

• How Volatility Can Be Your Friend (fool.com)
• How to Time the Stock Market (online.wsj.com)
• Fed to run the show despite big earnings (reuters.com)
• If the Dollar Stops Falling, the Stock Rally Could Be Over (dailyfinance.com)

S&P Renko Points Up

In my last report using renko charts back in September, the S&P 500 was falling back towards moving average support which was around 1071. The market went through the key level but bounced and the renko chart shows here, the trend for the S&P 500 remains higher. A break past 1200 and we will have a renko breakout (along with other breakouts on other charts). The one negative I have is the second chart below the renko here - it is a measure of momentum and it appears to be unwinding lower. A market losing momentum near a previous high is not bullish but can be wildly bearish as shown from 2007. I will be watching this very closely over the next month.

Inflating Assets

When a fed head goes on record and says that the current Fed balance sheet is inflating household assets to levels higher than they normally should reside, that ladies and gentleman is newsworthy. Here is the link.

Commodities and Currencies

Every once in a while I come across a chart that is important in terms of multiple markets. This chart is two different views of the relationship between copper and the Aussie dollar. On the top, the price movements between copper and the Aussie dollar are shown - one could say they are closely correlated. Then if you look at the second chart, a ratio of the copper contract to the Aussie dollar, you see the relative performance between the two contracts. Compared to the previous highs on both contracts from a few years ago, the Aussie dollar is actually stronger than the copper contract relatively speaking. If the dollar had not been so weak over the past few months, I wonder if this ratio would be spiking as I type?

Since it is not spiking, does this imply that the metals strength is not driven by demand but by dollar weakness? Further, that would imply a lack of fundamental support for the move and could lead to some intense selling of the metals and everything else negatively correlated to the dollar if the dollar finds any form of support. And if the Fed does not confirm the QE2 that the market wants, I believe the dollar will find some sort of support.

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S&P Trends Firm

No change to the "Trender" model which argues that the bull market is in force. The Range momentum model is featuring a higher higher and higher low relative to the previous peak. The trend momemtum model is breaking out to a higher high which argues that the broad markets should breakout to new recovery highs sooner than later. A move over the zero boundary would then shift the focus to when is the trend overbought. However, we are not there yet with the primary indicator in green still negative. Overall, model is bullish.

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Momentum Crossroads for the S&P

Back in September, when I last reported on the "P Momentum" model, things were starting to show a significant turn in momentum - to the point that all four time frames of the model would be above their respective moving average indicating that the next leg of the bull market was underway. Since that that time, the S&P has surged from 1109 to a close over the 1160 today. With this move, the momentum has all shifted into positive territory and each of the momentum components are over their key moving averages. Only the long term ROC still has a negative momentum moving average. This shift to an above zero bound behavior for all four components is typical of a bull market - the last two from the late 1980s to 2000 and 2003 thru 2007 featured such.

With the move over zero bound though, now the discussion moves from how far we are from oversold to how far we have to go to we are overbought. Further, there are two different types of momentum moves we see during bulls - one that features trade between the 5-35% momentum range and the excessive ones that are above this range. As this market climbs, all the components are in the normal range. Based on the movement of the past 20 days, if it were to continue this momentum, we will fast approach the excessive range.

However, we are not at that juncture at this point and I argue that the S&P has attained a normal bull market status - for the first time since 2007.

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