“All headlines do is satisfy our need for coherence: a large event is supposed to have consequences, and consequences need causes to explain them. We have limited information about what happened on a day, and [we are] adept at finding a coherent causal story [to satisfy our needs].” -Daniel Kahneman, “Thinking, Fast and Slow”
The third quarter of 2012 ended in unimpressive fashion on Friday, but it is safe to say that the last three months’ aggregate performance took a lot of people by surprise. The quarterly gain was a respectable +5.8%, which was the 8th best return dating back to 2007. This is very good, but not really eye-popping compared to a few others. (The second and third quarters of 2009, for instance, each notched 15% returns.)
So, why has this been one of the most hated rallies in recent memory, especially of late? There are countless reasons to cite – stretched indicators, bullish sentiment, “how far we have come already,” the European mess, the political uncertainty, the fickle economy, an oversold VIX, doubt in the EURO, a non-confirming Transportation Average and strong opposition to QE3 (both the use of it and its potential implications) to name some.
Many market participants have looked at the price action over the last few months and just can’t comprehend how it could be sustained with so much of the above reasons out there. As Dr. Kahneman brings to light, when something really big (good or bad) happens, we all search for headlines to explain it. QE3 can be partially blamed… both the anticipation of, and then the reaction to, it.
But what about the early part of the summer? July had its fair share of fireworks, both up and down. While we didn’t get a trustworthy breakout until August, the quarter’s initial month was important in its ability to weather the erratic earnings season. While the market took its fair share of beatings then, in aggregate, it was able to absorb them very well, as it continuously made higher lows and averted closing below its 50-Day MA at least five separate days.
And this set it up for the August breakout. That breakout, of course, pushed the SPX to, and through, 1400 for the first time since May. Then, on 8/21, it made a new 2012 high. The second half of August was about as boring and quiet a month in recent memory, but the dullness only got the market primed for September’s breakout move.
What could disrupt this run? A marked change of behavior, and despite some cracks to end the month and quarter, it hasn’t fully happened just yet. For comparison’s sake, looking back to earlier this year, we recall that Q1 logged a substantial 12% gain, the third best over the last five years. A new high was immediately logged on April 2nd as the second quarter commenced. But with it, some noticeable divergences emerged, as the RUT, COMP and NDX all failed to confirm this high. Soon thereafter, the market began to bleed, which wasn’t fully bandaged until the June 4th pivot.
Will the same fate be in the cards for the fourth quarter? Are we on our last legs? We’ll have to see. As of now, the market continues its attempt to hold in place in a very challenging environment. Using price action as the final arbiter worked well in Q3, and if nothing else, we’ll continue to look toward it as a guide more than anything else.
Not bad, huh? I would bet that a select few are fortunate enough to boast a performance that high, especially in a time span so short. However, from that 1266 SPX print on June 4th, this is exactly the index’s return.
The issue is that up until now, it had been very difficult to trust the zig-zagging price action. Many trend followers, myself included, were whipsawed in June and July, since, even though the index broke through resistance with each successive rally, the index was rudely sold into each time. And those single day sell offs were harsh, weren’t they? With the general news stream being sub-par since 2008 (arguably), each decline brought with it enough reasons to think that breaking support was next, and new lows were to be hit soon thereafter.
Regardless, seeing the violent turns play out in real time seemingly made the most recent push to, and through, 1400 so difficult to trust…until last Thursday’s extension. It was the first “rally and hold” type scenario since the first few days of the advance in early June. But even then, the intra-day action was outsized (on both sides of the tape) and, thus, a bit too tumultuous to hang one’s hat on.
And this takes us to the current conundrum. The price action over the last few weeks has been solid, has it not? Breaking 1400. Holding 1400 on unexciting volume (bullish) on its way to forming a bullish flag. And then extending from 1400 on increased volume and with a still extended stochastic.
So, does this please the crowd that was looking for more “certainty” before jumping in? For those of us that look to pure action for this, then the answer is yes.
Others, however, will be even more apprehensive up here, citing the close proximity to resistance, being stretched from every time frame you can imagine, a bleak economy and continued nervousness over Europe. These all exist, but the major indices have done a fine job rising despite them.
Even some technicians aren’t biting (see second quote)…
That is what makes a market, of course, but through it all, prices have held. When/if this changes, then all the secondary divergences, indicators, sentiment readings and gut feelings will be right. Until that time, respecting price action seems to be a simple, yet worthy enough, way of analyzing this market.
…is Japanese for continuous improvement. Sometimes these steps are tiny, but if done constantly and with determination, they can amount to ultimate success. Sound familiar? It pretty much defines the market action over the last two weeks, as each non-eventful day did its job in getting the market ready for an eventual break higher. Many people cited the historical precedent of seeing the collection of narrow finishes over the last six days. They were rare to say the least. And while it is always neat and tidy to see market action quantified with actual statistics, it seemed more important to actually witness the flag develop the way it did.
We were all painfully aware that the rallies since June were all harshly sold into. And while these sell offs ultimately fell short of disaster, they left a mark, both on the indices’ prices and on the collective psychology of market participants.
So, maybe the August rally came at a perfect time to play out as it has so far – occurring at the tail end of a temperamental earnings season, where some of those bombs no doubt tried the patience of otherwise happy holders. It came in August, too, a month that clearly has had a challenging record for participation levels.
Thus, when both Bernanke and Draghi refused to expand upon any QE rumors as the month began (8/1 and 8/2, respectively), maybe traders had been teased enough and couldn’t fully trust the Friday, August 3rd rally and the five days of advancement that followed it..
The market typically takes the path that emits the most pain to the most people. Sideways, then up, seemed to satisfy this sacred cliche this time around. And this is exactly what we we witnessed for nearly 3 1/2 months from mid-December through the end of March, which came after a volatile bottoming formation in the prior two months.
So, what can we expect now? Thursday was impressive, but we have yet to break the big one, meaning push above 1422. We can be sure that there will be a good amount of traders looking to unload some shares up around there. But some short-covering may also be triggered. Thus, whether the overbought condition finally encourages some profit taking or not, the price action should continue to be respected; it has been amenable since August, and it must prove itself again now with the fresh pattern break.
The SPX lost ground for the second consecutive day on Tuesday, the first successive string of declines since we saw four in a row from July 30th to August 2nd. Be definition, yesterday’s session, was, in fact, a distribution day, as volume ticked up slightly from the day before. But the 0.1% loss didn’t exactly make the nightly news headlines. In fact, the DJIA, DJ Transportation and OEX indices all scratched out marginal gains. So, all in all, we can file it under “consolidation,” staying with the theme of late.
There a number of examples that show how market’s fresh breakout feels and looks different than what we saw from June through early August, and here’s another aspect to consider.
Those sharp summer dips had the following characteristics:
June 20-25: Down 3/4 days; -4% peak to trough; First two days of decline = -2.8%
July 5th-12th: Six straight losses; -3.6% peak to trough; First two days of decline = -1.5%
July 20th-25h: Four straight losses; -3.7% peak to trough; First two days of decline = -2.2%
July 30th-Aug 2nd: Four straight losses; -2.7% peak to trough; First two days of decline = -0.9%
Currently: 2 straight losses totaling -0.14%
So, while we are still very stretched from an indicator perspective, if the market had abided by this same summer script, it, 1. would have already materially pulled back. 2. By the second day (now), about half of the decline would have already been completed.
Who knows how this will play out day by day, but right now flag patterns still abound. The market has been able to take a punch for nearly two weeks now, doing it above 1400 nearly the entire time.
Yesterday, the bears had their chances, and they actually took advantage of an intra-day Head & Shoulders pattern. The problem, for them, at least, was that this formation was a small one, thus, hitting the target near 1401 did little to alter the technical landscape.
But we must be mindful of the environment regardless, as there are plenty of dark clouds around, which continue to cause some traders to remain on the sidelines up here: Daily stochastics are near 95, the VIX is close to multi-year lows, the Euro is struggling near its 50-Day MA and the 10-Year Yield is now in close proximity to 1.80 resistance (to name a few). These, clearly, will be obvious reasons to have sold if the big decline actually happens. It hasn’t yet, as the most recent pop has been digested constructively, much to the dismay of disbelievers. This is good, but the sideways movement should probably be taken advantage sooner rather than later. Otherwise, these divergences may actually matter.
Volume was at laughable levels again yesterday, the fourth straight day of declining participation. But at least the sell off can’t be classified as a distribution day (a decline on higher volume).
Whether your seat resides on the buy or sell side, you are probably a bit weary hearing about how anemic the volume levels have become, seemingly getting worse every week. However, from a trader/investor point of view, this has hardly mattered since the bull market commenced in March, 2009. Mike Santoli’s piece from this past weekend’s Barron’s (which has been making its rounds around the web) made this point quite clearly. He cited a collection of empirical evidence showing how the VAST majority of daily advances since the 2008-09 trading frenzy have come on below average volume. And since the 2009 low, the SPX is +111%.
And truth be told, and I am about to use a very overused adage, it is a market of stocks, not a stock market. In other words, if you are on the prowl for breakout plays or blow off moves, or any other sort of emotionally driven event, then volume had better be present. Other than that, waiting for volume to appear in aggregate day in and day out to confirm the general stock market’s uptrend has been a very frustration proposition.
At the beginning of last week, it seemed the best case scenario would be seeing some constructive, low-volatility consolidation action. As the SPX tacked on a quick 10 points over the next two days, it didn’t seem like we’d have a chance at seeing that elusive bullish flag develop. But the last four sessions have shaped into a formation that indeed appears like one. Throw in lower volume (a key characteristic for bull flags), and you can see how this could conceivably work higher despite the STILL stretched indicators. The price action remains strong, which has thus far trumped calls for a pullback.
We know that August options will expire this week, but is the same fate in store for the equity market? The “normal” technical measurements would have suggested a pull back as early as last week; This clearly didn’t pan out, thus, just because the SPX notched its sixth straight advance on Friday doesn’t guarantee we’ll indeed get a large mean-reversion trade now either.
Last week proved successful in various ways. Each session provided a gain, including last Monday, which was the first time the market advanced on the week’s first day since June 18th. Prior to that, there were only two other Monday advances going back to the beginning of May.
It was also the fifth straight weekly advance and eighth gain in the last ten weeks. The first quarter saw two separate five week runs, with only a single weekly loss wedged in at the beginning of February to keep us all honest.
Also, as has been well publicized, the 50-Day MA had finally turned higher over the last few weeks, which had been a difficult phenomenon to capture since the April highs. Given the extension since then, the MA hasn’t been much of a focus, and rightly so.
The 20-Day MA, too, started to curl up after a bout of steep downtrending from April through early June. Given the shorter-term nature of it, though, we began to see its trend change way before the 50-Day MA did, specifically in mid-June. With the harsh back and forth movement that followed, though, not much was made of this, especially since the decline in June and July took the index right below the line multiple times.
The August 2nd low (and ultimately, the end of the latest pullback), was the first in the series of declines to not puncture the 20-Day line on a closing basis. And the market hasn’t experienced a down session since. So, while we are overdue for some selling, seeing how the SPX reacts to the 20-Day MA could prove important.
Make it five straight gains for the SPX, with the net advance over the last two days now totalling…wait for it… +1.45 SPX points. And if you were lucky enough to sit through the action, it has felt exactly this exciting. Overall volume dipped for the second straight day with the directionless tape, as the 5.47 Billion shares checked in about 16% below the 50-Day MA.
The pattern this week has been tight to say the least, with lower highs and higher lows continuing through yesterday. Through it all, the index has been able to hang on to 1400. But it hasn’t exactly done so with a lot of conviction.
The question is, “does this matter?” As noted a few times this week, we don’t believe so, simply because the market was/is in need of a pause. And, for the most part, it has done this the last few days. It would have been “cleaner” had we witnessed a more a classic flag pattern, with lower highs and lower lows, which would have done a better job of neutralizing some short-term indicators. Again, longer-term, that is bullish; seeing the SPX do well in a stretched indicator environment always is. It just makes it difficult to chase it here.
And let’s not forget where this puts the SPX on the daily chart…pinned at the upper trendline. We have, thus, yet to undergo the same type of pullback that previous visits to this line have produced. One reason for this, at least technically, is that the most recent decline was able to stall mid-range, as opposed to falling all the way to the lower part of the trading channel. This signified a slight change of character, which, in turn, enhanced this most recent push. So, a potential pullback still seems likely, but having it hold near 1380sh (if/when) would be beneficial for its longer term prospects.
The SPX advanced for the fourth straight day on Wednesday… barely. This last four day run came near the beginning of this rally, from June 14th – 19th. Similar to that time, day one of this advance (August 3rd) took out resistance, with the next few days following through despite overbought stochastic readings. While the June edition was corrected rather aggressively, that pullback held at key support, and, thus, began the volatile three steps forward, two steps back advance we have witnessed since.
The daily pattern that the SPX logged yesterday can officially be labeled an “inside day,” as its intra-day price range was completely within the action of the prior session’s. Typically, this signifies indecision, and, it is often thought that when happening after an uptrend, it can signify that the move is getting tired.
I would agree with this, especially with the index a bit stretched and near supply from the April highs. But it is not clear that the market is thoroughly exhausted and ready for a meaty decline. Truthfully, this is the first time since that June period that the SPX has shown enough guts to continue its advance while in overbought territory. After all, the hallmark of any sustained advance is seeing price action digest gains constructively, which, in turn, helps prepare the market for the next up-leg. And this allows its indicators to hang between mid range and overbought, which we saw time and again from mid-December through April.
So, the current, short-term market environment continues to be important, as we have yet to see the market deal with any sort of real challenge from the bears since last Thursday. Their attempt yesterday proved futile, but the resultant pattern is now a pretty conspicuous symmetrical triangle, which the index will most likely exit today – one way or another.
I always thought the title of the movie, “300,” was powerful and fitting even before watching the firm; viewing it reinforced this notion. It, of course, was the story of the underdog, Greece, defeating the Persian Empire in a fictionalized account of the Battle of Thermopylae. 300 men ended up beating 1,000,000 in the Hollywood version.
I was reminded of this by the SPX crossing 1400 yesterday, as stock indices closing above round numbers clearly get a lot of press. Of greater significance, though, was that, like any underdog, the SPX had its own multitude of doubters along the way. We can’t blame the naysayers, of course, given the less than encouraging news (economic, political, global, stock specific and market structure-related). Its path was challenging, too, and not the neat, unwavering and persistent advance we saw in the year’s first quarter. The SPX’s battle looked lost with every dip and potential break. Regardless of the reasons for each bounce, demand met every challenge, and here we are…
So, we got that elusive close above 1400 on Tuesday, which the index is obviously toying with again today.
For the short term picture, it feels that we need to work off some the excess that has now been created. Each rally since June has stalled after similar percent moves (4-5%). Whether you believe the market character has now changed from the recent back and forth upward bias, it seems logical that we’d least pause before successfully challenging the April highs. Visiting that 1422 area now after being up 10.6% since the 1266 pivot low does not seem like the recipe for blasting through (unless some clear language regarding QE3 hits soon).
So, it stands to reason that we’ll get some backing and filling, and while we don’t need to hold above levels recently taken out, seeing support near 1387 remain intact over the near term would be an encouraging sign. After all, we are in a never ending war in stock-market land, 2012, which is kind of a big difference compared to how “300″ ended…
This market continues to defy the odds: Negative seasonality, extremely over-bought indicators, bullish sentiment readings, low volume and now some divergences – all of which have yet to knock anything loose from the major indices.
We have all seen the studies that show that this just can’t go on any further. The issue, of course, is that no matter what numbers you run and no matter how far back you look, there are always instances that have proven to be outliers. Put another way, when, say, 70% of all markets actually behave as they should – pulling back at extreme overbought readings, after a huge persistent run and at key resistance, etc., etc., it becomes easy to conveniently look beyond the 30% that just have continued along their merry way despite the warnings signs. In this regard, this market certainly seems like one of the outliers that will comfortably become part of the “minority” of many future statistical studies.
Yesterday, the market logged another impressive positive reversal. It got clipped rather hard on the open, but it immediately found demand near its last breakout level near 1355 and its 10-Day MA. For what it is worth, the candlestick pattern it formed can be labeled a hanging man, which is something which typically takes place toward the end of an uptrend. But for this formation to hold water, though, the following day needs to confirm it with a black candle (typically a down session).
In other words, and as long as the price action holds up, it does not make sense to fight the trend, regardless. And that is because previous action like this has done very little but provide successful buying opportunities.
Lastly, February is +4.2% heading into Tuesday. Over the last two years, there has been a tendency to see profit taking in the final days of a strong month like this (before seeing more upside at the beginning of the next month). As mentioned above, the market has not cared about these past inclinations, so, while we can’t lean on this bias, it is worth noting nonetheless.