Follow-Up To 'The Stock Market Rally Should Continue In The Short Term'

Includes: DIA, IWM, MDY, QQQ, RSP, SPY
by: Thomas Sobon


My focus is on stock price changes made during the last 10 trading days in the variables I use to determine the stock market’s performance for the near-term future.

(1) The Fed remains dovish. (2) The do-nothing Congress is still obstructive. And (3) the electorate wants changes made in the way the game of politics is played.

The “Sobon Oscillator” continues to track the performance of stocks as it provides feedback for guesstimating what the SPY will do during the near-term future.

I will conclude that the market, as measured by the SPY, will trend higher from 207 and encounter resistance as it tries to test its previous high at 213.

Introductory Considerations

All of the statistical data used in this article was processed in my workbook. And all of the price and trading volume data fed into the workbook was downloaded from Yahoo Finance. I make extensive use of index numbers in the analysis that I do. So wherever you see multiple price lines on a chart or bars where trading volume data is shown, the performance of one line or bar is fully comparable to any other such item relating to stocks or ETFs.

"The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it's not going to go up, don't buy it!" - Will Rogers

The Performance of the SPY and Other Related Indexes

The white box on the chart frames the performance of the market during the last 38 trading days. During the first three of those days, all of the indexes shown bounced and then trended higher for the next 35 days. Later on (in the section of this article dealing with the "Sobon Oscillator") I will focus on the last 22 days and guesstimate what such indicates for the near-to-longer-term future.

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The chart above shows the performance of several prominent ETFs during the last 150 trading days (about seven months). Along with (1) my index of 450 stocks (the blue line) and referred to in the legend as S450; and (2) my index of 45 technology stocks (the pink line) and referred to as Teck45. The S450 index correlates well with the Guggenheim S&P Equal Weight ETF (NYSEARC: RSP), the black line on the chart. All of the other indexes shown are capitalization weighted and they are identified by their line colors in the legend on the chart. They include the S&P Industrial Index (NYSEARCA: SPY), the Nasdaq 100 (NASDAQ: QQQ) and the Russel 2000 (NYSEARCA: IWM), the S&P 400 large-caps (NYSEARCA: ^OEX), and the S&P 400 mid-caps (NYSEARCA: MDY). Since the SPY is widely considered to be most important of all market indexes, I will refer to it as the primary indicator for the market.

All of these market barometers bounced off the bottoms of their price charts about 38 trading days ago. However, some did so more dramatically than others and therein lays the key to understanding the rally's performance: the small- and mid-cap stocks (which are usually considered to be more "speculative" than the larger "investment-grade" companies) outperformed the large-cap stocks: (1) the equal-weighted RSP (black line) outperformed the capitalization-weighted SPY (red line). (2) The MDY mid-caps (orange line) outperformed the ^OEX large-caps (purple line). (3) The IWM (brown line) is loaded with small-cap stocks. It had been the long-term laggard among the indexes shown; but it outperformed all of them during the first 20 days of the rally and since then it was the laggard. (4) The QQQ (green line) is much more heavily (and lopsidedly) weighted with large caps than any of the other indexes and it outperformed all of the other indexes by wide margins during recent months. But it underperformed all of them during the 38-day rally. (5) The best performing group was my Teck45 index (the pink line); it is only 0.6% below its all-time high made three months ago. And (6) whereas the SPY is 3.0% below its all-time high, the QQQ and the IWM are 4.2% and 7.4% below their respective highs.

The next eight charts can be identified by the ticker symbols in their legends. The first five are capitalization weighted indexes while the other three are equal-weighted. The horizontal lines frame the high and the low for the last 150 days. The dotted wavy lines are 10-, 20- and 30-day moving averages. Because of their short-time spans, they are very sensitive to changes that occur in the price lines for the related index.

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At the present time, all of these charts are technically strong. The best performing group among them was my Teck45 index, which is near its high made three months ago. In order for the bold and different colored prices lines for these market barometers to reverse the uptrends underway, they would have to break below the uptrends shown by the moving averages in a meaningful way. To address the possibility of that happening, I will rely on the technical situations extant as shown in these charts (which, as a group, are a supplement to the "Sobon Oscillator") and then defer to feedback from the oscillator to guesstimate what the market should do during the near-term future.

Unquantifiable Risks

The next chart shows what has been happening in stock markets around the world. It shows that the recent rally in stock prices was a worldwide phenomenon as investors in foreign countries found (invented?) reasons for bidding up stock prices.

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It includes Australia, Canada, Germany, China, Japan, Spain, England and France. These markets showed strong price gains during the last two months. The economies in all of those countries are weaker than that of the United States. And many of them (like it is here in the United States) are on life support provided by their central bankers. I believe that we may still have an international economic house of cards on our hands at this time. In previous articles, I commented on conditions in Japan and Europe and I won't repeat any of that here. (Adam Whitehead is a contributor to Seeking Alpha and he has been writing excellent articles about developments in Japan and Europe. Interested readers may want to read his articles to get the perspective he provides.) Investors should understand that there is an "unquantifiable risk" that trouble could occur in overseas areas in nearby years which may be beyond anything we can reasonably imagine at this time. And they should take that into consideration when making investment decisions.

Moreover, add to that the facts that (1) we cannot expect the do-nothing Congress to provide political solutions to our economic problems extant in an election year when politicians are busy bad-mouthing each other as they try to bamboozle the electorate to further their biased goals. And (2) contentious political campaigns are underway here in the United States. To paraphrase Winston Churchill, the political situation in the United States is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is the resolution of biased political interests. History shows that political factions do not yield political advantages easily, as evidenced by the revolutionary period from 1776 to 1848. Ralph Waldo Emerson summed up such situations cogently when he wrote, "You take the way from men, not to men" in his essay called "Self-Reliance."

The citizenry wants change, the Republican Party is in disarray, and the news flow about that just seems to worsen with each passing day. We have another seven months to go before the November elections and who knows how ugly things could get in political arenas by them. The do-nothing Senate won't permit the President to fill a vacancy on the Supreme Court. And Mitch McConnell recently voiced his concern that the Republicans could lose control of the Senate. It is a long-shot proposition but they could also lose control of the House. Regardless, the role of the Republican Party in domestic affairs will be diminished from what it was in recent years. The only question is "by how much?" Such change could have profound effects upon what happens in the stock market.

Worry is interest paid on trouble before it comes due. Fortunately, I don't have to be too concerned about the outcomes of the political shenanigans doing on at this time. Those battles will be resolved peacefully or otherwise and according to the survival of the fittest dilemma faced by all living creatures, not just us mere human beings.

My immediate concern must be about what happens in the stock market during the near-term future. So with all that I wrote above for perspective, let's see if I can provide a meaningful answer to the never-ending mystery:"Where will the stock market probably go during the near-term future from where it is now?"

The bottom line conclusion to be drawn from the chart presentation is that speculative interest in stock markets was pervasive on a world-wide basis during the last two months. When that happens, stock prices can only go in one direction, with that being up. Whether such was rational or irrational is debatable. Others can argue about the pros and cons of such matters if they so choose. When it comes to the stock market I rely upon feedback that I get from my oscillator to indicate what has been happening in the stock market and what will likely occur during the near- to longer-term future. And that part of this article follows:

Documentation by the "Sobon Oscillator"

While referring to the feedback that I get from the oscillator, I will (1) explain the salient features of the stock market's performance as they were documented in the next chart. And (2) guesstimate what that signals for the near- to longer-term future as the market trends toward its "always ill-defined" long-term goal. The white box on the chart relates to what happened in the market during the 10 days since I wrote the previous article and concluded that the market should continue to go higher.

To facilitate understanding of what the oscillator does, let's quickly review what the 32 variables shown in the four panels on the chart are all about:

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(1) The first (top) panel shows the daily price change from the previous day for the SPY, RSP, and the S&P 100 index (^OEX). For perspective, it also shows such data for the Nasdaq 100 index, the Russell 2000, my index of 450 stocks (which I call the S450), and my index of 45 technology stocks (which I call the Teck45).

(2) The second panel shows the volume of trading in the SPY, QQQ, and IWM ETFs as well as the S450 and Teck45 indexes. The higher are the volumes, the greater are the convictions about what investors (speculators?) think they are doing in the market.

(3) The third panel shows breadth indicators for stocks making "highs or lows" in the S450 index. The time spans for eight series of highs or lows range from about one week to seven months, as the shorter ones (referred to as S1, S2, S3 and S4) are lead indicators for the longer ones (the L5, L6, L7, and L8). So they help lead the market to where it will evolve over the longer term as it makes "higher highs and higher lows" (with that being bullish) or, perhaps, "lower highs and lower lows (and that being bearish)." Also, I am always ready and willing to improve the effectiveness of the oscillator. So I recently added the "RE1" and "RE2" breadth indicators to the eight shown in the third panel. They appear on the chart as the white bar with the black border and the purple bar, respectively. They are "accelerators" among the "momentum" indicators. These terms will lack meaning to readers but they have important and well defined meanings to me. I will have more to write about them shortly.

And (4) the fourth (bottom) panel shows breadth indicators for the "moving averages" for the 450 stocks. The time spans for the eight moving averages range from about one week to seven months. The shorter-term breadth indicators (referred to as S1, S2 and S3) are lead indicators for the longer ones (the L4, L5, L6, L7and L8) since they, too, must help to lead the market to wherever it is trending (be it up, down or sideways).

Since the longer-run trend of the stock market must be a "sum-of-the-parts" that reflect what happened during sequential short-run intervals, let's focus on what happened during the 10 days framed by the white box. That will bring us to the cutting edge of the future. And for perspective let's also consider what happened during the 12 days preceding that.

What happened to the breadth indicators during the 22 days shown on the chart can be summarized as follows: (1) the price-change data for the various indexes averaged below their usual gains (top panel on the chart) even though (2) the volume of trading was at average levels (second panel). (3) The moving averages (the bottom panel) improved steadily from very depressed levels but they are all solidly in positive territory at this time, with the leaders (S1, S2, and S3) indicating that further improvement for the followers (L4 through L8) is probable for nearby days. And (4) the high and low breadth indicators lost much of their momentum during the 16 trading days preceding the data shown on this chart. And during the last 22 days they even showed days of weakness. But the RE2 accelerator was usually strong because of repetitive gains made by the small- and mid-cap stocks on consecutive days. The RE1 accelerator usually is the primary indicator of a directional change in the market. At no time did it give such an indication during the past 22 days. The large-cap stocks were not the primary drivers for the stock market gains. In fact, it you were to look closely at the yellow column with the black border on the top panel of the chart, you would see that the ^OEX showed smaller gains than all of the others until three days ago. So it may be that the large caps will participate more fully in coming days than they had been up until now and that would add balance to the market's performance. That and knowledge gleaned from other charts shown above leads me to the conclusion that what we have been seeing in the market was largely a short-covering rally.

And until such time that the bullish sentiment currently present in the market is reversed, the market should continue to trend higher. There is substantial resistance on SPY's price chart up to 213 for the SPY, which is now priced at 207. And much more of such resistance on the price charts for the QQQ and the IWM. Although I am bearish on the long-term trend of the stock market because of the monetary policies of the central bankers and the political problems extant here in the United States, I must respect the actions of Mr. Market and conclude that the market will go up to test the high of 213 for the SPY during the near-term future. There is a time to buy and hold stocks, there is a time to sell them, and sometimes one has to be cautious and trade them when suitable trading opportunities present themselves. At the present time, I do not hold any stocks, but I have been trading the leveraged ETFs for the SPY and will continue to do so.

Regarding the VXX

The next and last chart shows the performance of the VXX, with the dotted trend lines for its moving averages and hashed lines to show its trading ranges. As the market goes higher, the VXX should go lower. If and when the current rally in the stock market ends (as it will someday), the VXX should be of interest to those traders who are willing to bet that the downside potential for the market is substantial. Until then, it can be used as a contrary indicator for the market.

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When writing an article like this, I never tell readers what they should do in the market. I write the story according to the way I understand it. I may tell readers what I am doing when I buy or sell stocks. It is up to them to make their own personal investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.