(1) 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 statistically comparable to any other such item relating to stocks or ETFs.
(2) The "SharpChart" used as a supplement to my other charts was downloaded from StockCharts.com.
And (3) in one of my favorite books called "Self-Reliance," Ralph Waldo Emerson wrote,"A foolish consistency is the hobgoblin of little minds... Speak what you think now in hard words, and tomorrow speak what tomorrow thinks in hard words again, though it contradicts everything you said today... 'Ah, so you shall be sure to be misunderstood.' … Is it so bad to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh." … Whenever I need to change my opinion about the direction for the market, I will do so as soon as possible. Let the critics say whatever they may. Far more often than not, a critic is a guy who knows how something should be done but he, himself, can't do it. Constructive criticism is welcomed. Why not? When I accept good advice I increase my own abilities.
Yes, Things Endure According to the Amount of Virtue They Contain
Nothing much changed in recent days about the lack of virtue in the Fed's policies and that of the do-nothing Congress or corporate America before and after the fiasco of 2007-2008. So I won't repeat here what I wrote about such in the June 26 article. Interested readers can refer to it if they so choose. Instead, I'll cut to the quick and focus my comments on stock market developments for the remainder of this article.
What Kind of Stock Market Environment Will We Have During the Near-Term Future?
The top panel on the next chart shows the performance of seven well-known ETFs during the last 150 trading days (that's a little bit more than seven months).
Also shown are (1) my index of 450 stocks (the dark blue line) and referred to in the legend as S450, and (2) my index of 43 technology stocks (the light blue line) which is referred to as Tech43. The S450 index is unweighted (as is the Tech43) and it correlates well with the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP), the black line on the chart. The Tech43 index has been a fairly consistent outperformer of many of the other indexes during the last three years. The other equal-weighted index charted, the First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ:QQEW), is the light green line.
All of the other indexes shown are capitalization weighted and they can be identified by the colors of their lines as shown in the legend on the chart. They include the S&P Industrial Index (NYSEARCA:SPY), the NASDAQ 100 (NASDAQ:QQQ), the Russell 2000 (NYSEARCA:IWM), the S&P 100 large-caps (^OEX), and the S&P 400 mid-caps (NYSEARCA:MDY).
Because the SPY is widely considered to be the most important of all market barometers, I will use it as the benchmark indicator for the general market.
The white box on the chart frames the price action of the indexes during the last 22 trading days. Those days will be my focus for the remainder of this article, with particular attention paid to the last several trading days.
When speculative interest in the stock market waxes, the market goes up. And when it wanes the market goes down. For perspective, let's briefly consider what happened with these indexes since they made bottoms on their price charts five months ago: All of them bounced in February and then trended higher. However, some did so more dramatically than the others and therein lay one of the keys to understanding the waxing of speculative interest: the small- and mid-cap stocks (which are generally considered to be more "speculative" than the larger so-called "investment-grade" stocks) outperformed the large-cap stocks. So, the RSP outperformed the SPY, the MDY outperformed the ^OEX, and the QQEW outperformed the QQQ. At present, the SPY, RSP, ^OEX, MDY and S450 are 4% to 5% below their highs for the last 150 days. And the IWM and the QQQ are about 8% and 9% below their respective 150-day highs.
The bottom panel on the chart shows one of five sets of breadth indicators that I use in the Sobon Oscillator. The "Short Crossover Indicator" and the "Near-Term Trend Indicator" (referred to in the legend by their acronyms SCI and NTTI, respectively) are the indicators I usually use to forecast the neat-term trend for the market. The brown box on the left side of the chart shows that the NTTI crossed below the zero line last August when the correction in the market was beginning. The brown box on the middle of the chart shows that the NTTI crossed above the zero line in February when the uptrend in the market was beginning. And the brown box on the right side of the chart shows that the NTTI came close to the zero line but did not cross below it until Monday June 27. This indicates that the sharp drop in stock prices on Friday was not a continuation of trend weakness that preceded it. Such is an important consideration when it comes to forecasting what the market will do during the near-term future. I will have more to say about that below.
The second key to understanding the waxing of speculative interest relates to the rally in stock prices that started 25 trading days ago when the IWM outperformed all of the other indexes most of the time. The increases in the prices of some of these indexes for 14 days were so sharp that the price lines on the chart came close to going parabolic. If that had happened, it might have been a sign that a sharp correction in the market was imminent because history shows that such insanity does not last very long. But sanity returned to the market and the speculative binge ended. That brings us to the last nine of the 22 trading days which are framed by the white box on the chart. I will have more to say about those days very shortly.
A third key to understanding the current level of speculative interest relates to valuations. (1) The economy and the stock market continue to be on "life support" provided by the Fed.
(2) But P/E ratios for stocks are well above their historic norms and dividend returns on many stocks are abnormally low. And, yields on Treasury notes and bonds are well below historic norms.
(3) Portfolio managers have been reaching for yield. Now that it's unlikely the Fed will increase interest rates some time in 2016, portfolio managers should continue to hold onto equity positions because they don't want to buy low yielding bonds, which could be a lousy alternative for stocks because sooner or later the Fed will have to normalize interest rates. And when interest rates rise, bond prices fall.
And (4) wittingly or otherwise, the investment community is assuming that somehow the economy will transition smoothly as the Fed withdraws its stimulus. That is about as speculative a wish that investors could possibly make because of imbalances in the economy which the Fed helped to create. Redress of such imbalances could easily become disruptive.
Look at the next chart. It shows the performance of the five component parts of the Sobon Oscillator for the last 22 trading days.
During the first nine days shown on the right side of the chart, the market was in a rally mode. (1) The daily volumes (second panel) approximated their daily norms while (2) the daily price changes (top panel) showed gains that were about half of their norms. (3) The breadth indicators for the highs and lows (third panel) were moderately strong as were (4) the breadth indicators for the moving averages (fourth panel). And (5) the bottom panel shows trend lines that I usually use to make near-term forecasts for the market; those being the Short Crossover Indicator and the Near-Term Trend Indicator (the acronyms for which are SCI and NTTI, respectively).The columns referred to as S1, NU and RE are momentum indicators. All of these indicators gave bullish readings during the nine-day period.
Then (1) during the next four trading days ending with Wednesday June 15(these were the first four days' results posted on the left side of the white box), the price action in the market turned sloppy. And it looked like the market would go significantly lower. But (2) on Thursday June 16 the market gapped down, declined further during the first hour of trading, and then trended higher on heavy volume until it closed with fractional gains for the day. This marked the beginning of the volatile price action that occurred ever since then.
And (3) now, I will continue by directing your attention to the next chart. It was downloaded from StockCharts.Com. It is a "candlestick" chart which shows the performance of the SPY during 15 minutes time periods for 10 days beginning with June 14.
I am not going to explain in detail all that the chart can disclose. But I will say a few things about it so that readers know something about its salient characteristics: (1) the candle's part of the candlestick shows the open and close for the trading day. (2) The wick's parts extend above and below the candle to show how much the SPY traded above and below the open and the close, thereby showing the trading range for the day. (3) The color of the candle tells where the SPY closed at its open or close on the candle, with black indicating up for the close and red indicating down for the open (or vice versa). (4) The volume of trading during the 15 minute time periods is shown by the columns below the price chart. (5) The panel above the price chart shows the performance of intraday moving averages. And (6) the panel below the volume panel shows the performance of an intraday relative strength indicator. Candlestick charts can be very informative but they should be used in combination with other technical indicators. I got lucky and learned about them a few weeks ago when I was looking for hourly price data that I could use in my oscillator. They should be an excellent supplement to the technical work that I do.
As stated above, the price action in the market was sloppy for the four days ending with June 15. When the market opened for trading on the 16th, the SPY gapped lower and then proceeded to decline until about 10:30 a.m. That is when the SPY bottomed and then steadily trended higher on heavy volume to finish with a small gain for the day.
It appeared to me that the trading desk of at least one major brokerage house and institutional buyers were determined to arrest the decline. What I am getting at is this: when a small number of bulls with deep pockets among the Wall Street community want to push the market higher that may not be hard to do. All they would need to do is buy a lot of shares in the SPY, QQQ and IWM from the ETFs and the operators thereof would have to enter buy orders for the stocks in the indexes. And if the institutions entered their buy orders late in the day, the ETF managers might not get around to buying the stocks until the morning of the following day… If ever the Fed wanted to support the market it could do that very easily. All it would need is one man in a locked room at the New York Fed who would place buy orders in the three ETFs and (since its books are not audited) few people would ever know that it was manipulating the market.
Look at what happened on Monday June 20. The SPY gapped up three points at the open on heavy volume because there was a lot of talk about England staying in the Eurozone. Also, the SPY gapped up again on Thursday June 23 and then finished strong on very heavy volume. During the last 15 minutes of trading nearly 30 million shares of SPY were traded; indicating heavy institutional buying.
But a not-so-funny thing happened on Friday morning, the 24th of June: The English people voted to exit the Eurozone. Unless, as an investor, you were visiting another planet you know what happened in stock markets around the world. The big buyers on Thursday took a beating on Friday; but so did just about everybody else who had long positions in the market. The volume of trading in the SPY was four times its daily norm while the volumes of trading in the QQQ and IWM were about three times their norms. The advance-decline line for the 450 stocks included in my oscillator was plus 95% on Thursday and minus 92% on Friday. Those are lopsided numbers which indicate that a lot of buyers on Thursday got whipsawed on Friday.
On Monday June 27, the market gapped down, declined further and then moved sideways for the rest of the trading day. But the price action was such that an astute trader would have been a buyer at the close because (1) the candles' trend and formation was no longer bearish as shown on the price panel of the chart, (2) the intraday moving average trend lines on the top panel turned bullish, and (3) the relative strength indicator (the bottom panel) also turned bullish. (I didn't take a long position at the time because there is still much that I have to learn about the art of using candlestick charts. However, I did benefit by closing out a position that I had in an inverse ETF.)
On Tuesday June 28, the market gapped higher, consolidated its gain and then added to its gain before the close. So during the last four trading days, the market gapped up or down at the open and trading in the SPY, QQQ and IWM occurred on volumes that averaged about two times their daily norms.
The daily breadth indicators that I use in my oscillator are good but they cannot provide the granular insight I can get from an intraday candlestick chart. I got lucky and discovered the intraday data available on StockCharts.com about 10 days ago. I became a subscriber to its charting services and would recommend the site to anybody interested in doing technical analysis.
So What Will Likely Happen in the Stock Market During the Near-Term Future?
What happened with Brexit was decidedly bearish and markets around the world reflected that. I am sure that central bankers around the world are going to do whatever they can to contain the problems that Brexit will cause. But there are other economic and political problems extant here in the United States and such were referred to near the beginning of this article.
As a market technician I rely upon technical considerations when making decisions about the market's near-term trend. A few days ago I thought it could go down from 203 to test its August low of 185. The SPY is still priced at 203. However, although my Near-Term-Trend indicator turned bearish two days ago, I am no longer willing to make a directional bet on the market. There are too many economic, political and technical uncertainties extant that could influence the performance of the market. And it is not clear how the various issues will be resolved. So I am going to conclude that the SPY will be volatile as it moves in a wide trading range from a low of 185 to its recent high of 212. The near-term investment (speculative?) environment should be much more suitable for traders than it will be for buy and hold investors. And since I am now well positioned to trade the market, I intend to do some of that.
Regardless of what I (or anybody else) say, what is virtuous about the ways that stocks are priced in the market will endure and what isn't won't. And what is virtuous about our economic and political systems will endure. And what isn't virtuous won't. The writing is on the wall for everybody to see. A contentious political campaign is underway. The Republican Party is in disarray. In November control of both the House and the Senate will be at stake. The electorate wants change here in the United States just as the English people did when they voted for Brexit. And the surest way to bring about constructive change is to get rid of the partisan politicians who have been obstructionists and replace them with others whose politics are more in line with what the electorate wants.
But as George Bernard Shaw said,"Liberty means responsibility. That is why most men dread it." History shows that people only get the kind of government they deserve. And if the electorate makes bad choices it will be stuck with more bad government such as that which we got from the do-nothing Congress during the last 7.5 years. Good choices could result in good government. It is as simple as that. And whatever happens in the political arena could have profound effects upon the stock market. Until the political problems are resolved, they will likely contribute to market volatility.
I do not own any stocks at this time because I am bearish on the market for economic and political reasons as well as the technical analysis that I do. But I expect to trade leveraged ETFs during the near-term future.
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.