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Bob Palmerton
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Mr. Palmerton is the founder of Baseline Analytics TrendFlex, a market trend-following system incorporating high-probability trend change signals. Robert is a Registered Investment Advisor. He is co-founder and advisor to The Absolute Return, LLC, which manages a family of absolute return... More
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  • Why The S&P 500 Can Move Higher

    Several Market Technicians have been rather vociferous of late in characterizing the chart action as a gradual topping pattern in the equity indices. Clearly, the NASDAQ index is in worse technical shape than that depicted in the S&P 500 chart below. It feels like tough going for the S&P 500 until it can break out of the 1890-1895 range to a new high. A pickup in volume on the upside would be further encouraging.

    (click to enlarge)

    A positive sign after reviewing all of the setbacks during the last year, has been the ability of the Relative Strength Line (RSI, at the top portion of the chart) to maintain support at the low end near 30. This has historically been a signal of a strong uptrend in that the RSI has repeatedly failed to sink to lower levels that would denote a more serious setback.

    The middle of the chart shows Martin Pring's KST (which stands for "Known Sure Thing"), another technical tool in Baseline Analytics' arsenal. During uptrends, when KST crosses below zero, that point typically coincides with a short-term low. Note the several instances when KST crossed below the zero line over the last eleven months depicted in the chart. Those points represented buying opportunities. A trader would have generally profited by going short when the blue (faster) KST line crossed below the slower red KST line.

    As for measures of market sentiment, Baseline Analytics favors VIX and the Put/Call Ratio, tracking those indicators relative to historic extreme points as well as their moving averages. VIX has entered a neutral stage (neither suggesting complacency nor worry), and the Put/Call Ratio also has settled back from a near-extreme reading approaching 1.2 at the height of the early-April swoon in the market.

    So what's our take? Clearly the market is resilient. It wants to maintain its uptrend but it faces occasional headwinds that encourage dumping of momentum plays and calls for a deeper correction. Add to that the mid-term election year fear and exasperation that the bull market is five years old (old age for such a trend) and you have a solid dose of fear and caution, just what we need to push the market higher.

    This is the time for sensible portfolio allocation. A mix of large cap, dividend-paying stocks, a prudent partial allocation to bonds, some emerging market ETF's and perhaps a little small-cap spice, as well as a cash reserve for future buying opportunities, would be a reasonable approach to this fickle market.

    Baseline Analytics TrendFlex market signal use several indicators (including those in the chart above) to help investors stay on the right side of the market. Visit our website for more information.

    Tags: SPY, QQQ, market trend
    Apr 19 9:00 PM | Link | Comment!
  • 2,000+ S&P 500 Target Within Reach?

    I am not one to predict targets for the equity indices. But reviewing the monthly chart of the S&P 500 below, one can't help but wonder if the index is setting up for an aggressive bull run not unlike that of the early 1990's. I want to draw your attention to the Relative Strength Index (RSI) at the top of the chart below:

    (click to enlarge)

    Note how "overbought" the index got in 1995, preceding a tripling of the index to its high near 1500 at the height of the Internet bubble in 2000. Since then, despite RSI highs prior to the financial crisis in 2008-2009, the S&P 500's Relative Strength Index has barely touched upon an overbought level in the monthly charts. Given the severity of the 2008-2009 downturn, one would expect new highs to make up lost ground, and then some, as it meanders in "overbought" territory. The daily chart view of the S&P 500, as well as key market indicators that comprise the Baseline Analytics TrendFlex market trend indicators, show a robust bull market but with early signs short-term topping action.

    The chart below depicts the daily view of the S&P 500, along with some of our key TrendFlex indicators, such as RSI, Martin Pring's "Known Sure Thing (KST)," and sentiment gauges as measured by VIX (the CBOE volatility index) and the CBOE Put-to-Call ratio. As for the S&P 500, its emphatic uptrend is denoted by no less than five touches of its uptrend line from May, 2013.

    (click to enlarge)

    Near term support of the S&P 500 is at 1850, with the next level of support at the 50-day moving average near 1825. Some noteworthy indicators include KST (bullish since the 1825 level) and neutral-to-slightly negative reading in VIX and Put/Call (low level as such indicate modest complacency, which has been, in the past, a forewarning of a potential setback in the stock market). Other key indicators of our TrendFlex Score include several measure of market breadth, namely the extent to which there is broad participation of stocks in the market uptrend, including more new highs and higher prices coupled with higher volume.

    The chart below shows some of these indicators:

    (click to enlarge)

    It is worth noting that the surge in the Advance-Decline ratio of the New York Stock Exchange (NYSE) since early February, is very similar to the surge experienced in April-May 2013 (see circle). The 2013 surge was quickly followed by a correction in the S&P 500 of about 8% (a similar correction this month would take the S&P 500 to about 1727). The Summation Index, show at the bottom of the chart above, similarly appears to have reached a near-crescendo at its 1050 close on Friday March 7th. Likewise, the NYSI reached 1200 in May 2013, prior to its 8% correction.

    As our subscribers are aware, the Baseline Analytics TrendFlex Score measures the RISK of a change to the current trend. Complacency and a "this time is different" attitude can hypnotize traders and investors to join the trend at the very point of an impending reversal. A balanced portfolio, protected with adequate capital preservation, will prepare traders and investors to weather corrections as well as provide the capital necessary to continue to participate in the longer-term uptrend.

    Tags: SPY, DIA, market trend
    Mar 11 9:44 PM | Link | Comment!
  • Indicators Of Growth (And Inflation?)

    Each week, Baseline Analytics follows key charts and technical indicators to obtain a read on the direction of the markets, especially the various intermarket sectors (bonds, commodities, stocks) as well as macro-economic developments.

    Several charts are affirming signs of a pickup in economic growth as well as potential signs of inflation. The first chart is the CRB index basket of commodities. It has been no secret that commodities have strengthened this year, with Natural Gas, Coffee, precious metals and others (have your checked out DBA lately?).

    (click to enlarge)

    Our next chart depicts the relative performance of the Financial ETF (XLF) compared to the S&P 500. Financials have been underperforming the S&P 500 since mid-January. Anticipation of rising interest rates (consistent with the pickup in commodities and potential inflation) could be driving this underperformance. Financials and Technology have been viewed as necessary sectors to support a bull market. Although financials are not showing leadership, technology is showing decent relative strength.

    (click to enlarge)

    The chart below depicts the Nasdaq market, which broke its 2014 high this week. Nasdaq leadership is a bullish indicator, and we would look for other indices to likewise reach new highs. See the chart below:

    (click to enlarge)

    Finally, one of our favorite charts is the relationship between Staples and Discretionary stocks, as shown by a comparison of SPCC (discretionaries) and SPST (staples). Outperformance in discretionary stocks is a harbinger of economic growth and consumer confidence. Sure enough, discretionaries (purple line on chart below) recently printed a higher low relative to the S&P 500, and have outperformed staples, since early February.

    (click to enlarge)

    These sector indices suggest that investors would be rewarded to favor growth and inflation-driven opportunities, and lighten up on interest-sensitive sectors (financials, bonds) as well as defensives (staples).

    Baseline Analytics market tour follows intermarket activity each week, and utilizes several indicators as part of its TrendFlex Score system. ETF Zone (for subscribers) selects timely sector ETF's consistent with economic signals and intermarket relationships. Subscribe to our TrendFlex market trend signals, ETF Zone and StockStash, for timely trading and investment selections.

    Feb 22 2:13 PM | Link | Comment!
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