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JoeHentges
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I am an equity option and futures trader. I have been trading the markets since 1979. More about me on my website
My blog:
Beyond the Chart
My book:
7 Keys to Successful Option Trading
  • Lullaby | Stock Market Today 0 comments
    Aug 30, 2014 5:33 PM | about stocks: SMH, XHB, XLF, HYG

    Lullaby2Are you listening? The market has been playing a lullaby lately. It doesn't realize that a lullaby is supposed to be for children. If you listen closely, it is softly playing its tune. Here's what it is saying.

    Stock Market Lullaby

    "Buy the dips, buy the dips, the market's going higher.

    Buy the dips, buy the dips, sleep softly tonight.

    Buy the dips, buy the dips, Putin will come to his senses.

    Buy the dips, buy the dips, everything will be all right.

    Buy the dips, buy the dips, the markets going higher.

    Buy the dips, buy the dips, sleep softly tonight."

    - Joe Hentges

    Okay, okay, I haven't lost my marbles but when you look at the weekly chart of the S&P 500 (SPX) you've got to wonder. Is this thing just lulling everyone to sleep. The trend is your friend until...it ends.

    There are enough divergences out there on weekly and monthly charts that we need to stay alert. I look at all of these in today's video. The markets keep pushing. And the lullaby keeps playing. The Nasdaq Composite Index sits at the 2nd highest monthly close in its history.

    CAPE Follow-up

    So I want to follow-up on the CAPE chart from last week. I show it here again for reference. In last week's post I talked about CAPE. Here is a link to that post.

    (click to enlarge)Data provided by Yale Professor Robert Shiller

    This is the same chart as last week but this time I want to focus on the two moves coming off the peaks in 1966 and 2000. First let's look at 1966 thru the late 70's.

    Notice how there are a series of lower highs and lower lows, trending down. This was the opposite of what happened in the market and indicated that each rally in the market was doomed to fail. Here is how the market looked during that time.

    (click to enlarge)Dow Industrials Monthly Chart

    When the market rallied in 1968, almost taking out the 1966 high, it was not confirmed by CAPE. When the market rallied to a new all-time high in January 1973, it was not confirmed by CAPE. So what is CAPE telling us since 2000?

    It is a similar picture. But what is happening now seems to be on a magnitude higher than what occurred during Wave IV of the rally from 1932 - 2000. I have often thought that the Wave IV pattern from 1966 - 1974, is being replicated since 2000, but on a much bigger scale. I talk about that in my post, That 70s Show X2 on May 10, 2014.

    So I think a key part of CAPE for our current environment is whether CAPE shows another lower peak, when turning down. It did that for the first post 2000 peak which occurred in 2007. We are higher than 2007...just like the January 1973 stock market peak was higher than the 1968 peak.

    (click to enlarge)Dow Industrials Monthly Chart 2000 - 2014

    So last week I talked about how Prof. Shiller believes we are in a period of over-valuation that has only occurred 3 other times in the history of the stock market.

    And I then showed how the peaks in CAPE correlated with the impulse moves of the market from 1932 - 2000. And now I show how the lower peaks in CAPE foreshadowed market turns to the downside. Or should I say dark side. Okay, time for that lullaby again.

    Stocks: SMH, XHB, XLF, HYG
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