"Trading is the most dangerous human endeavor, short of war." - Alexander Elder
Introduction To 2013
The first trading week of year 2013 was historical. First, the US economy went over its self-prescribed fiscal cliff (Monday at midnight), but then by late Tuesday night it suddenly did not. The tail was wagging the dog on Monday and Tuesday, as politics wholly trumped any perceivable market forces. The ancient Mayans and their dying calendar have nothing on Washington bureaucrats and their calendars (it was an absolute circus here). Wednesday's succeeding "sigh of relief rally" was spectacular, and Thursday and Friday saw those gains held into the weekly close.
Technically, I would note that the S&P 500 and the Nasdaq 100 diverged from each other on Friday. We have seen this behavior several times over the past 4 months (where tech is weak and value is strong). On Friday, the banks and energy pulled blue chips higher, while Apple (NASDAQ:AAPL) and the chip stocks pulled big tech lower. Here is a chart showing how tech has lagged value over the past several months (worth your time):
http://tinyurl.com/ac8ebq2 ("tech" lagging "value" since Sept 2012)
I think that the tech divergence is an important indicator to keep an eye on. Because of this, I will be discussing the topic of "tech vs. value" in two consecutive blog posts. Today will provide a brief chart summary about the value side of the market, leadership in the current market, and some contextual comment. The 2nd blog post (provided over the next day or two) will focus upon the tech side and its frequent divergences from value over the past few months.
Charting Value Side of the Market
Value continues to present a trend up. It currently appears very strong. Also, the inter-market relationships support this trend up (few divergences). Here are a few charts:
$SPX Daily (QE fuels the trend up, although each QE event does result in less effect)
NYSE Advance-Decline Line (just keeps climbing to higher highs)
$VIX (continues to be crushed by unknown forces in the futures market **)
30 Yr Bond Yield (making higher highs, pushing bonds down, and inflating equities)
Total Market Volume (declining 4 yrs and keeping market moves manageable for MM's)
Of the charts shared above, it is worth noting that the $VIX saw the largest decline this week in 26 years (over 42% in 3 days). It was completely deflated and crushed. ZeroHedge has recently had a lot to say about this phenomenon, and has associated trading activity in the VIX futures to the NY Fed and its recent change in leadership. I mention this as an explanation (and not necessarily a conspiracy) **.
Technically, I would additionally observe that last week's market move places an upward shock event (power spike) on most weekly charts. As some background, the term shock event is used by Alan Farley, so I have provided a link to that description (if you are not familiar with that concept). A key feature to note about a shock event is that (if strong enough) it can signal a change in direction (which in this case would be up).
I keep an eye on the major market areas (e.g., not the same as individual industries) on a daily basis. The strongest general areas currently appear to be small cap's ($RUT), cyclicals ($CYC), and Transports ($TRAN). Small cap's made life time highs this last week, and that makes some sense if you consider both Seasonality and the annual January Effect. Here are three live charts (e.g., they will update from day to day):
Russell 2000 Weekly (breaking out of a multi-year triple top pattern)
Cyclicals (daily) (often leading on the same days as small cap's)
Transports (daily) (a leading sector and overall indicator for the $INDU)
Until one (or several) of these leaders gives up some ground, I do not expect the markets to pull back a lot. I have noticed that these 3 areas have consistently led (and held up) the markets up over the past few months. The markets cannot fall unless their leaders fall.
Please consider this (much longer than normal) post my introduction to ZenTrader. I will share more about myself in the future. If interested, you can find me on Twitter most trading days (@facesincabs), where I socialize with other traders. Good luck with your own trading (luck = preparation + opportunity + a little risk).