"Charting is a little like surfing. You don't have to know a lot about the physics of tides, resonance, and fluid dynamics in order to catch a good wave. You just have to be able to sense when it's happening and then have the drive to act at the right time."
…Ed Seykota in Market Wizards: Interviews with Top Traders
"The Only Indicators You'll Ever Need"
As technical analysis continues to become more mainstream and the voodoo-like stigma often surrounding its practice dissipates, I am more frequently being asked for some beginner-level tips to help get novices started on their own path toward enlightenment. These are always fun conversations, and, for the most part, I usually attempt to steer them in the direction of how to best traverse what can be a very esoteric field of knowledge and focus one's attention on what really matters.
For followers of this blog its apparent that I do rely on technical analysis as part of my investing strategy. This discussion on TA isn't intended to suggest that a good LT strategy be abandoned and replaced with a trader mentality. It's been shown that most swing and momentum trader's will lose money over the course of their investing lives, despite their claims. That fact is simply not debatable. Instead, it is intended to show how anyone can use this tool to control risk.
So, naturally, whenever I am asked what I consider the best technical analysis tool available, I usually cheat and give two answers because I feel these are the only two tools an investor really needs to accomplish the primary goal of technical analysis, which is managing risk.
In fact, with successful use of these simple indicators, an investor would have missed the bulk of every major bear market in history, while also preventing the many headaches and restless nights that generally accompany these large corrections. I gave examples of just that in my blogpost from July 2013.
And there's nothing magical or complicated about them either; they're actually two of the most common tools at a technician's disposal. So without further ado, I am, of course, referring to trend lines and moving averages, and once you learn how to use them, you will begin to see their powerful effects all over the charts.
For example, important moving averages can often act as dynamic support and resistance, halting a stock or index in its tracks and forcing it to reverse in the opposite direction. Not only has it bounced around many individual names, this is exactly what has been happening with the major averages over the last couple of months as well. I have also noted from time to time that technical analysis, like so many other tolls is not infallible.
Lets look again at the S & P. A false breakout in the middle of May and now possibly a false breakdown this past week. Certainly not a black & white scenario for sure.
What I have added to the chart this week that was very notable to me, was an oversold condition (based on the data set I use) that matched the previous highlighted areas on the chart.
IF history repeats, this move if continued has the potential to take the S & P to new highs. If so, my Guess would be the 2170 range.
When you start to see clear violations of important levels on the charts, it often pays to heed the warnings, and depending on your risk-tolerance, these breakdowns can provide timely signals that it might be time to lighten up on your stock exposure. Conversely, breakouts can signal a time to add that extra stock and add a bit more exposure to the long side.
Two examples of how charts can assist an investor - both from the Biotech sector.
GILD - Gilead, a classic "breakout". I have shown and highlighted this chart back when the shares were @ $100, and now it sits in true breakout mode. While many will now shy away and even advise to sell, the opposite of that mindset should be in place. The notion that a stock has gone up too much and is a "sell' is absurd.
It doesn't matter where the shares have been, it matters where they are going. IF the fundamentals are driving the bus here you simply stay on board for the ride. I believe this IS the case with Gilead. I don't chase, ( I also have a full position) BUT when these shares do pull back to a support line - they are a BUY for the LT. I said that with GILD @ 80 and once again at 100 just 2 months ago , the shares are up 17% in that time frame.
Furthermore, a name like GILD or others I have mentioned over time that contain more risk are in my view, appropriate for DGI investors. Other wise they wouldn't be mentioned at all. The thoughts of Chuck Carnelave on that topic seem to agree with my view and I believe are appropriate to hold as a retiree. Certainly an investor with years left in their investing career needs to have some of these names in their holdings as well. Of course each has to weigh their own personal risk profile into the equation, before adding these types of growth stocks.
CELG- Celgene represents the support or trendline situation that investors can look at to make a decision to either get involved in a stock or add to an existing position.
One can look at this picture and come to the conclusion that the stock could go either way. If the stock does break that support you could be looking at the longer term chart to define the next level of support. That yellow line is the 200 day MA and has not been violated since June 2014.
Let's step back for a minute and use the fact that the overall backdrop of the market is definitely bullish, that starts to tilt the odds that "support' could hold on a fundamentally sound name. The stock has already corrected 13% from its high and in my view the fundamental picture is solid. Thus tilting the scale even more to the side that support will be held.
For those more cautious, the chart also defines your ' line in the sand". If purchased and the shares continue to fall, you can easily establish a mental stop to help reduce losses and move on. I added the shares @ $109 for my 2015 playbook, they once again look to be a buy here.
Margin Debt and Stock Prices
It seems many are again focused on this data point and suggest that it is is one of many signals being flashed calling for a stock market "top". Not surprising, the conversation usually starts with a comparison to the peaks in 2000 and 2007 when margin debt also hit record highs, so there conclusion is now that margin debt is at a record high again, stocks must be set for an imminent decline.
I debunked that premise in the blog post on May 28th titled Signs That The Market Is At A Top -- But Are We?? .
Lets take a look at " History"
Taking the entire history of margin debt data into account paints a much more complete and less ominous picture. While it is true that margin debt levels are usually at record levels when a bull market peaks, they are also usually at record levels for much of the period leading up to the ultimate peak.
Yes, margin debt was at record highs when the market peaked in 2000 and 2007, but it has hit record high levels in 159 other months since 1957. In the 1990s bull market, margin debt first hit a record high in February 1993, but the bull market continued for another seven years! Also, in the period between February 1993 and March 2000, 60% of all the monthly margin debt levels were record highs, so trying to time the market based on record high levels of margin debt more often than not doesn't work.
Fast forward to this secular bull market. The first occurrence was in April 2013, and since then the S&P 500 is up more than 30%. Also, since that first record high reading in April 2013, there have been eight other record high readings, and the S&P 500 is higher now than it was at any of those other points.
Whenever the market does peak, it is highly likely that margin debt will be at a record high, but to say the market is going to fall because margin debt levels are at record highs is faulty logic.
According to the American Association of Individual Investors (AAII), bullish sentiment fell from 27.34% down to 20.04%. This is the lowest weekly reading for bullish sentiment in more than two years (April 2013).
At its current level, bullish sentiment is now just slightly more than a point above its lowest levels since the start of 2009 @ 18.92%. Where is the euphoria everyone is talking about ?
This represents the 14th straight week where bullish sentiment has come in below its bull market average of 38.5%. That is the longest streak of below average bullish sentiment since August 2012 when bullish sentiment was below average for 20 consecutive weeks.
It's purely coincidental but also ironic that at the same time that bullish sentiment has been below average for 14 weeks in a row, jobless claims have come in below 300K for 14 straight weeks! Another sign that investors are simply confused as to what they are seeing.
In this week's survey, bearish sentiment surged from 24.63% up to 32.58%, which is the highest weekly reading since last October during the height of the Ebola scare. With bearish sentiment where it is now, the spread between bulls and bears is now at its most negative level since August 2013.
Let me guess ----Wouldn't you know it, that just when most investors couldn't find anything to like about the market, citing and spinning any negative they can find to disdain and short stocks ----- stocks surged.
The Secular Bull market- Where do we stand now ?
In the history of the index, there has never been a year where the index has hovered this close to the unchanged level on a YTD basis this far into the year (approx. 110 trading days).
So far this year, the index has yet to move up or down more than 3.5% on a YTD basis, and going all the way back to 1928 there are only three other years (1952, 2004, 1993) where the index wasn't up or down more than 5% at some point in the year by early June.
An interesting note that in each of those three years the S&P 500 gained between 4% and 10% for the remainder of the year.
As of June 5th the S&P 500 has gone 1,339 calendar days without a correction of 10%. The 3.5 year gap between the last 10% decline and now is the third longest rally in the history of the S&P 500 behind only the 7-year stretch from October 1990 through October 1997 (2553 days) and the 4.5-year run from March 2003 through October (1673 days)
Naturally, the fact that the S&P 500 has gone so long without a 10% correction makes many investors uneasy that the market may be "overdue" for one. Yes the "This is the Top" articles are abundant.
When the correction comes, though, is anyone's guess. As bears painfully learned in the mid-1990s, just because we are due for a correction doesn't necessarily mean it will come. Many have learned that history can and often does repeat and those calling for tops and corrections all during this secular bull run have been burned repeatedly.
Lets go back to the mid 1990s. On 1/28/94, the S&P 500 set what at the time was the longest streak of days without a correction of at least 10%. Many investors at the time probably thought stocks were due for a pullback then too, but had you sold all of your stocks or shorted the market just because the market was 'due' for a pullback, you would have missed out on a 105% + gain in the S&P 500 over three years and nine months before we saw a correction.
So for those wanting to write articles here and elsewhere attempting to make the case that this market is old and is 'due" for a spill they are merely attempting to out think and outguess the market. As I like to point out to the naysayers, it may be time to 'think again" when it comes to their theories on why the market is set for a big fall.
The example that I just gave is certainly not meant to say that investors should throw caution to the wind and buy stocks. Regular readers know how many times i have repeated that statement at various stages in this run.
If anything, with valuations where they are now and the jitters of rate hikes looming on the horizon, investors should be more discerning in any buy decisions. Pick your spots and take what the market gives you.
I still think earnings for the S&P 500 are going to grow by 4% - 5% on average for the year of 2015. I also believe companies are going to buy back somewhere between 2% - 2.5% of their shares. When added together that implies stocks might rally between 6% and 8%.
Add in the ~2% dividend yield on the S&P and you look for an expected total return for the S&P this year of 8% to 10%. I know that sounds like pretty lofty returns given the meager returns year-to-date, and given all the consternation in the world but as repeatedly stated, " The equity markets do not care about the absolutes of good and bad, but only if things are getting better or worse." The backdrop I am using is the same as 2013
The secular bull market is in force and the S & P will in fact be higher down the road than it is today.
The Economy - Here at home
This week we got a look at a report for the month of May, the index of small business optimism jumped from 96.9 up to 98.3, which was more than a full point ahead of consensus expectations.
The monthly NFIB report is always full of interesting data and trends regarding small businesses, so if you have the time it's always a good idea to check it out.
Two trends that stuck out in the latest report were sales and earnings at small businesses. The sales component of this month's report had its largest one month gain in more than ten years (April 2004), rising from -4 to +7, the highest level since May 2006!
That increase in sales is also translating into higher earnings too. The index of earnings in the NFIB report saw its largest one month jump since April 2012, rising from -16 to -7. That is the highest level since October 2005.
The report also reveals the following
Owners report that the labor market is, from an historical perspective, getting very tight. Owner complaints about "finding qualified workers" are rising, job openings are near 42 year record high levels, and job creation plans remain solid. Over 80 percent of those hiring or trying to hire in May reported few or no qualified applicants."
That coincides with the Jolts report released this week with a headline that "Job openings hit a 14 YEAR high".
Retail sales rebound
Retail sales rose about as expected in May, but upward revisions to March and April painted a much brighter picture of consumer spending.
After five straight months where headline retail sales missed consensus forecasts, this morning's report for the month of May bucked the recent trend and was right inline with forecasts. While the headline reading matched consensus forecasts, underneath the surface the report was considerably better. Backing out autos and gas, retail sales actually saw stronger than expected growth. Additionally, sales readings for March and April were also revised higher implying an even stronger rate of growth
Maybe the headlines that we have been seeing regarding GDP isn't telling the entire story of what is really going on underneath the surface.
An issue that many may be overlooking - Household deleveraging. The Federal Reserve's quarterly Z.1 release details aggregated balance sheets of the United States, giving us a view into household, government, and corporate asset, liabilities, and net worth.
While total household debt has stopped falling and is indeed 4.2% off of the lows from Q3 if 2012, as a percentage of total output it continues to fall, albeit at a slower rate. This is an extremely important context to keep in mind for recent economic growth. While growth has been sub-par, massive chunks of income have been directed to paying down debt rather than investing or in consumption. This is in contrast to the mid-2000s, when households piled on debt, artificially boosting consumption.
For now, household debt's share of GDP is rising, ever so slightly, to 76.8% from 76.3% the last two quarters. If that share starts rising, we can expect stronger growth ahead.
Economy - Globally
Greece and the ongoing headlines on foreign debt issues.
The soothsayers are proclaiming
"The global bond market is telling us something". "Look at the German Bund yields" , Why would anyone want to invest there and lend money to these entities for negative and now paltry yields?"
Perhaps there are reasons why this has and is happening and offer an explanation as to why the recent selling in these bonds have led to rising yields.
The case to won Greek Debt - maybe some do believe Greece will not default and investors/ European money managers want to pick up that extra yield.
But how to hedge that , just in case they are wrong. If Greece does default, it will cause a panic in Europe, especially in debt instruments issued by the less secure countries (justified or not).
In such an environment, every institution that MUST be invested in Euro-denominated securities will run for whatever is considered the safest security in Europe. Might that be German bonds?
It is generally believed, without question, that anything guaranteed by the German government is the safest thing in Europe.
If there is a Greek default, the German Bund will skyrocket in price as everyone tries to "run through that door" at the same time.
Institutions throughout the world have been therefore buying the German Bund as a hedge against a Greek default, rather than buying it solely as a debt instrument. So it doesn't matter what the Bund yields, or even if it has a zero or negative yield. Almost no one is buying it for income.
The other side of this story; Greek debt is being bought by certain institutions that have significantly large German bund positions, because if Greece does indeed somehow solve their issues, it dissolves the need to own a virtually non-interest-paying hedge.
This would cause the German Bund to plunge in price. The Greek bond would, in such a scenario, jump in price, and that price increase, coupled with the very large interest payments, would act as a hedge and trump any German Bund price decline.
THIS is a factor that should be recognized as a reason for the head scratching that is taking place when it comes to fixed income around the world. To ignore it is simply an attempt by the naysayers to spin a story and make a case for another Armageddon.
One other factor that may be putting pressure on European Yields is the news that the Bundesbank said in a press release that
"The German economy has recovered more quickly than expected from the cyclical lull in the middle of last year and has returned to a growth path that is underpinned by both domestic and foreign demand."
A comment from an author here on SA and his views on the equity market and 'Headlines".
Definitely, I'm not interested how and why that 11 million population of Greece and it's $242Billion GDP will ever be able to derail the ongoing global recovery story being spearheaded by the US, Japan, Germany, and possibly China next shoe to kick up with QEs. With more than $1Trillion now allocated for EU's QE, better set our sight on that and Follow The MONEY!
I'll agree and add the fact that he has been correct on the direction of the equity market for quite some time now.
Hit a new 2015 high this past week. Two weeks ago I mentioned that many were calling for prices to fall and as usual that created a following of more "wizards" that called for shorting both the crude futures and oil stocks.
Might we see Crude go back to $50-$55, in the course of consolidating this years gains ? -- sure. Can we see WTI head back to the $65- $70 level? --- a distinct possibility. Many can attempt to gauge the Supply side of the equation but fall woefully short when trying to come up with the demand picture.
What I don't see is a price collapse that people are still calling for. I don't see the company "debt" issues that are talked about with some of the oil names as becoming a contagion and finally I don't see the panic selling in the energy names that some predicted.
In my view anyone that has little or no exposure should now be scaling in and accumulating the "majors" with their historical dividend growth records and current yields. Many of the E & P names are back to support levels. Use those support levels as your guide to limit your downside when entering a position.
The financials continue to outperform and have been the beneficiary of money rotating into that sector. The same crowd that called for the debacle in the oil patch also noted that the "financials were "dead", citing the "contagion " that they "knew ' was just around the corner.
Here is a chart of a regional Texas bank - TCBI, that was the target of the shorts when that story was spun back in Feb .
A 40% move since then. For the new chartists in the room an example of a stock following its trendline. That's the first takeaway from this example. The second, avoid the noise from the people who have had the story wrong for this entire bull market run. ( more on these morally bankrupt individuals later)
Overall, Financials are hardly "dead" as the KBW Bank index is now up 7% for the year after being one of the laggards in February.
Another industry I prefer at the moment in the consumer Discretionary sector is the "hotels". Occupancy rates are being reported at the highest levels since 2000, which is the previous high water mark for hotel capacity utilization. Revenue per hotel room is up 11% year over year and the average daily rate charged is up 6.5%. People are traveling at historic levels and the industry has massive pricing power over consumers, contributing to what I believe is now a secular growth story.
I'll take a few more minutes of your time by repeating the message that I have delivered for quite some time.
We are in a secular bull market, & if nothing else I suggest to avoid those that have had the story "wrong'. I repeat this as the frustrated bear crowd has renewed life as I was inundated with commentary this past week debating the notion that pundits like John Hussman and Jesse Felder are individuals that we should be heeding now.
I beg to differ;
Mr Hussman's weekly missive - May 2013
"""Examine market conditions. We have a Shiller P/E of 24, 52.1% bulls versus just 19.8% bears, the S&P 500 pushing into its upper Bollinger bands (two standard deviations above its 20-period moving average) at daily, weekly, and monthly resolutions, the S&P 500 at a multi-year, overbought high, and the 10-year Treasury yield above its level of 6-months prior. Identify similar periods in history (even on less restrictive thresholds), and you'll find a Who's Who of major market tops.""""
I'll add :
2 months after the S & P broke out of a 13 yr trading range and embarked on a secular bull run, with the S & P @ 1550, it was being compared to the "who's who" of market tops..
that's 550 S & P points ago,
From Mr Felder May 31, 2013
Same time frame and circumstances,
He penned this
S & P was at 1630 the day he wrote that and according to him, it was the worst time to be invested.
I mention risk and using technicals to assess and maybe avoid risk.
The naysayers complain that there is a lot of risk in the market at these levels.
Risk ???, Take the time and assess the risk when listening to the many pundits that have been completely wrong. It is one thing to make a bad call and be wrong, we all are guilty of that. However the individuals that ply their trade spinning and pounding their ill fated messages and strategy over and over are in fact morally bankrupt individuals.
THE takeaway -- successful investors follow those that have had the story correct, not those who have been miserably wrong and waiting and hoping that someday their views and strategies regarding the equity market will eventually come to pass.
My takeaway - the frustrated bear, "top" calling, short selling crowd is alive and well, --- that my friends is a good thing.
Enjoy !! , Best of Luck to all !!
Disclosure: The author is long GILD,CELG,LQ.
Additional disclosure: I am long numerous equity positions - latest updates are here http://seekingalpha.com/instablog/706857-fear-and-greed-trader/4050696-may-31-update-minus-2015-portfolio-playbook It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.