LunaticTrader

Investing with the Moon

We got a 1% down day, what next?

Posted by Danny on March 22, 2017

The S&P 500 dropped 1.2% yesterday and this ends a 109 day streak without 1% drop. This is only the 13th such +100 day period since 1950 for the S&P, see my February post.
This drop was met with panicked reactions and crash warnings on social media, but people forget that 1% down days in the S&P 500 are nothing special. Over the last 67 years the S&P 500 has had 1662 such down days, or 10% of the time. That’s about one 1% down day every two weeks on average. But traders have very short memories and when something hasn’t happened for 5 months it feels as something special already.
The previous 1% down day was 11 October 2016, do you remember it? Probably not.

What’s more interesting is what happens after such a long streak ends. Here is the updated list of +90 day periods:

1pc_down2

While most investors intuitively think that a first big down day after a long absence of such days is a bearish sign and maybe the start of a crash, history shows us otherwise. More often than not the market just keeps climbing after that first big down day. Two weeks later (10 trading days) stocks were higher 8 times out of 13. After two months (40 days) the market was higher 11/13 for an average gain of 3% ( = 19% annualized). And a year later the S&P 500 was higher 11/13 for an average gain of 14.8%.
While this doesn’t guarantee similar gains in the coming months, there is certainly no reason to believe that yesterday’s 1% down day is a very bearish omen. If anything you should probably use this drop to pick up some cheap long term call options in the coming days. That’s the counterintuitive thing to do here.

Sure, this drop does some technical damage and has probably shocked a few investors. A trend line is clearly broken and now the market will search for a bottom from which it can start to rally again. How long that healing will take is a guess at this point. I like to keep an eye on my aggregate stats for bullish and bearish stocks in S&P 500. This is what we have at the moment:

spx

The number of S&P stocks in bullish mode (red line) has dropped to 230, which is below 50% for the first time since early November. Stats have been weakening slowly since early March, very similar to what happened in Jul-Aug 2016. When the red line bottoms out it will be a first positive development and when it gets back above the blue line we can start thinking about a new sustained rally.
I wouldn’t be surprised to see the market test the bottom orange trend line in the coming week or so. And that’s where it will get interesting.
Patience pays.

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SKEW is high again

Posted by Danny on March 20, 2017

Stocks have been pulling back a bit in recent weeks, but so far it seems to be the “short and shallow” variant as described in my most recent post. The Nasdaq has easily held above 5800 and is already pushing back towards its recent highs. This means the scenario for a further 5% surge before summer stays firmly on the table and is gaining traction. Let’s have a look at the current S&P 500 chart:

^SP500 (Daily) 6_17_2015 - 3_17_2017

The trend line since the November lows is being tested but holds up well. The Earl (blue line) has bottomed out and is headed higher, this is short term bullish. The slower Earl2 (orange line) has a bearish divergence in place and that is a medium term warning sign. The MoM indicator is back in the neutral zone and can go either way. The bearish divergence in the Earl2 indicates a serious risk for a significant pullback, but it would get invalidated if the Earl2 turns back up near the neutral line. That would probably happen if the S&P 500 climbs above the March 1 highs. So, what will it be? This is the kind of situations where keeping an eye on investors’ mood is most important.

Right now lots of technical traders probably see a strong potential for a sharp pullback if the blue trend line gives way. And that’s why the CBOE SKEW index reached a new all time high last Friday. This means traders are overpaying for “crash insurance”. But, as I pointed out in this article a few years ago, major crashes are typically preceded by a period of relatively low SKEW readings. When there is widespread confidence and feel-good about the economy then people don’t buy crash insurance puts. Then SKEW becomes low and complacence high. But that’s not what we see at the moment. Here is a chart showing the recent years evolution of SKEW index:

SKEW

The early 2015 highs were accompanied by relatively lower SKEW values for months and that’s when we got some significant drops later that year. Then SKEW reached new record highs in the days before the Brexit referendum, as investors were buying crash insurance again, but most of that crash insurance became worthless as the market surged to new highs in the ensuing weeks. More often than not overpriced cash insurance does not pay off. But bears keep trying and now we have record high SKEW again. Will their crash bets pay off this time? If history is a guide then the answer is: probably not.
And in that case we can expect something like this:

spw

On a breakout above the March 1 highs the market will probably head for the upper boundary of its trend channel (blue) since the early 2016 lows. That boundary is currently in the 2500-600 area, so that would be my initial target for such a move.

This bullish case would go on the back burner if the S&P 500 makes a close below 2350. Such a failure could come this week, because our LT wave for March suggests weakness until the 29th. If no downside action is seen and the bullish scenario can survive this weaker period then we are probably headed for a mad April. Be ready.

Posted in Financial Astrology, Market Commentary | Tagged: , | 2 Comments »

Outlook for week of March 20

Posted by Danny on March 20, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

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Outlook for week of March 13

Posted by Danny on March 12, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | 2 Comments »

Stocktwits is overtaking Zerohedge

Posted by Danny on March 7, 2017

Stocks are pulling back a bit since their March 1 peaks, but nothing dramatic so far. The S&P 500 has now gone 99 trading days without a 1% down day, so if stocks don’t drop today this move will join the 100 day club. That hasn’t happened since 1995.
Let’s have a look at the Nasdaq chart:

^COMP (Daily) 6_29_2015 - 3_6_2017

All my indicators have turned down, so March 1 may have been a major peak. But we have to watch carefully what happens next here. If the current pullback stays short and shallow or sideways then it will probably be followed by another 5% surge higher. Such a shallow pullback could see Nasdaq test 5800, but not much lower than that.
This market has been doing all the right things, as described in my December post, and that means a final strong advance is quickly becoming the base scenario. One of the main conditions is an S&P push to 2500-600 before summer and that doesn’t look so crazy anymore.

If we get that kind of blow-off peak scenario then we should start seeing the typical symptoms that come with it. Look for reports that a lot of new investors are opening brokerage accounts and buying stocks for the first time. And a much more buoyant mood on popular investor hangouts like Stocktwits. At the same time look for known bearish sites to become less popular. Once retail investors cave in and put more of their savings into stocks their appetite for bad news, bubble warnings and bearish commentary goes down. I like to use Google Trends to keep an eye on it. For years I have been expecting that Stocktwits would become more popular than Zerohedge by the time this market peaks. And that seems to be happening now:

zeroh-sttw

(source: https://trends.google.com/trends/explore?date=all&q=stocktwits,zerohedge )

The surge for Stocktwits shows that retail investors are quickly warming up to this market. Meanwhile Zerohedge seems to have lost about 20% of its audience in recent months. If those trends continue and Stocktwits clearly overtakes Zerohedge then it will be a very significant indication. And then the difficult job will be to determine when and where this love affair with stocks will end. Such a final surge typically lasts between 8 and 18 months.

Posted in Market Commentary | Tagged: , , | 7 Comments »

Outlook for week of March 6

Posted by Danny on March 5, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

LT wave for March

Posted by Danny on March 1, 2017

The market has drifted sideways in the recent week and we are now going almost 100 trading days without a 1% down day in the S&P 500. That’s already the longest such streak since 1995. It will be interesting to see if this move joins the 100 club. Let’s have a look at the current S&P 500 chart:

sp500-daily-6_3_2015-2_28_2017

The rally that started in November keeps going and there is no clear sign yet that the advance may be over. The MoM indicator stays in the +8 euphoric zone, but it has turned down which means we can do some first selling at this point. If MoM drops below +8 then do some more selling. See last week’s article.
The Earl (blue line) has turned down, which suggests a pullback is coming up. But maybe it will be no more than a few days hiccup before stocks climb to another record. There is no way to tell at this point, we just need to be aware that this market can suddenly go into blow-off mode here. Such a move becomes very difficult to read in its final stages, and traders who find themselves on the wrong side of it are typically given little or no chances to get out without significant losses.

The LT wave for March doesn’t paint an easy picture either:

ltwavemar2017

The LT wave for February was partially successful. After some hesitation in the first week stocks surged to new records in the expected strong period until the 15th. The next expected weak period didn’t produce any decline and the final days saw new records again.
For March there is a peak value on the 1st followed by projected weakness until the 10th. Then a strong period until the 15th or 16th. A second weak period is expected until the 27th.
The lowest LT wave value of the month comes on the 7th, with a second low on the 27th. Peak values come on the 1st, 13th and 29th.

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Outlook for week of February 27

Posted by Danny on February 26, 2017

Outlook for world markets with brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. Comes as a daily html file covering over 2700 stocks and ETF. To see what you get you can pick up recent free samples on this page. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

A long absence of 1% down days

Posted by Danny on February 24, 2017

The S&P 500 hasn’t had a 1% down day (on a closing basis) since 11 October 2016. That’s 92 trading days without a more than 1% decline, the longest such streak since late 2006. If the market keeps this up a few weeks more then the current series will join the 100+ day club, which would be the first since 1995.

Investors generally don’t care about days when the market goes down 0.4%, 0.7%,… But when benchmark indexes are down more than 1% in a single day then it stings. Since 1950 there have been only 12 occasions when the S&P 500 went more than 100 trading days without a 1% decline. I wanted to see how the market performs in the weeks and months after such a long streak ends. Here is the list including the 2006 streak, which ended at 94 days:

1pc_down

The table shows the ending dates and how many trading days the S&P had gone without a 1% drop. The longest such period was 154 days, which happened twice. The next columns are more important, showing the market performance in the 10 days, 40 days and 250 days after a long period without 1% down days ends. This is trading days, so roughly corresponds to 2 weeks, 2 months and 1 year after the 1% down day that ends a streak.

On average the S&P climbed 0.77% in the next 10 days, 3% in the next 40 days and 14.8% in the next 250 days (= 1 calendar year). To put that into perspective, since 1950 the average performance has been 0.33% in 10 days, 1.3% in 40 days and 8.7% in 250 days.
Somewhat surprisingly we see that the market has performed much better than average after a 1% down day that ends a +100 day streak. Intuitively one would think that the first serious down day after a long period of relatively “painless” trading would often start a more serious downturn. But that happened only once, in 1957 when the S&P dropped more than 10% in the next 40 days. Most of the time that 1% down day was a great buying opportunity for the short and medium term.
The reason seems to be that such 100 day series tend to happen in the midst of multi-year stock price advances and not towards the end of them. So, when that first 1% down day finally comes there are usually several months if not years left in the ongoing bull market.

The problem with this kind of studies is that it suffers from the “law of small numbers”. We have only 12 historic cases, so we cannot be very confident the same will happen again. Here is the list of streaks that were 50 to 90 days long:

1pc_down2

Obviously those shorter streaks without 1% down days have been more common, but the subsequent market performance shows a totally different picture. Now we get a -0.4% in the next 10 days, -0.5% in the next 40 days and an average gain of 4.7% in the next 250 trading days. This is significantly worse than the average over this test period.

The current dearth of 1% down days will end sooner or later. But will it be a buying opportunity or not? On the basis of the history of 100 day streaks we would say yes, but the second table of 50-90 day streaks suggests that our 100 day club may have been very lucky. It is a good example that shows us how careful we should be with anything that has been observed only ten or twenty times.

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MoM will take care of you

Posted by Danny on February 20, 2017

That’s not just a wink to all the loving mothers out there. I am of course talking about the MoM indicator, one of my three “bread and butter” indicators you can usually find in the charts I post every week. Before taking a closer look on how to use the MoM for index trading I want to start with the current Nasdaq chart:

comp-daily-6_23_2015-2_17_2017

Both the Nasdaq and the S&P 500 have been making a significant breakout to the upside, brushing aside overhead resistance and not showing any intentions of looking back. This is a scenario I have been warning for last week. We still have to keep an eye on the remaining possibility of a failed breakout, as I discussed in my mid-week post. But if the market keeps forging ahead into March then the scenario of a failed breakout would become unlikely.

The MoM indicator is shown at the bottom of the chart and has now climbed above 8 for first time since early August. For individual stocks it is quite common to see the MoM go above 8 during strong rallies, but for broader market indexes a +8 usually happens only a few times per year. The +8 euphoric zone means the market is red hot and the risk for a sudden pullback, if not the start of a bear market, is high. But that doesn’t mean a pullback is imminent. Just as often a +8 gets worked off through time. That’s what we got in Aug-Oct 2016. We see three earlier cases of MoM +8 in the chart (circled in blue) and you wouldn’t have missed much by selling on those occasions.

Conversely, when MoM drops below -6 into the blue zone it usually marks tradeable bottoms and a -8 (= depressed) will typically indicate a major low. I have marked 7 such opportunities in the chart. It is easy to see that you would have done well by doing some buying at those -6 opportunities and just hold until the next +8 peak. Again, for individual stocks it is more common to see -6 or even -8, but for market indexes it is quite rare. We can use this to do swing trading with just one indicator.

There is a couple more things to know if you want to make the most of this:

1) You do not need to sell on the very first day the MoM climbs above 8. As long as it keeps climbing you can wait. Just move your stops closer to the market when MoM is +8 and wait for MoM to turn down to start selling. If MoM falls back below +8 then do some more selling. More often than not you will be able to get back in at lower prices in the ensuing weeks or months and that’s how you can lower your cost basis.

2) In a strong bull market the MoM may not drop back to the -6 zone all that often and may print a series of peaks in the +8 area. Here is a good example from Nasdaq in 2013-15:

comp-daily-5_23_2013-4_8_2015

MoM in the -6 zone gave us good entry points, but in the second half of 2013 we see a series of +8 peaks with small pullbacks that take the MoM to the zero level but not all the way down to -6. This happens when the market goes into “climbing up the stairs” mode. Then pullbacks are short and shallow with each new thrust creating another step higher. So, be prepared for this possibility. Actually, the current +8 as shown in the first chart could be the start of such a series. Two pullbacks since the November lows have seen the MoM bottom at zero before turning back up. This is climbing up the stairs until we see a deeper drop in MoM.

3) In major bear markets MoM will often fail to reach the +8 zone on rallies and print series of -6 lows during “waterfall declines”. This is just the reverse of #2. Here is a great example showing Nasdaq in 2008-09:

comp-daily-9_6_2007-8_20_2009

MoM reached +8 near the peak in October 2007. That was followed by a series of MoM lows in the -6 zone and a persistent failure to reach +8 on rallies. During the crash stage in late 2008 MoM stayed in the -6 zone for months. In this kind of situations patience is of the essence. After a lengthy stay in the -6 zone you will almost always see a secondary low that takes MoM back to the -6 zone, but not as low as during the crash stage. You want to buy on those secondary lows, not during the crash itself. Here we got two of them, November 2008 and March 2009. The next +8 didn’t happen until July 2009, almost two years after 2007 peak.

4) To buy major lows you don’t buy on the first day that MoM dips below -6. At least wait as long as MoM keeps going down and if it is a powerful decline then be aware for possible “waterfall” stages. It will often be better to wait until MoM climbs back above -6 and if there has been a lengthy -6 phase then wait for secondary lows as described above. To show an example for a different market here is the Oil crash from 2014:

cl-daily-6_27_2013-5_16_2015

A +8 peak in July 2013 was followed by several -6 lows. Those lows gave way to little rallies, but none of them strong enough to reach +8 again in the next 12 months. That signaled weakness. The subsequent waterfall declines kept MoM below -6 most of the time and dead cat bounce rallies couldn’t even get above zero. When you see that it is important to resist the temptation to buy at “very cheap” prices. Just wait. In this case buying when MoM climbed back above -6 in late January 2015 would have given a good entry, but still dangerous as evidenced by the drop to lower lows in March. We want to wait for a secondary low after such a waterfall decline. here is how it continued:

cl-daily-11_29_2014-10_7_2016

There was a nice rally in early 2015, taking Oil back up to $60 and making many investors think that the bottom was in. But it failed to reach the +8 zone, suggesting ongoing weakness. Soon the price of Oil was sliding to new lows again with MoM staying in the -6 blue zone for almost two months. And then a final washout decline into early 2016 lows just above $25. Notice how the final low in February 2016 came with MoM bottoming well above the -6 zone. This is a major bullish divergence, a common feature at the end of long declines. The next +8 peak came in August 2016, almost 3 years after the previous one. This is how patient we have to be in major bear markets.

Reading the market is a difficult challenge and always will be. There are no perfect tools for that purpose. But MoM indicator usually does a decent job. The MoM for major indexes is posted on my Twitter every day.

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