LunaticTrader

Investing with the Moon

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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Outlook for week of February 20

Posted by Danny on February 19, 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 »

Is this it?

Posted by Danny on February 15, 2017

For years I have been updating a 1920s comparison chart on this site, until mid 2015. That’s when the current bull market started falling behind compared to the 1920s, as reported in this post. I want to revisit this chart today and the reason will be clear from this updated chart:

dow2010vs1920_upd9

The current bull market has reached the point where it is just as long as the great 1920s advance. And the market is at new all time highs. The recent run-up has not been nearly as spectacular as the final push in 1928-29, but the price pattern still shows a nice similarity over this entire period.
Of course, there is no law that says that bull markets have to be equally long. But I zoomed in a bit more closely and compared the recent price action to the final year before the 1929 peak. This is what I got:

1929vs2017

Daily price action doesn’t get much more similar than this, especially in the final 7 months. A six month sideways phase gave way to a final rally that lasted a little over three months. Even the smaller six weeks sideways before the final three weeks upward thrust to the top gets repeated. If this is not a mere coincidence then we are now within days of a major top.
The gains are smaller (which is not abnormal in a bull market that “only” triples from its starting lows), but the price pattern is almost a photocopy.

What could go wrong? Well, it’s never good to get married to a price pattern. There is also another possibility to consider here. In the 1920s the final runaway mania stage didn’t start until the Fed had really started hiking interest rates several times in a row. Bonds are not a place to be when rates are going up (which pushes bond prices down), so more investors started getting into stocks (which happened to be going up every day, making them hard to resist).
This time the Fed has waited longer to hike rates, so the final runaway stage may just be getting started now. We will know if the market keeps going up in March and April. In the 1920s an acceleration came once the market had more than tripled from its lows and we are now very close to triple again. This could be a sudden “phase change” just like water starts cooking at a certain temperature. Vapor behaves differently from liquid water, and just so a market that goes into blow-off mode behaves very differently. Buying begets more buying and people who stayed in bonds start feeling stupid compared to their friends who are driving nice new cars they bought on the back of their stocks market gains. It starts feeding onto itself.
Sure, some people will keep warning about overvaluations. But investors won’t listen. Why not? Because it is well known that most investors suffer from “superiority bias“. Just like almost 90% of drivers think they have above average driving skills, investors typically believe they have above average investing skills. If you happen to think that your investing skill is below average then you will probably keep your money in a savings account, or hand it over to a money manager (who is usually having even more superiority bias than a retail investor). The result is that participants in the stock market are almost invariably believing that they will be able to get out before stocks go down.
This may happen again and we are probably close to the point where this phase change can start.

Posted in Market Commentary | Tagged: , , , | 6 Comments »

Pushing higher

Posted by Danny on February 13, 2017

Markets are not looking back and the S&P 500 is trying to push above the overhead resistance in the 2300-2350 area. Meanwhile the Dow is trying to get away from the 20k level, which is the final step we want to see if this market is to climb further. This is a do or die point. Here is the current S&P chart:

sp500-daily-6_11_2015-2_10_2017

The sideways price action since December is giving way to a new upward thrust. The move could still fail at this point, but a climb above 2350 would quickly change the odds towards the more optimistic scenario given in my recent Dow 32k article. Then a final sharp blow-off rally stage would become the base scenario.
The Earl (blue line) is neutral and could go either way. The slower Earl2 (orange line) appears to be making a shallow bottom, which would bode well for a further advance. We will also start a new lunar green period this week and that could fuel a further advance towards S&P 2500-2600 this summer.

What could go wrong? Well, the S&P 500 may fail at this 2350 hurdle and that would probably lead to a sharp pullback. The LT wave for February peaks today with some carry-on strength until the 15th. We don’t want to see strong gains that are given back by the end of the day, because that would indicate strong selling near a top.
All we can do at this point is watch carefully and be ready for both scenarios. Once we get a real breakout or a failed breakout subsequent price action will become more clear. I will be posting updates on my twitter as events continue unfold.

Posted in Market Commentary | 5 Comments »

 
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