A Cycle Peak Is Approaching for the U.S. Equity Market

I try to keep an open mind when it comes to applying various forms of analysis to financial markets. I of course have my preferences: pure price and volume analysis while incorporating tools to evaluate momentum. However, there are many other tools at the disposal of a trader, some can be beneficial while others are often just variations of noise. While I do not heavily use cycle analysis in my research, it is something I keep an eye on.

I’ve mentioned the currently cycle several times on Twitter as well as a couple of blog posts…

On August 8th of last year I tweeted out this cycle was peaking. The S&P ultimately declined 5% before the post-election rally took hold. In January of last year I also tweeted about the cycle before equities dropped 11%. On April 21, 2015 I wrote an article for See It Market highlighting the cycle, stocks then dropped about 12%. And in 2014 I wrote a post, Is A Cycle Peak Coming Later This Year? Which was just before the S&P 500 declining a little over 7%.

I don’t bring these tweets and blog posts up to pat myself on the back but to show that I didn’t just make up this cycle yesterday by formfitting the data.

We are now at a point where the cycle is turning once again and with equities at/near (depending on which index you look at) new highs, the risk is to the downside. The amount of prior declines has not been bull market-ending but instead have been buying opportunities. Based on the strength in the breadth data, I don’t see a major argument why this time should be different – i.e. a 5-10% drop before buyers step back in. I’m not saying that’s what will happen, but that’s what’s taken place over the last several years when the cycle has topped or bottomed. We’ll see what Mr. Market brings in the coming weeks, but it appears the risk/reward is not overly favorable from a cycle standpoint.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Charles H. Dow Award

I’m extremely honored to announce that I’ve won the 2017 Charles H. Dow Award given by the Market Technicians Association (MTA). The Dow Award is given by the MTA for research completed that’s helped advance the study of technical analysis and has been received by many authors and money managers I greatly admire. My research paper, “Forecasting A Volatility Tsunami,” which takes a unique look at market volatility will be released in several weeks and I’ll be sure to share it on the blog once it’s made public.While I completed the paper over six months ago, the topic and findings are quite pertinent during the current market environment.

After joining the MTA and earning my Chartered Market Technician (CMT) designation several years ago, it was a professional goal of mine to complete a piece of research that was worthy of receiving the Charles H. Dow Award. I consider it a great honor to have my work acknowledged and I look forward to the feedback it gets by those I respect in our industry.

From the Market Technicians Association:

In 1994 the MTA established the Charles H. Dow award to highlight outstanding research in technical analysis. The Award has received over 160 submissions, and recognized 17 papers for their excellence. Of the 21 authors/coauthors who have won, eight have gone on to publish books based on their submissions to the Charles H. Dow Award. Winners have presented at the MTA Annual Symposium, local chapter meetings, and participated in MTA podcasts and/or educational web-series.

Charles H. Dow Award (MTA)

2017 Market Technicians Association Symposium Press Release (MTA)
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Breadth For The 9 S&P 500 Sectors

Below are the charts showing price (most charts are price only and not dividend adjusted outside of $XLF, which is divided-adjusted) as well as the sector’s respective Advance-Decline Line. The Advance-Decline Line is one of the most commonly used tools to measure the breadth, which is just a fancy way of saying participation, within a market. A-D Lines simply measure the cumulative number of underlying stocks that are rising or falling. When a sector is hitting new highs, ideally you want its breadth measurement to also be in a strong up trend and hitting new highs. It’s when these two diverge that we see a warning sign that the trend may be changing as the level of participation by individual stocks is not showing strong support.

Health Care
The SPDR Health Care ETF ($XLV) is currently trading in a consolidation pattern with resistance around $71.50 and support of a rising trend line connecting the prior higher lows. The A-D Line for Health Care is near a new high and has shown a solid level of support by the underlying health care stocks.

Consumer Staples
$XLP has been in a down trend since its mid-2016 peak, however price has recently broken above the declining trend line as buyers have re-entered the market for consumer staple stocks. The A-D Line for $XLP has been showing a greater sign of strength having risen back to its prior high and is ready to potentially breakout.

Utilities
The utilities sector ($XLU) has been improving since November but still well off its mid-2016 high. Breadth has maintained its up trend for $XLU, not putting in any lower lows like price has over the last 6 months.

Materials
The materials sector has been in an up trend since its early-2016 low and is currently testing a trend line off its intermediate low from November. $XLB’s A-D Line test its prior high but was unable to break out like price had last month.

Consumer Discretionary
$XLY has been setting new highs after putting in an intermediate low in November. However, its Advance-Decline Line has not been able to breakout quite yet – still sitting under its prior August high.

Energy
$XLE had a strong 2016 after declining for several years. However, it’s A-D Line has not been seeing the same level of strength, creating a bearish divergence since for the last several months. While the sector has been rising, it appear many individual energy stocks have not been as lucky.

Financials
Financials have been one of the strongest sectors since the November U.S. election. Price has been attempting to set a new high and the sector’s A-D Line has been support of that attempt, remaining strong and confirming price’s advance.

Industrials
Similar to $XLF, Industrials have been quite strong since the November election with price hitting new 52-week highs. $XLI’s A-D Line has continued to confirm the moves made in price.

Technology
Finally, the last of the S&P sectors and one of the strongest of the group. Technology has continue its up trend and practice of hitting fresh new highs. Fortunately, the A-D Line has continued in its up trend as well. While the A-D Line hasn’t quite broken out like $XLK has most recently, it is very close to doing so.

Update: While Real Estate has been added as a sector, I unfortunately am unable to find an advance-decline line for it, so it has to be left out of this post at this time.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.