February 2013 – Andrew Thrasher

Sector Performance Should Worry Equity Bulls

Posted on February 28, 2013 by Andrew Thrasher, CMT

With today being the last day of the month you’ll likely see the calls for month-end window dressing and a bunch of other excuses for why the market rises or falls to finish out February. It’s often best to take all of this with a grain of salt. However one thing we can look at as we head into March is the sector performance for the first two months of 2013.

Stockcharts has a great sector tool to look at performance of the 9 S&P sectors on a customizable time frame. So far we have two sectors in the red (tech and materials) with a clear outperformance in energy, healthcare, and staples. While equities have had decent performance so far this year, it appears the advance has come on the back of some of the lower-beta areas of the market.

Where does this put us in the grand scheme of things? It doesn’t look good. As you can see from the cycle chart below, which shows what sectors typically outperform in various stages of the market and economy, energy, staples, and healthcare sit at the crest (top) of the cycle. When we expand our view and look at the sector performance from the Nov ’12 bottom through yesterday, we can see that financials, industrial, and energy are the top performers, with technology being the laggard.

This isn’t a good sign for equity bulls it’s not necessary the final bullet to stop them in their tracks. I’m still looking to see if we can test the high of 1530, although it appears equities are gasping for air as traders attempt to regain their footing.

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+.

Checking Back in With Copper

Posted on February 27, 2013 by Andrew Thrasher, CMT

Back on Feb. 14th I wrote about the bearish setup taking place in copper. Since then we have seen copper fall a little over 7%.

This has taken us to a longer-term rising trend line going back to October ’11. The more times this trend line gets tested the weaker it likely becomes, so with the global markets recently taking a ‘risk off’ posture it might be just what copper bears need to finally break below and test the previous low of $3.40. Those hoping for lower copper prices must also contend with the 200-week moving average (not shown) which sits at $3.52.

Level of Equity Support and A Possible Scenario

Posted on February 26, 2013 by Andrew Thrasher, CMT

Well yesterday was fun. I’m sure all of you saw the massive spike in the $VIX and the big advance that the yen took. Today also should be an interest day for traders with Bernanke testifying before Congress at 10am and headlines about the Italian election.

We saw the S&P 500 approach its first Fibonacci retracement level of 1486 after yesterday’s drop. This is the level of support I’ll be watching today to see if bulls can defend their ground or if the swift switch in momentum is too much to overcome.

Back in late-September I discussed a possible drop in equity prices if 1430 was unable to hold. I showed a chart of the relationship between the NASDAQ and 30-year Treasury Bonds on a weekly basis. Well yesterday’s price action has caused this ‘risk off’ metric to flip again like it did last fall – giving us another warning sign of investors shifting out of the higher beta NASDAQ Comp. in favor of long-dated bonds. After that post in September equities did rebound and test the previous high before breaking 1430 and taking us to the low we saw in November. Last week I mentioned on Twitter and on the blog that we’d likely whipsaw as the last group of buyers stepped in before the real technical damage took place. We’ll see if this plays out and we get a test of 1530 or if things have broken down already.

Is China Setting Up to Outperform EAFE?

Posted on February 25, 2013 by Andrew Thrasher, CMT

My article for TraderPlanet this week takes a look at the ratio chart between $EFA and $FXI. I show how the RSI indicator can be used to get an early warning to a possible shift in relative performance between these two ETFs.

Here’s a piece:

The iShares MSCI EAEFE Index ETF ($EFA) typically has a positive correlation with the iShares China 25 Index ETF ($FXI). The 20-day correlation currently sits just over .70 and has only dipped negative three times momentarily in the last year. While the correlation between these two foreign ETFs is positive they still can be looked at through a lens of mean-reversion. The way this can be done is by looking at the Relative Strength Index (RSI) of the ratio created by $EFA and $FXI.

Read the rest: China: Minimize Risk with Pairs Trade $EFA (TraderPlanet)

Yes The Market Was Negative Yesterday But Don’t Pee Your Pants

Posted on February 21, 2013 by Andrew Thrasher, CMT

It’s amazing the shifts that take place on days where the market moves like it did yesterday. Those that were calling a top a few weeks ago and then went silent were resurrected with their chest pounding announcements for the Dow to drop to zero….view this as entertainment and not as analysis. They are CNBC and other news sites to draw viewers not to personally make you money. While some technical damage was done yesterday it needs to be kept in context of the bigger picture. I stand by my believe that the risk lies to the downside but we still must be smart.

I’ve discussed the sentiment data that showcased the extreme amount of bullishness that has plagued the market (here here here and here). Typically we see sentiment top out before equities do, and so it seems we can check that box. With each post warning caution I would end it with saying we must watch price and let it dictate our actions. This has been critical since we’ve marched higher in the face of the sentiment warning flags.

Tops are a process. We appear to be seeing further weakness this morning which is exactly what equity bears want to see – but not for the reasons you may think. The market ‘needs’ to go down for those that are on the sideline waiting to “buy the dip” to get excited. This gives the last group of buyers an opportunity to get long and we could very well see this happen a few times. What I’m looking for are signs of market internals cracking with each attempt to recover from the weakness.

You cannot manhandle Mr. Market. He’ll beat you every time. We saw yesterday a near 20% move in the $VIX. This took it to an overbought level on various measurements, this doesn’t mean it must drop but it could signal a breather is necessary. If you’ve been doing the potty dance waiting for stocks to dive don’t get too excited yet. Watch the market leaders, keep an eye on transports, financials, and cyclicals. When these begin to crack, and not before, is when traders will likely begin to get worried.