May 2014 – Andrew Thrasher

A Potential Shift in Relative Performance Between Gold and Oil

Posted on May 29, 2014 by Andrew Thrasher, CMT

Gold has been a disaster lately, with the past few days seeing some large selling take over in this shiny metal market. I wrote about gold hitting resistance the day after gold ($GLD) peaked back in March and more recently last week I highlighted the triangle pattern that was forming on the daily gold chart with momentum hitting previous resistance. So where does gold stand now?

With the recent increase in weakness for gold ($GC_F) I wanted to show one bright spot that may be developing, at least compared to oil. Below is a chart of the relative performance between gold and crude oil ($CL_F). As a reminder, when the green line is rising we know that gold is outperforming oil. That could mean gold is rising more or gold is falling less than oil, it doesn’t mean gold prices will start rising – this is just looking at the ratio between the two commodities.

The ratio right now is testing previous support going back to 2013. In late December and in August and September of last year we saw the ratio between gold and crude oil bottom around the 12.2 level. We also can see that the Relative Strength Index (RSI) as shown in the bottom panel just kissed the ‘oversold’ 30 level. Back in August ’13 we saw the RSI spend some time under 30 before seeing a shift in relative performance. However, if we go back further we can see that sometimes we just see a day or two of being ‘oversold’ in momentum before a trend change occurs in the ratio.

So with the relative performance ratio between gold and oil testing support and momentum being nearly ‘oversold’ its possible we see a shift in relative performance to begin favoring gold. We’ll see.

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.

Investors Show Lack Of Trust Of New Stock Highs

Posted on May 27, 2014 by Andrew Thrasher, CMT

As the market hits new highs it appears traders are beginning to get a little more cautious based on the latest data of fund flows for the Rydex family of mutual funds. As I’ve written before, while sentiment polls are somewhat helpful, being able to watch what investors are actually doing provides a much clearer lens into the mind of the market. Even though the S&P 500 ($SPX) has been moving higher, albeit at a slow choppy pace, it seems both the bears and the bulls are hoping for a pullback but for difference reasons.

Below is a chart of the Total Money Market Assets at Rydex, as you can see since mid-2012 we’ve seen a slow set of higher highs. It’s important to note that this is a total number not as percentage of total assets, so as more traders add funds to Rydex this figure will rise which doesn’t mean investors are shifting out of stocks or bonds and into cash. What is interesting is to see that off the low in April of this year, the amount of money in money market assets has been going up right along with the equity market.

Click here to keep reading and see the charts

Source: Investors Show Lack Of Trust Of New Stock Highs (TraderPlanet)

Complacency Takes Over As Fewer Stocks Hit New Highs

Posted on May 19, 2014 by Andrew Thrasher, CMT

There was a very interesting note put out by Andrew Lapthorne of Societe Generale discussing the complacency that’s taken over. As the number of stocks making new highs dwindles we are seeing minimal market volatility. How long can it last?

From Business Insider:

“Little wonder,” wrote Societe Generale’s Andrew Lapthorne this morning. “The number of 1% down days for the S&P 500 in any given year has averaged 27 since 1969; the S&P 500 has seen just 16 1% down days over the last 12 months. It has now been 468 days since a market correction of 10% or more, the fourth longest period on record, and, as we show below, the annualised peak to trough loss has only been 5% compared to typical annual drawdown of 15%.”

…

Lapthorne charted the maximum annual drawdowns in the S&P since 1970. As you can see in the far right, volatility has been below normal.

Traders are beginning to get use to stocks just going up. Forget the fact that the number of stocks that are making new highs has been dropping all year. The chart below shows the number of stocks that are making new highs vs. new lows over the last five days. In 2013 we saw this number stagnate around 4,000 as the S&P 500 ($SPX) put in one of its best years in quite a while. But it’s been a different story for 2014, as we sit at just over 1,000 net new highs and the S&P is just a few points from its own new all-time high.

Source: We’re Witnessing A Risky Build Up Of Investor Complacency In The Stock Market (Business Insider)
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.

Weekly Technical Market Outlook 5/19/2014

Posted on May 19, 2014 by Andrew Thrasher, CMT

The S&P 500 finished the week essentially flat, down just 0.03% while the Dow was off by 0.55% and the Nasdaq was able to pull off an almost half a percent gain for the week. Just two sectors closed under their 50-day Moving Average: Financials ($XLF) and Consumer Discretionary ($XLY).

While the equities market started to weaken after hitting new highs, we did not see the Volatility Index ($VIX) futures curve switch from contango to backwardation. Meaning, traders were not showing an increase in fear by creating a premium in front-month $VIX contracts compared to longer-dated contracts. For example, we saw the $VIX enter backwardation at the April ’14, January ’14, October ’13 lows. On Weds. I tweeted and on Thursday morning I wrote a post that we may see a spike in Volatility. During trading on Thursday we saw the Volatility Index advance by 12%, only to givemost of it back on Friday. I’m curious if we see more volatility enter the market and if the $VIX repeats its pattern of backwardation before stocks rally, or if that tiny dip was the extent of the selling. We’ll see.

Equity Trend

With last Friday’s strong bounce we finished the week relatively flat, which has kept us in this period of consolidation for the S&P 500 ($SPX). The January high of 1885 is still above us and needs to get taken out for the bulls to keep the train chugging back up to 1900. However, with the lack of lower lows we are still in an up trend.

Equity Breadth

Last Monday I discussed the double top we were seeing in the Advance-Decline Line (common stock only) as the S&P hit a new high. While the A-D Line retreated, it did not make a lower low, keeping the up trend in breadth intact. Although, when we look at the Percentage of Stocks Trading Above Their 200-day Moving Average, we did see it drop below the April low for a day before trying to reclaim the level on Friday.

Equity Momentum

Not much has changed in momentum for the S&P. The negative divergence in the Relative Strength Index is still with us, as is the divergence in the MACD.

Bonds

I can’t do a post without including a chart of the 10-year Treasury Yield ($TNX) after its strong move recently. As stocks weakened last week we saw bonds have a fairly a nice rally. The 10-year Yield broke under a support level many traders had been watching and tested the October ’13 low. While many traders were positioned and calling for higher yields, the market rarely gives them what they want and last week was a great example of this. It’ll be interesting to see if yields rebound and get back above 2.6% or if bond bulls maintain control and push them back through the prior low.

Gold

While gold ($GC_F) had a great start to 2014, it’s begun to consolidate over the last couple of weeks. The 50-day Moving Average has been acting as resistance while the trend line off the 2014 previous lows has helped provide support. As we approach the apex of the two blue trend lines we will see a break, it’s just a matter of in which direction. Looking at the Relative Strength Index for a clue, the level of resistance (shown by the red box) that plagued gold for nearly all of 2013 appears to be back in play.

When looking at the seasonal trends in gold, we historically have seen a period of weakness begin in the latter-half of May. So if the bulls are not able to regroup soon, they will be facing a tough period of seasonality along with the above mentioned levels of resistance in price and momentum.

60-Minute S&P 500

As the S&P hit a new high two weeks ago we saw the negative divergence in the Relative Strength Index break as the momentum indicator kissed the 70 level. However, the divergence is still present in the MACD indicator. With Friday’s rally we can begin to draw a trend line off the higher low, which could act as potential support on any future short-term drops. As I mentioned on the Equity Trend section, 1885 is still a critical level for the index to contend with. With each attempt to break higher, including the momentary new high, we are able to work off more supply at 1885, which is bullish for stocks.

Last Week’s Sector Performance

For the third week in a row we saw the Utilities ($XLU) sector under-perform the S&P 500. While it started off the year as a leader, we are beginning to see some deterioration in the relative performance for this defensive sector. Technology ($XLK) was the best performer last week, followed by Health Care ($XLV) and Materials ($XLB). The worst performers were Financials ($XLF) and Consumer Staples ($XLP).

Year-to-Date Sector Performance

While Utilities weakened in relative performance last week, it still remains the best performer YTD. Followed by Energy ($XLE) and Health Care. Consumer Discretionary ($XLY) and Financials still remain the only two sectors to be under-performing so far for 2014.

Major Events This Week

This is a pretty light week for economic releases. We get the FOMC minutes on Wednesday and a couple pieces of housing data later in the week. With a lack of economic data to move the market we’ll get a better idea of the risk appetite for stocks as traders are allowed to focus more on the price action and internals and less on gov’t reports.

Monday: None
Tuesday: None
Wednesday: FOMC Minutes
Thursday: Jobless Claims and Existing Home Sales
Friday: New Home Sales

Preparing For A Potential Spike in Volatility

Posted on May 15, 2014 by Andrew Thrasher, CMT

Yesterday I tweeted that I thought we were getting ready for a fairly decent size move in the Volatility Index ($VIX). As we turn into the bearish six months of the year based on the seasonality studies done by the Stock Trader’s Almanac and with the $VIX sitting near $12 it’s not hard to imagine that we may be “due” for some volatility in the equity market. But there is one chart that is making me think this possibility seems more likely based on past instances.

Below is a chart that will take some explaining. If you’ve been reading my blog or following me on twitter for very long you likely know that I’m constantly looking at relationships between varies markets. Whether it’s different sectors, asset classes, commodities, or bond duration, I’m always looking to see how markets are interacting with one another.

The chart I want to discuss today is the relationship between the Volatility Index ($VIX) and the 10-year Treasury Yield ($TNX). I’m not concerned with the absolute level of this ratio but its respective width of the Bollinger Bands. Bollinger Bands show the standard deviation of a stock’s (or in our case a ratio) price movement. J ohn Bollinger, the creator of the Bollinger Bands, has found that low periods of volatility are often followed by high periods of volatility. This can be shown by the width of the Bands as they widen and contract, which is what’s shown in the top panel of the chart.

Currently the Bollinger Bands for the ratio between the $VIX and the 10-year Yield has fallen to previously historic lows. I’ve marked dotted blue lines to show past instances where the width of the bands has been near the current level. On the bottom panel of the chart we have the price movement of the $VIX itself. As you can see, when the Bands width for the ratio has been this tight, its lead to quick moves to protracted long advances in volatility. For example, we saw the Bands contract in late January of this year before the $VIX spiked nearly 40%.

Like most forms of intermarket analysis, we can use this relationship and the chart below to begin looking for setups in the $VIX; however, this alone does not necessarily pinpoint a low in the Volatility Index. We may still see some downside or choppy action before a potential large move in Volatility takes place. But if history does in fact repeat, or as Mark Twain once said, “history does not repeat itself but it often rhymes” then we may be in for a bout of volatility in the coming days or weeks.