Since the October low SPX has now made a new record for the number of days in a row it has closed above its 5-dma, now at 24, beating out the old record of 23 set back in July 1998. It's a sign of a very strong rally. But too strong perhaps? Things didn't go well for the market after the previous record.
Wednesday's Market Stats
Even though SPX closed marginally in the red today, it still closed above its 5-dma, which is at 2043.77 and SPX closed at 2048.72. That makes it 24 straight days above its 5-dma, which is a very fast moving average and to close above it for one day shy of 5 weeks of trading is a phenomenal achievement (it has closed above its 5-dma for 18 or more straight days only 8 times, including the current streak, in the past two decades). It's a rare event and the two previous times ended with 18 days on September 3rd and 19 days on July 24, 2013.
The two previous occurrences of this kind of strength were followed by a brief dip before making a marginal new high (September 19th this year) but then gave up ground over the next 4 weeks. This isn't hard to understand when you think about a market that has gone too far too fast -- the profit taking can easily retrace a good chunk of the rally since there wasn't much building going on underneath the market. It's essentially an air pocket below us.
The previous record number of straight days above its 5-dma was 23 days back in July 1998, which occurred the day following the market peak and was then followed by a loss of near -15%, taking back the gains of the year in the following 6 weeks. It would take "only" at -10% decline to accomplish the same thing for this year (200-point decline to the December 2013 close at 1850). Going for a record number of days above its 5-dma is probably not a good idea for the bulls. A -15% decline would lop off about 300 points and knock SPX back down to about 1750. That's not a projection but it is the kind of risk the market is facing here.
Today was only an inside day (price action remained inside yesterday's price range) and that could mean it was just an indecision day. Part of that indecision was the market waiting for the FOMC minutes to be released this afternoon and the after the minutes the market chopped up and down but closed virtually where it was before the minutes were released. In other words, not much of a reaction to the minutes.
The minutes from the Fed's October meeting were interpreted as slight dovish, which was a good thing since the market is not going to be a happy camper if there's any hint of tightening. The Fed said it was concerned about signs of slowing in the global economy since it could affect the U.S. The main worry is disinflation (love that word - they can't seem to get de- in place of dis- since in order to become a Fed head you must be brain-washed into thinking deflation is a complete and total economic disaster and therefore the word has been removed from their vocabulary).
The most important thing for the market is that the phrase "considerable time" was still there (in reference to accommodation). Removing those two words would have an immediate negative effect on the market since it would essentially mean the Fed is getting ready to tighten. But that's highly unlikely in the next year since the Fed is more worried about "disinflation" and another recession, which the rest of the world is back in or is heading there quickly.
Tonight we'll get reports from several countries, including China and Japan, that report on their manufacturing strength. There's a lot of worry about China right now, especially since their housing prices have been dropping and as with Japan and the U.S., that's a precursor to much tougher times for the stock market. The U.S. market will not be immune to bad news coming out of China and Japan. Before the bell we'll get PMI data from Germany.
It's important how strong the economies are doing because the stock market is now going to become more dependent on that, and the financial performance of companies, and less on the Fed's money. There is still plenty of money coming from Japan and Europe but that money is going to be split between different world markets. This comes at a time when the U.S. market is overbought and overloved and has a big air pocket below it.
Of the many market analysts I read, some technical, others fundamental (and the best ones use both), I like John Hussman's work. He uses unemotional analysis to make his points and often reminds his readers that he's not out to convince anyone of anything but instead offers his observations and opinions for what it's worth. He has a very good track record for identifying the reasons why a market's direction is likely to continue or reverse. He is currently describing a market that is "extremely overvalued, overbought and overbullish."
As Hussman notes, currently we have the most lopsided bullish sentiment, according to Investor's Intelligence data, since 1987. Bearish sentiment is now down to 14.8%, which is back down near the 13.3% seen at the September high. Prior to this year, the two previous occurrences of readings this lopsided were at the April 2011 peak, which was followed by a -20% decline, and the October 2007 high, which of course led to the market crash into 2008 and a -58% decline. With a record like that, I think it's prudent to at least be cautious about the upside potential vs. the downside risk.
The market has been overbought for quite a while and we know these conditions, including wildly bullish sentiment and low VIX readings (although the VIX has started to climb even as prices press higher), can continue far longer than expected. But this time we're seeing a widening of credit spreads between Treasuries and other bonds. This is indicative of risk-off trading and when combined with the deterioration of market internals it could be different this time. There's still a lot of faith in the Fed protecting our backs but I think that's misplaced faith.
Further highlighting the bullish sentiment, the most recent Investors' Intelligence poll of newsletter writers shows the biggest shift of bears to bulls in more than 40 years (since back in the 1970s). The most recent AAII numbers show the number of ordinary investors who are bearish is less than half of what it was at the October low, and it's the lowest reading in nine years (2005). It would appear everyone has literally bought into the idea that we're going to have a Thanksgiving rally, a Santa Claus rally and an end-of-year rally. Nothing but rally and not a care in the world, which is of course a major warning that now is the time for bulls to be afraid. Be very afraid.
From a sentiment perspective, this is a very dangerous time to be complacent about the upside, or to even harbor thoughts about holding through the next "pullback" since the pullback could turn into something much more significant. We have seasonality behind the bulls but statistics showing the recent rally could be setting up more than just a pullback before heading higher. As a trader, the best course of action is to at least protect what you've got, get to cash and be ready to buy back in at cheaper prices. Playing the short side is likely to be a winning strategy soon.
OK, to the charts. Looking at the SPX weekly chart below, there is no indication yet that the bulls are in trouble. I would say they look like they're in potential trouble as price has reached up and tagged the trend line across the highs from April 2010 - May 2011. This trend line stopped the rallies since December 2013 and until proven otherwise I think it's a good bet that the rally will again be stopped by it. But there's certainly the possibility we'll see a throw-over finish as a way to nail the stops just above the trend line, near 2059 by the end of the week, before finishing the rally. And of course it would turn more bullish if it rallies above 2060 and holds above.
S&P 500, SPX, Weekly chart
The importance of the trend line along the highs from April 2010 - May 2011 is that it fits as the top of a rising wedge pattern, which is an ending pattern, and it fits for the c-wave of a big A-B-C rally off the 2009 low. This can be seen clearly on the weekly chart below. In other words, the rising wedge pattern, unless price can break out the top of it, near 2060, is a sign that the 5-1/2 year rally is not the start of a secular bull market but instead it's been a large cyclical bull within a continuing secular bear. The continuing degradation of rate-of-change (ROC) is not a healthy sign for the rally either.
SPX vs. XLY/XLP ratio, Weekly chart
The blue line on the above chart is the ratio of XLY to XLP, which shows the relative strength of consumer discretionary stocks vs. consumer staples. Purchasing the former is done by consumers when they feel good about their purchasing power (income vs. expenses) whereas they tend to buy fewer discretionary stocks and stick with the staples (toilet paper, toothpaste, etc.) when their financial times are tougher. And how the consumer behaves has a lot to do with our economic wellbeing and right now, since the peak in March, the consumer hasn't been feeling so well (regardless of improving consumer sentiment, their purchases speaks louder than their words). The divergence between the stock market and consumer spending will not likely continue much longer, which makes the recent streak of days above its 5-dma feel more like a blow-off top than something more bullish.
Updating another chart comparison I've shown before, shown below, highlights the kinds of divergences we're seeing between the Wall Street and Main Street. This comparison is between the stock market and the commodity index. Just as consumer spending can be used as an economic gauge, so too can the commodity price index (which reflects demand more than what the U.S. dollar is doing). These are more affected by the global economy but we're all so inextricably linked now that any strength in the U.S. will only be relative and similar to all boats in a rising or receding tide.
As can be seen with the weekly chart below, the decline in prices for commodities, especially the sharp decline this year, says our economy is not as strong as one might guess by looking at the stock market. That gator's mouth could snap shut at any time and a -15% decline might seem like child's play compared to what could actually happen. One thing to note on the chart below is the uptrend line on RSI from 2011, which was broken in September and is now being back-tested. This is a common occurrence with a new price high while RSI back-tests its broken uptrend line (or the opposite in a decline) with a lower high -- it's bearish divergence and often provides a very good heads up that the rally is about to complete.
SPX vs. DJUBS Commodity index, Weekly chart
On the daily chart of SPX, shown below, you can see the trend line along the highs from April 2010 - May 2011 (bold green), as well as the broken uptrend line from November 2012 - February 2014 (blue) intersected yesterday near 2056, which was yesterday's high. Yesterday's rally carried SPX over its trend line along the highs from July-September, currently near 2048.70, and basically closed on it today. A successful back-test of this line could lead to at least another minor new high before topping out. But the setup here looks good for a top so we'll soon find out if the market agrees with that. A rally above 2063 that holds above that level will clear the field for the bulls to dash higher, in which case I've got a Fib projection near 2073 (127% extension of the September-October decline) for the next upside target.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2063
- bearish below 2030
The 60-min chart below shows two upside projections I've been tracking since the end of October. The 5-wave move up from October 15th shows the 1st wave up to the October 22nd high and a wave-ii pullback on the same day. Wave-iii is shorter than wave-I, which means wave-v needs to be shorter than wave-iii and in this case is typically 62%. Wave-i is considered an extended wave and typically the 3rd through 5th waves then become equal to the 1st wave. All that said, it gives us two projections for the completion of the 5th wave -- at 2055.31 and 2061.35. Yesterday's high at 2056.08 is in the target zone and it's what has me watching carefully for confirmation of a high (don't have it yet). You can see the rolling top that's also getting put in as price levels off. We could find the rolling top continue with minor ups and downs for the next week. The risk is that once the rally is finished we could get a flush to the downside as all those who recently turned bullish are suddenly scared out of their positions. In fact a break below today's low would be a breakdown from a narrowing price arc that it's been in.
S&P 500, SPX, 60-min chart
If the buyers can keep up the pressure, to at least block the sellers, I see the potential for the DOW to make it up to its trend line along the highs from May 2011 - May 2013, which will be near 17900 by the end of the month (currently near 17845). But a drop below the November 12th low, at 17536, would also be a drop back below its trend line across the highs from December 2013 - July 2014, as well as its uptrend line from November 2012 -February 2014.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish up to 17,900
- bearish below 17,536
NDX has been crowding up near its trend line along the highs from April 2010 - April 2012, as well as its Fib projection near 4233. This projection is the 127% extension of its September-October decline, which is a common reversal Fib to watch. A drop below Monday's low at 4194 would be a good indication the final high is in place. As with the other indexes, what we don't know yet is whether we'll get just a pullback before heading higher (much higher) into the new year or if instead the decline will be the start of the next bear market. The longer-term pattern suggests the latter but we'll have to wait to see what kind of pullback/decline pattern we get in order to help answer that question.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4235
- bearish below 4194
There are two other charts I'm watching to help me get a better sense for what NDX might do in the next couple of weeks -- the SOX and AAPL. The SOX is a very good indicator of economic health since chips are most every electrical product we buy today. AAPL is a very good sentiment indicator. The chart below of the SOX shows it has reached a very important level and what it does from here will tell us plenty about the health of the current rally.
The rally from October has brought the SOX back up to its previous highs in July and September, which were 652 and 659, resp. Yesterday's high was 656 and while testing its previous highs, with significant bearish divergence, it is also back-testing its broken uptrend line from November 2012. While it could certainly head higher, and that's what stops are for, this is one of those setups that I take every time (short in this case) and then let the market tell me whether or not the trade is going to work. And if the SOX does roll back over from here I think it's going to be tough for NDX to make much more headway to the upside.
Semiconductor index, SOX, Weekly chart
AAPL has also been strong since its October 15th low but it too could be completing its longer-term rally. As noted on its weekly chart below, the move up from January is now a 5-wave move and can be considered complete at any time. At a minimum we should see a pullback correction before heading higher (green dashed line). The more bearish interpretation says the 3-wave move up from April 2013 is a corrective move in what will become a larger pullback correction off the September 2012 high. AAPL has met two price objectives shown on the chart -- the first is the 127% extension of its previous decline (2012-2013), at 113.15, and the a-b-c move up from January has two equal legs up at 114.43. This morning's spike up was to 115.74, which was followed by a selloff to 113.80 before bouncing back up to close at 114.67. This week's doji candle, if it stays that way, could be interpreted as a reversal candle so it bears watching here.
Apple Inc., AAPL, Weekly chart
The RUT has been the weaker index since last week's high, which is another check in the bear's column and more evidence of risk-off trading. The daily chart shows last week's high was another test of its broken uptrend line from March 2009 - October 2011. This is a major trend line which identifies the trend since 2009. Breaking that uptrend line in September, as well as its uptrend line from October 2011 - November 2012, was a big deal. Coming back up to it for a back test on November 3rd and another one last week, with bearish divergence on MACD, followed by a bearish kiss goodbye is another big deal and the chart basically has "SELL!" written all over it. It tried to hold its 20-dma today, at 1160.66, but lost the battle into today's close, finishing at 1157.68. The next support level will be near 1148 where its 200-dma and broken downtrend line from July-September are both located. If that support level holds I'll be watching the bounce pattern to help identify whether it could lead to yet another new high or just a correction to the decline before heading lower.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1185
- bearish below 1160
Since achieving a price target at 87.98, where the 5th wave in the leg up from May is 162% of the 1st wave, on November 6th, the U.S. dollar has chopped sideways. Consolidating on top of its downtrend line from March 2009 - June 2010, currently near 86.92, looks bullish. I show a pullback for the rest of the year, possibly something more bearish for next year, but the current bullish consolidation says dollar bulls might have different ideas.
U.S. Dollar contract, DX, Weekly chart
Gold's bounce off the November 7th low is looking more corrective than impulsive, which keeps the larger pattern bearish. It's not clear what the short-term direction will be but until I see evidence to the contrary I see gold bounces as shorting opportunities and that's likely to continue into the new year.
Gold continuous contract, GC, Weekly chart
Silver continues to support the idea for a larger bounce into January before heading lower again. It's been a struggle, like that for gold, with only two strong up days since the low on November 7th so it could be a choppy ride higher but a bounce up to the 18.60 area in the next couple of months is my expectation until proven otherwise.
Silver continuous contract, SI, Weekly chart
Oil is struggling to get off support at 74.60-74.95. It's oversold on a weekly basis and showing bullish divergence on the daily chart so it looks like it's getting ready for at least a larger bounce into early next year. Depending on the bounce pattern, assuming we'll get it, it should then help determine whether or not it will be just a 4th wave correction in the decline from August 2013, to be followed by another new low next year, or if instead we'll get a more bullish bounce. For now, just waiting to see if support holds.
Oil continuous contract, CL, Daily chart
Thursday will see a few economic reports that could move the market. As mentioned earlier, overnight we've got some PMI manufacturing so the combination of economic reports could shove the futures around before the open. Following the housing starts and permits data this morning (neutral for the market) we'll get existing home sales data tomorrow morning. Core CPI data (good for the Fed's "data-dependency"), the Philly Fed index and Leading Indicators will present more data on how the economy is doing. One of these days that data will be more important than what the Fed is doing, which is likely right around the corner.
Economic reports and Summary
We've got good setups on the charts for market highs yesterday. At most I was looking for just a small pullback in the blue chips and then one more new high on Thursday/Friday, which a bullish opex week supports. But today's pullback negated some of the short-term bullish patterns I was watching and that turns the market bearish short term unless there's a recovery on Thursday.
Time is coming together with the price pattern to suggest this week is potentially very important for the market. There are some Fib time cycles, Lindsay cycles (George Lindsay) and a Bradley turn date pointing to this week as an important turn window. Since we've rallied into the turn window the expectation is for a reversal to the downside. The EW counts suggest the final 5th waves completed, especially on NDX. The RUT has already made its turn and being out in front to the downside is another notch in the bear's gun.
In addition to time/price coming together for a high we've got extreme bullish sentiment and virtually no more bears in the market. Everyone's in the theater waiting for the movie to start and it's a bit crowded. Hopefully no one will yell "FIRE!" since the stampede out the door is likely to hurt some people. The huge amount of money that has flowed into ETFs, especially leveraged ones, could leave the market extremely vulnerable if they get hit with a lot of selling. It's not something that's been tested before and many are suggesting it will be the next reason for a downside disconnect in the market (where buyers simply vanish).
The bottom line is that I see this market as far more vulnerable than I have since October 2007, and actually more vulnerable than in 2007. If you're long the market, keep your stops tight (and hope that a limit-down morning isn't a jump over your stop, which is why market orders are needed for your stops). If you're an anxious bear, get ready to rumble.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying