Market Commentary

Why Do the Big Gains Come on Monday Mornings?

Bespoke posted an interesting piece that points out that much of the market gains this year occurred on Monday morning gaps.  Since the start of the year, there have been 11 times that the S&P 500 index gapped higher by at least 0.5% to start the week.  Looking at the equity market's performance for the rest of the day and the rest of the week shows a mixed picture.

How can you explain the government's continued interventions?  If the government believes that intervening in the market is in the public's best interest, then the best way to push the market higher is to do it during light futures trading periods (like weekends or after-hours).  Why?  Because it takes less capital (and thus costs less to do it) after-hours than it would have during periods of thicker trading. 

What Do the Charts Show?

The S&P 500 is testing the top of its four month trading range, sitting just under resistance.  Will the third time be the charm, or will there be a sell-off from this triple-top ?

The past two times we saw failed rally attempts on declining volume before the market cratered.  A sustained move above the 1140 level will likely give the index plenty of room to rally. We'll see.

Sentiment Has Flipped to Bullish.

The American Association of Individual Investors (AAII) sentiment survey is interesting to watch. Retail investors are notoriously wrong at market turning points.  Consequently, many look at extreme readings of the AAII Sentiment Survey as a contrary indicator.  So, where is it now?

Bullish sentiment (meaning expectations that stock prices will rise over the next six months) rose 7.0 percentage points to 50.9%. This is the highest level of optimism since August 13, 2009. The historical average is 39%.

Bearish sentiment (meaning expectations that stock prices will fall over the next six months) fell 7.4 percentage points to 24.3%. This is the lowest level of pessimism since December 31, 2009.

Not only is the data at extreme levels, it also represents an abrupt sentiment reversal. Just four weeks ago in the late August reading of the AAII Bull Ratio (the percentage of bulls divided by the percentage of bulls and bear) fell below 30%. That level of pessimism is often seen at the turning point of significant market bottoms.

In contrast, now we are seeing the opposite side of the sentiment spectrum.  The current reading of 51% bulls and only 24% bears, results in a bull ratio of 68% – the highest for the whole year.  That level of optimism is often seen at the turning point of significant market tops.

As you can see on the chart, in recent years, we’ve seen this level reached only a handful of times: in late December 2009, May 2008, and October 2007. A quick glance at the chart of the S&P 500 will tell you that all of those instances were much better times for selling rather than buying.

Another market getting a lot of attention lately is Gold. 

Why Do the Big Gains Come on Monday Mornings?

Bespoke posted an interesting piece that points out that much of the market gains this year occurred on Monday morning gaps.  Since the start of the year, there have been 11 times that the S&P 500 index gapped higher by at least 0.5% to start the week.  Looking at the equity market's performance for the rest of the day and the rest of the week shows a mixed picture.

How can you explain the government's continued interventions?  If the government believes that intervening in the market is in the public's best interest, then the best way to push the market higher is to do it during light futures trading periods (like weekends or after-hours).  Why?  Because it takes less capital (and thus costs less to do it) after-hours than it would have during periods of thicker trading. 

What Do the Charts Show?

The S&P 500 is testing the top of its four month trading range, sitting just under resistance.  Will the third time be the charm, or will there be a sell-off from this triple-top ?

The past two times we saw failed rally attempts on declining volume before the market cratered.  A sustained move above the 1140 level will likely give the index plenty of room to rally. We'll see.

Sentiment Has Flipped to Bullish.

The American Association of Individual Investors (AAII) sentiment survey is interesting to watch. Retail investors are notoriously wrong at market turning points.  Consequently, many look at extreme readings of the AAII Sentiment Survey as a contrary indicator.  So, where is it now?

Bullish sentiment (meaning expectations that stock prices will rise over the next six months) rose 7.0 percentage points to 50.9%. This is the highest level of optimism since August 13, 2009. The historical average is 39%.

Bearish sentiment (meaning expectations that stock prices will fall over the next six months) fell 7.4 percentage points to 24.3%. This is the lowest level of pessimism since December 31, 2009.

Not only is the data at extreme levels, it also represents an abrupt sentiment reversal. Just four weeks ago in the late August reading of the AAII Bull Ratio (the percentage of bulls divided by the percentage of bulls and bear) fell below 30%. That level of pessimism is often seen at the turning point of significant market bottoms.

In contrast, now we are seeing the opposite side of the sentiment spectrum.  The current reading of 51% bulls and only 24% bears, results in a bull ratio of 68% – the highest for the whole year.  That level of optimism is often seen at the turning point of significant market tops.

As you can see on the chart, in recent years, we’ve seen this level reached only a handful of times: in late December 2009, May 2008, and October 2007. A quick glance at the chart of the S&P 500 will tell you that all of those instances were much better times for selling rather than buying.

Another market getting a lot of attention lately is Gold. 

President Obama promised to roll-out “new ideas” to boost growth and spur hiring during an economy-focused trip to the Midwest. He says the economy is moving in “the right direction; we just have to speed it up.”

Consequently, the President is asking Congress to help small businesses by passing legislation that includes $12 billion in tax breaks and $30 billion worth of aid to free up credit. The question, of course, is whether the White House can turn these ideas into a political reality.

Seems to me I've seen this play a few times.

Ed Stein reminds: "Every time these guys refuse to lend money, the government ponies up more billions. If it were me, I'd keep playing that game until the Treasury was empty, which apparently is exactly what the bankers are doing. There's a reason why they're rich."

Market Commentary

The markets continued higher on light trading.  We are coming into the top of the consolidation zone.

There is not much to say, other than we are approaching a clear decision-zone.  A sustained move above the 1040 level will most likely trigger some real buying.

Sign of the Times: McDonalds Hitting All-Time High.

Here is something we haven't seen often lately, a stock hitting all-time highs.  Well, McDonalds recently hit $75.13 which is a long way from the $13 it hit in 2003.  Must be the special sauce?

Successful Patterns.

Why do patterns work? 

Elephants leave tracks … and smart traders follow the big money.

Large traders like governments, sovereign wealth funds, or a mutual fund can affect markets while they buy or sell; however, when they're done, some other group's strategy becomes the dominant force.

It is important to understand "who is in control"  … not necessarily why they are trading.

That means you don't have to figure out every bit of information or rationale behind their strategy in order to make money.

For example, if you were about to walk into a movie theater, but were suddenly confronted with hundreds of people running in the other direction screaming, you don't have to understand exactly why it's happening in order to respond intelligently.

On a superficial level, that's the basis of trend following.  It is also an example of pattern recognition.

You Can Find Patterns Everywhere.

If you don't believe there is a consistent formula for success, then you should watch this collection of songs made-up from the same four chords.  The video is from an Australian Comedy group, called "Axis of Awesome".

Quite clever.

President Obama promised to roll-out “new ideas” to boost growth and spur hiring during an economy-focused trip to the Midwest. He says the economy is moving in “the right direction; we just have to speed it up.”

Consequently, the President is asking Congress to help small businesses by passing legislation that includes $12 billion in tax breaks and $30 billion worth of aid to free up credit. The question, of course, is whether the White House can turn these ideas into a political reality.

Seems to me I've seen this play a few times.

Ed Stein reminds: "Every time these guys refuse to lend money, the government ponies up more billions. If it were me, I'd keep playing that game until the Treasury was empty, which apparently is exactly what the bankers are doing. There's a reason why they're rich."

Market Commentary

The markets continued higher on light trading.  We are coming into the top of the consolidation zone.

There is not much to say, other than we are approaching a clear decision-zone.  A sustained move above the 1040 level will most likely trigger some real buying.

Sign of the Times: McDonalds Hitting All-Time High.

Here is something we haven't seen often lately, a stock hitting all-time highs.  Well, McDonalds recently hit $75.13 which is a long way from the $13 it hit in 2003.  Must be the special sauce?

Successful Patterns.

Why do patterns work? 

Elephants leave tracks … and smart traders follow the big money.

Large traders like governments, sovereign wealth funds, or a mutual fund can affect markets while they buy or sell; however, when they're done, some other group's strategy becomes the dominant force.

It is important to understand "who is in control"  … not necessarily why they are trading.

That means you don't have to figure out every bit of information or rationale behind their strategy in order to make money.

For example, if you were about to walk into a movie theater, but were suddenly confronted with hundreds of people running in the other direction screaming, you don't have to understand exactly why it's happening in order to respond intelligently.

On a superficial level, that's the basis of trend following.  It is also an example of pattern recognition.

You Can Find Patterns Everywhere.

If you don't believe there is a consistent formula for success, then you should watch this collection of songs made-up from the same four chords.  The video is from an Australian Comedy group, called "Axis of Awesome".

Quite clever.

The "invisible hand" is becoming replaced with a much more easily seen and felt version, and I suspect people are not only noticing … but adjusting.

At this point, I'm not sure if people (or the "market") want more or less intervention.  For example, The Financial Times reports that the Fed minutes released last week fueled recovery fears because the meeting notes raise questions about whether the Fed has ruled out large-scale asset purchases. (FT)

Apparently, the powers-that-be still have some things in their bag-of-tricks.  Early last week I posted a Tweet saying that big market drops on low volume have been the trigger for Plunge Protection activity.  Not to disappoint, we got the requisite ramp-up.  The question is whether we'll get real follow-on buying?

Market Commentary.

Last week was technically stronger than I originally thought.  Why?  Because both the S&P 500 and Nasdaq indices moved above their 20-, 50- and 200-day exponential moving averages. That isn't a common technical happening. Getting through a single moving average often proves difficult; so getting through all three major moving averages at once is something worth noting.  Now let's see the reaction.

The short-term average is below the mid-term average, which is still below the long-term average.  In English, that means we are probably still in a down-trend.  Consequently, I'll be watching the resistance zone market by the pink highlight. If bears mount a challenge to the recent push higher, that would be a likely spot for the reversal.  Otherwise, a break above that level could easily test the May highs.

How Does Employment Effect the Outlook?

It is a little ironic to talk about this on Labor Day weekend; nonetheless, we got more bad employment data last week.  The best I can say about it is that it wasn't met with selling. 

First, we'll look at the percent of job losses during various recession.  The following chart shows that our current job situation stands out and speaks for itself.  This chart also highlights the effects of census hiring as well as the extremely weak hiring in this recovery. 

The dotted lines tell the real story about how pathetic the jobs recovery has been so far. Bear in mind it has taken $$ Trillions in stimulus to produce this.

Second, the chart below shows the unemployment rates during recessions and recoveries.  Notice that there has not been any recovery in the labor market.  Unemployment has actually deteriorated when compared to the end of past recessions.  

According to the Pragmatic Capitalist, without a recovery in the labor markets, it’s impossible to say that the economy is rebounding.  As of now, the outlook remains negative.

However, without sellers, that increasingly visible hand can continue to push the markets higher.  As summer (and slow trading) comes to an end, it will be interesting to see what happens next.

The "invisible hand" is becoming replaced with a much more easily seen and felt version, and I suspect people are not only noticing … but adjusting.

At this point, I'm not sure if people (or the "market") want more or less intervention.  For example, The Financial Times reports that the Fed minutes released last week fueled recovery fears because the meeting notes raise questions about whether the Fed has ruled out large-scale asset purchases. (FT)

Apparently, the powers-that-be still have some things in their bag-of-tricks.  Early last week I posted a Tweet saying that big market drops on low volume have been the trigger for Plunge Protection activity.  Not to disappoint, we got the requisite ramp-up.  The question is whether we'll get real follow-on buying?

Market Commentary.

Last week was technically stronger than I originally thought.  Why?  Because both the S&P 500 and Nasdaq indices moved above their 20-, 50- and 200-day exponential moving averages. That isn't a common technical happening. Getting through a single moving average often proves difficult; so getting through all three major moving averages at once is something worth noting.  Now let's see the reaction.

The short-term average is below the mid-term average, which is still below the long-term average.  In English, that means we are probably still in a down-trend.  Consequently, I'll be watching the resistance zone market by the pink highlight. If bears mount a challenge to the recent push higher, that would be a likely spot for the reversal.  Otherwise, a break above that level could easily test the May highs.

How Does Employment Effect the Outlook?

It is a little ironic to talk about this on Labor Day weekend; nonetheless, we got more bad employment data last week.  The best I can say about it is that it wasn't met with selling. 

First, we'll look at the percent of job losses during various recession.  The following chart shows that our current job situation stands out and speaks for itself.  This chart also highlights the effects of census hiring as well as the extremely weak hiring in this recovery. 

The dotted lines tell the real story about how pathetic the jobs recovery has been so far. Bear in mind it has taken $$ Trillions in stimulus to produce this.

Second, the chart below shows the unemployment rates during recessions and recoveries.  Notice that there has not been any recovery in the labor market.  Unemployment has actually deteriorated when compared to the end of past recessions.  

According to the Pragmatic Capitalist, without a recovery in the labor markets, it’s impossible to say that the economy is rebounding.  As of now, the outlook remains negative.

However, without sellers, that increasingly visible hand can continue to push the markets higher.  As summer (and slow trading) comes to an end, it will be interesting to see what happens next.

The Fed had their annual meeting in Jackson Hole, Wyoming last week. On Friday Fed Chairman Bernanke announced that the Fed was ready to dig deeper and take bold actions if the economy continued to weaken. On cue, Intel announced lowered guidance and the Dow Jones Industrial Average was trading under its 10,000 level.

However, traders say that it's not the news that matters, but rather it's the reaction to the news that matters. In case you didn't see it, the reaction was consistent buying for the rest of the day. Not only did the Dow get back above 10,000, but the markets also erased much of their losses for the week.

Market Charts.

Here is a daily chart of the Russell 2000 Small-Cap Index showing the downtrend it has been in since April. The good news is that support held at the July lows. That level is marked by the green highlight. Any move beneath that would be decidedly bearish. On the other hand, it is unlikely the Bulls would feel safe until price clears the resistance level marked by the pink highlight.

Another thing to note in this chart is how dramatically the Russell 2000 Small-Cap Index had under-performed the broader S&P 500 Index since May.  It is usually a bearish sign for the market when small caps and technology stocks are under-performing — which is what they are doing presently.

What is Happening with the Volatility Index?

While the markets retreated back near July lows, the Volatility Index (or VIX) did not show a spike of fear.  Many traders view the VIX as a contrary indicator, which means the lack of fear could be bearish.

How Has the Government Spent the Stimulus So Far?

Counting through the beginning of August, Congress has now approved over $1 trillion in spending and tax measures to stimulate the economy.  Here is a chart, put together by the Washington Post, which breaks down the spending.

I wonder what that will look like next year?

Business Posts Moving the Markets that I Found Interesting This Week:

The Fed had their annual meeting in Jackson Hole, Wyoming last week. On Friday Fed Chairman Bernanke announced that the Fed was ready to dig deeper and take bold actions if the economy continued to weaken. On cue, Intel announced lowered guidance and the Dow Jones Industrial Average was trading under its 10,000 level.

However, traders say that it's not the news that matters, but rather it's the reaction to the news that matters. In case you didn't see it, the reaction was consistent buying for the rest of the day. Not only did the Dow get back above 10,000, but the markets also erased much of their losses for the week.

Market Charts.

Here is a daily chart of the Russell 2000 Small-Cap Index showing the downtrend it has been in since April. The good news is that support held at the July lows. That level is marked by the green highlight. Any move beneath that would be decidedly bearish. On the other hand, it is unlikely the Bulls would feel safe until price clears the resistance level marked by the pink highlight.

Another thing to note in this chart is how dramatically the Russell 2000 Small-Cap Index had under-performed the broader S&P 500 Index since May.  It is usually a bearish sign for the market when small caps and technology stocks are under-performing — which is what they are doing presently.

What is Happening with the Volatility Index?

While the markets retreated back near July lows, the Volatility Index (or VIX) did not show a spike of fear.  Many traders view the VIX as a contrary indicator, which means the lack of fear could be bearish.

How Has the Government Spent the Stimulus So Far?

Counting through the beginning of August, Congress has now approved over $1 trillion in spending and tax measures to stimulate the economy.  Here is a chart, put together by the Washington Post, which breaks down the spending.

I wonder what that will look like next year?

Business Posts Moving the Markets that I Found Interesting This Week:

We are in the dog-days of summer.  Perhaps it is a good time to travel, just so you are not tempted to watch the news.

Biggest Negative Fund Flow Out of U.S. Stocks Since During the Crisis.

Money is flowing out of equity markets into the bond market.  According to the NYTimes, investors withdrew a staggering $33.12 billion from domestic stock market mutual funds so far this year.

In the chart, below, the red bars represent fund flows for U.S. equity mutual funds, and the gray bars represent fund flows for bond mutual fund.  The data for this chart is based on the fund flow data of long term mutual funds tracked by the Investment Company Institute.

Likewise, according to Rasmussen research, consumer & investor confidence has fallen to a 2010 low.

The Consumer Metrics Institute's Growth Index.

It's easy to get distracted by other data, but (for the most part) price is the primary indicator to use when analyzing a stock chart. Of course, it's still useful to try and get an early indicator of how a well-followed metric may perform.

The chart below shows three different data points. The S&P 500 index, GDP, and the Consumer Metrics Institute's Growth Index.  Historically, the Growth Index has given an early indication of what GDP and the stock market are likely to do soon after. So, its recent decline might be an early indicator of continued weakness.

This is something that bears watching.  If you're interested, here's a link from dshort.com that covers this topic in more detail.

As more people worry that our economy is not changing as hoped; some things are changing … technology and legislation.

How Does Technology Change the Investment Landscape?

Duncan Niederauer, NYSE Euronext CEO, sat down with Maria Bartiromo at the "Techonomy Conference" in Lake Tahoe to talk about technological advancements and what they mean for the future of trading.

My guess is that we are going to see a whole new round of cries for regulation of financial technology.

Here is an Explanation of How Laws Are Made.

For the past two years, Financial Reform has been in the news.  Here is is a link to a discussion of what it can accomplish. Now that the Dodd-Frank Bill has become law, I thought it might be helpful to show the path it had to take?  Here is an informative infographic put together by  Mike Wirth that lays out how a Bill becomes a Law.  Click the image to see a larger version.

Business Posts Moving the Markets that I Found Interesting This Week: