Archive for November, 2015

The Grinch May Steal the Christmas Rally

Monday, November 23rd, 2015

Breadth tends to tell you where you are going in a market. Breadth is sending negative signals.

The direction of breadth has diverged from the direction of the market-cap weighted indexes (indexes dominated by a few giant stocks, like Apple and Exxon) creating the negative warning signal.

Breadth is moving down and the market-cap indexes are mostly flat for the year, with a recent strong rally from a short-term correction — but the indexes have still been unable to exceed their mid-year highs.  Breadth may be the Grinch that steals the Christmas rally.

These charts show the deteriorating underpinnings of the US stock market.

Each chart shows the distance of the S&P 500 price from its trailing 1 year high in orange (using right scale); and a parameter of breadth of the S&P 1500 (large-cap, mid-cap and small-cap combined) in gray for the end-of-week value, and in dashed black for the 13-week average (3 months) of that weekly value (using left scale).


This first chart shows the distance of the median S&P 1500 stock from its trailing 1 year high.

(click images to enlarge)


You can see in the orange line that the S&P 500 had its Correction in August, but that the median S&P 1500 stock began its slide from its trailing 1 year high near the beginning of the year, giving a warning.  The median has recovered somewhat on a weekly basis, but is still declining of a 13-week basis.

The median stock is off its 1-year trailing high by more than 13% as of Friday, and about 16% on a 13-week average basis.  This compares to the S&P 500 index being off a bit less than 2% from its trailing high.

At the end of 2014, the median stock was down only 4% on that Friday, and 8% on a 13-week basis — a lot better than the 13% and 16% now.  The median stock was also off its high by 4% at the beginning of 2014.  Much damage has been incurred this year.

This is an important divergence.  The median is falling while the market-cap weighted index dominated by the giant companies is essentially flat and attempting to reach prior highs.  How long can the giant companies do well if many smaller companies do not?  Generally the answer is not too long.

Let’s look at some other breath time series.


This chart tracks the percentage of S&P 1500 stocks that are within 2% of their trailing 1 year high.  That too began to slide downward months before the S&P 500 Correction, and continues its downward slide.  The weekly value has risen from its correction low, but is proportionately still in a much weaker recovery than the S&P 500.  This is an important negative divergence and warning signal.


Approximately 15% of the S&P 1500 are within 2% of their trialing high, and about 8% are that close on a trailing 13-week basis, but that compares to approximately 40% and 23% at the end of 2014. That’s a large deterioration for the top end performers.


Now let’s look at the weak performers — those  in a Corrector or worse (10% or more below their 1-year trailing high).

The S&P 500 is well out of Correction territory, but a majority of the stocks in the S&P 1500 are not, as this chart shows — note the gray and dashed black lines are using an inverted scale to more clearly show the divergence.  That charting method makes the plot turn down as the number of stocks in Correction goes up (condition goes worse).


Fully 60% of the S&P 1500 stocks are down 10% or more from their highs, and 68% are down that much on a 13-week average basis.  At the end of 2014, the numbers were 34% and 45%; and only 25% on the first Friday of 21014.

Once again, we see a big deterioration.  And, simply on the face of it; well more than half of the S&P 1500 in still in Correction.   That is not encouraging for the giant companies, that can only outpace the pack by so much for so long, after which their performances must come closer together — either by the pack catching up or the leaders coming down.


What about those in Bear or worse territory (down 20% or more)?  That doesn’t look so good either.

Currently 37% are in a Bear or worse as of last Friday, and 40% are in that condition on a 13-week average basis.  That compares to only 19% and 23% at the end of 2014; and only 8% on the first Friday of 2014.

This chart uses an inverted left scale like the last chart to show negative conditions by a downward plot.


That Bear statistic did not give forewarning, as the median and 2% off of high and Correction statistics did, but it is giving warning now that the situation is not getting better under the surface of the S&P 1500; and by indirection that is a bad sign for the near future of the S&P 500.


Now let’s look at stocks in really tough shape — those down 30% or more from their trailing 1-year highs.  That is an ugly chart too.  This also uses an inverted left scale.

2015-11-20_SevereBearAt the beginning of 2014, only 3% of the S&P 1500 stocks were in a Severe Bear condition (below their trailing 1-year high by 30% or more).  By the end of 2014, that number had risen to 10% on an end-of-week basis, and 11% on a 13-week average basis.  However, now the statistic is 23% as of last Friday, and 22% on a 13-week average basis.  That’s a serious deterioration.


The bottom line is that below the surface of the market-cap weighted indexes — the indexes the daily business reports publish — there is a deeply troubling breakdown.

The majority of stocks are not doing anywhere near as well at the giant stocks, and many are doing just terribly.  This divergence must resolve – it always does.  The top can come down or the bottom can come up, but the performance gap is too large and growing to be sustained long-term.

There is a possibility of, and perhaps an historical tendency for, a Christmas rally in the market-cap indexes, but we see the distinct possibility to probability of the Grinch stealing Christmas.

As a consequence we continue to hold above average cash positions, but are nibbling on high quality, low volatility, value oriented, above average yield, consistent  dividend paying domestic stocks with strong brand equity, and  believably sustainable businesses, that have been around long enough to have proven they can weather strong storms.

We certainly could be wrong in our short-term view — holiday spirit can be a powerful force, and who knows what the Fed, the ECB, China, Russia and ISIS have in store for us; but trying to be data driven, and needing/wanting to preserve capital as much as make it grow; we are sticking with our cautious view for now


Here are some noise canceling charts of the S&P 1500, and its three components indexes, the S&P 500 large-caps, S&P 400 mid-caps and S&P 600 small-caps that show in their own way that the smaller market-cap weighted stocks are well behind the large-cap stocks.

The charts cancel “noise” by only plotting a change in price when it moves by more than a certain amount (the 14-day average true range in this case).  They do not plot time on the horizontal, just new equal size “boxes” for each incremental price change greater than the selected amount (the 14-day average true range).

A second traditional set of charts plots the market-weighted version and equal weighted version of the S&P 500 and of the Russell 2000 small-caps, to further show that the bulk of stocks in the major indexes are falling behind the larger members to dominate the index quotes you see and hear on TV and radio and read in the business press.

Both the S&P 500 and the S&P 1500 are massively dominated by a handful of mega-cap companies such as Apple and Exxon.  As a result they have similar performance.

S&P 500 Large-Cap (SPY)


S&P 1500 All-Cap (ITOT)


S&P 400 Mid-Cap (MDY)


S&P 600 Small-Cap (IJR)



S&P 500 Equal Weight vs Market-Cap Weight (RSP equal weight and SPY)



Russell 2000 Equal Weight vs Market-Cap Weight (EWRS equal weight and IWM)


Technical Trivia of Current Interest For S&P 500

Wednesday, November 11th, 2015

The first two noise cancelling charts show the short term resistance created by a double top in SPY and a triple top in the S&P 500 index itself.

One psycho-social explanation of the effect of double and triple tops is that some of those who bought there are in loss positions and are waiting for a chance to get out even.  As the price approaches the former top, they sell creating downward pressure until those weak hands are exhausted (the third chart helps visualize that phenomenon).

(click images to enlarge)

2015-11-11_SPY Renko



Current US Stock Market Condition Rating on 43 Indicators

Tuesday, November 10th, 2015

[This is our November 9, 2015 letter to clients]

There is no denying a very impressive rally in the S&P 500 over the past couple of weeks, but there is also no denying that things are not universally in good shape – that some of the underpinnings of a sustainable Bull market are showing signs of weakness. This letter presents some of the good and some of the bad in the stock market story.

We have been publishing this data to you for some time, but the format today is different (hopefully easier to read and quickly scan). We also added a few more indicators that help add depth and color to the market conditions.

  • Overall US large-cap stock market is currently moderately Bullish, all indicators taken together
  • Important fundamental indicators are mixed, but currently net positive
  • Internal breadth indicators (how all the individual stocks in the indexes are doing) are negative and flashing caution
  • Index price behavior is largely positive, flashing encouragement for stocks

Let’s look at these observations one at a time, with data.

We are using a 200 point conditions rating scale from minus 100 (strong Bearishness) to positive 100 (strong Bullishness), with zero in the middle for a neutral indication.

We rate the overall US large-cap stock market by these indicators at about positive 33 (moderately Bullish). The weights within the overall rating are:

  •  60% Fundamentals
  • 20% Internal Breadth
  • 20% Price Chart Data.

(click images to enlarge)


The fundamental data has two main parts: intermarket Impact Factors, and Company Operations.

The Intermarket Impact Factors are primarily a set of interest rate data that drives the economy, profits and stock investment behavior in various ways – all translating in the end to changes in stock valuation levels. The data consists of Treasury yield curve data, junk bond spreads versus same duration Treasuries, and multi-factor financial market stress indexes from the St Louis Fed and the Cleveland Fed.

The Company Operations data consists of earnings growth, profit margins and sales growth – bedrock core fundamental data driving stock prices.

The weights within the Fundamental section are:

  • 50% Intermarket Impact Factors
  • 50% Company Operations.

The Intermarket section is rated positive 90 (very supportive of stocks), but the Company Operations are rated negative 10 (mildly Bearish).

When weighted equally, they give the Fundamental a rating of positive 40 (a Bullish rating) – but note the tug of war between largely interest rate factors supporting the market, and weak company operations weighing on the market. Note also that the Company operations are divided between not so hot reported data and optimistic 2016 estimates.


The Internal Breath Factors, with a 20% weight in the overall rating index, have a rolled up rating of negative 11 (mildly Bearish), in spite of some encouraging advances within the S&P 500 index.

Breath data suggests that a declining number of very large members of the S&P 500 are doing the heavy lifting, while a rising number of smaller members of the S&P 500 and the broader market are declining or sitting out the recent sharp stock market index rally — note: we have had a market-cap weighted index rally, not an across the board rally of most stocks.

The Internal Breadth Indicators look at 20 dimensions

For the S&P 500 versus the New York Stock Exchange Index:

  • New Highs
  • Net Advancing Issues
  • Net Advancing Volume
  • Issues with price > 200-day average
  • Issues with Bullish Point & Figure charts

For the 1500 constituents of the S&P 1500 total market index:

  • Direction of median price
  • Direction of median flow of investments
  • Direction of stocks within 2% of their 1-year highs
  • Direction of stocks in a Correction or worse
  • Direction of stocks in a Bear of worse
  • % of stocks with 21-day positive flow of investments
  • % of stocks in a Correction or Worse
  • % of stocks in a Bear or worse

For equal-weight versus market-cap weight sisters for these indexes:

  • S&P 500 large-caps
  • Russell 200 very large-caps
  • Russell 800 mid-caps
  • Russell 2000 small-caps

The most negative data comes from the study of the individual stocks in the S&P 1500 total market index. For that data, we identified the weekly prices and volumes for each of the member companies for each week from the beginning of 2014 through this past Friday, and then plotted the data versus the percent by which the S&P 500 was off from its trailing 1-year high. You have not seen this data before, so we have supplied some of the graphs at the bottom of this letter for you to get a better feel for this part of the rating.


The Price Chart data has a 20% weight in the Overall rating. It paints a Bullish picture consistent with the ebullient TV moderators all last week, and consistent with the strong rally of the last couple of week; sporting a positive 55 rating .

The section consists of 12 data points, as follows:

Our 4 factor technical rating tool (combines trend line tip direction, price position vs trend line, money flow index, and parabolic stop and reverse indicator)

  • S&P 500 large-caps
  • Russell 2000 small-caps

Price over or under 40-week moving average

  • S&P 500
  • New York Stock Exchange Index

40-week average tip direction

  • S&P 500
  • New York Stocks Exchange Index

Short-term price direction and position in 1-year high/low range

  • S&P 500
  • S&P 1500
  • Russell 2000


Most of these indicators cannot be used to predict or declare major tops or bottoms, but collectively they show the presence or development of forces that shape and move markets.

The Fundamental section does contain indicators known to predict or call tops or bottoms – namely the Treasury yield curve, reported corporate earnings and profit margin changes.

We have tested our 4 factor rating tool back as far as 1980, and it has done a pretty good job when using monthly data of calling tops and bottoms with a few false positives. It did not fail to give a signal, but has given some few signals that did not materialize (weekly and daily data for the tool are too noisy with many whipsaws).

We have recently cautiously added back some to equity exposure, but with more conservative funds and stocks, and still with above average cash.


Here are some of the S&P 1500 Internal Breadth charts we developed for this rating approach. We think they cast a shadow on the sharp rise of the market-cap weighted indexes

Each chart plots the distance of the S&P 500 from its trailing 1-year high in orange (right scale).

In this first chart the gray line (left scale) plots the median distance off its trailing 1-year high price for each stock among the 1500 stocks in the S&P 1500 index; and the dashed black line is the 13-week average of the median for the median stock.

You can see that the moving average of the median began to decline in early January and continued to and through the recent S&P 500 Correction. There has been some recovery of the weekly median stock along with the S&P 500 rally, but the median is still down from a pre-Correction level of negative 6-8% to a current level of negative 14-16%. That is not supportive of the stock market as a whole.


This chart plots the percent of stocks in the S&P 1500 that are within 2% of their 1-year trailing high (left scale) in the gray line. That also began declining in early 2015 from the high teens to less than 10% now. That is not supportive of the market as a whole.


The gray line (left scale) of this chart plots the percentage of S&P 1500 stocks that are in a 10+% Correction or worse. That percent began a clear rise in April and May from around 40% to 60+% now. That is not supportive of the market as a whole.


The percentage of S&P 1500 stocks in a 20+% Bear market, shown in gray (using left scale) did not provide any advance warning, but it has risen from around 20% in June to near 40% now – also not supportive of the market as a whole.


This chart plots the percentage of S&P 1500 constituents that have a 21-day moving average positive flow of investments (left scale), along with the 13-week average of that measure. The 13-week average has declined for most of the year, beginning around 60% to the current level of around 40%. On the other hand, the weekly 21-day investment flow responded strongly favorably to the rally in the S&P 500. This measure needs a little more time to tell its story. You can see that it is a very volatile measure, that makes the 13-week average a more useful guide.