Archive for January, 2016

Compare Breadth: Europe, Japan, USA, China And India

Wednesday, January 27th, 2016


Back in December, many institutions recommended over-weighting Europe, and some preferred Japan.  They may still feel so, but at this time the internals for the key European and Japanese stock indexes are just a lousy as for the S&P 500.

(click images to enlarge)



Europe’s STOXX 600  has the highest portion of stocks within 2% of their trailing 1-year high at 4.03%, but that is not good.  Japan’s NIKKEI 225 is near zero at 0.45%.  The S&P 500 is between Europe and Japan at 2.01%

The percentage of constituents of the STOXX in a 10% Correction or worse is 78.49%; Japan 91.96% and the USA 80.48%.  Those are very bad numbers

The percentage of constituents of the STOXX in a 20% Bear or worse is 57.31%; Japan 62.95%; and the USA 58.15%. Those are very, very bad numbers.

You can see from the table image that the depth of the problem is not evident in the price performance of the indexes themselves, which are market-cap weighted and dominated by a small number of mega-cap members.

The median STOXX member is 23.46% off its high, while the index is only off 17.83%.  Both are bad numbers, but the median stock is about 6% farther from its high than the index is from its high.

Japan and the US show even greater divergences.  While all three indexes have similar median stock positions relative to their trailing highs, Japan’s median stock is about 10% off its high more than the NIKKEI; and the S&P 500 median stock is about 11.5% farther off than the index.

Only about 20% to 25% of the constituents of those three indexes have 200-day indexes with the tip pointing up (75% to 80% have tips pointing down).  The direction of the tip of the trend line is an important thing, as it takes a lot of force to make it change direction from positive to negative, or from negative to positive.

The percentage of members of those indexes that have prices above their 200-day averages is similar to the percentages with trend line tips pointing up.

We defined “rising” as a condition where both the tip of the trend line is pointing up AND the price is above the trend line.  Based on that arbitrary definition only 12% to 16% of members of the three indexes are “rising”.

Looking at the very short-term (the percentage of constituent stocks with prices above their 10-day moving average), the data are bit more encouraging (STOXX 63%, NIKKEI 70%, S&P500 50%).E


India is favored over China by many analysts, and this internal breadth data agrees with the point of view, at least in terms of the current condition of their respective markets.


This chart looks at the combined Shanghai and Shenzhen for China; and at the SENSEX for India.

While they both have over 90% of their constituents in Correction territory or worse condition (China worse at 98% and India better at 91%); India is much better off than China when it comes to the percentage of constituents in a 20% or worse Bear market (76% for India versus 96% for China).

Only 15% of Chinese stocks are above their 200-day average, while 50% of Indian stocks are above.

Using our definition of “rising”, only 15% of Chinese stocks are rising (similar to Europe, Japan and the USA), but 46% of Indian stocks are rising.

This is not a recommendation to invest in India, but it does appear that India is mending faster than China.


  • STXX (STOXX 600)
  • EWJ (NIKKEI 225)
  • SPY (S&P 500)
  • GXC (China)
  • INDA (India)








S&P 500: Where From Here? (2016-01-22)

Monday, January 25th, 2016

We have been getting calls, asking where the market is going. To be clear, nobody really knows. Markets can do anything – an they usually do. That said there are some technical tools to take reasonably educated guesses about what might happen in the short-term (excluding exogenous changes, such as central bank policy changes, or shocking macroeconomic statistic releases, or some terrible world event).

Fundamental projections are not any more useful in the short-term than technical indications. Fundamentals do determine where markets end up in the long-term, in the short-term emotions, funds flows and world events (and media hype) have a lot more to do with market behavior than fundamental valuation.

Adam Parker, founder of FundStrat, and former Chief Equity Strategist at Morgan Stanley recently had this to say about market price forecasting based on valuation.

“Trying to figure out where the market is going is like taking something we don’t know how to forecast (the price-to-earnings ratio for the market) and multiplying it by something we aren’t very good at forecasting (the earnings for the market). We have always written that we don’t think anyone can forecast the market level P/E ratio in time frames less than a few years.”


  • The primary trend for US stocks and the S&P 500 in particular is down
  • The rally last week was contra trend, but was likely not a reversal of the downward primary trend
  • The current S&P 500 price is far enough below its trend that there is a statistical probability of a contra trend rally to perhaps 1935
  • There are numerous fundamental and macro issues that are applying negative force to continue the downward primary trend
  • Internal breadth of the S&P 500 (as well as other major indexes around the world) is decidedly negative
  • Historical volatility over 1 year, 6 months and 3 months suggest a reasonably likely index price range over the next 3 months between 2250 and 1775
  • The downward path of the primary trend suggest the lower half of the 2250-1775 range is more likely to be realized
  • Fibonacci, Price Channel and Pivot Point indicators suggest the index price may experience resistance in 1935 to 1950 range, 1970 to 1975 and the 2015-to 2025 range


Investors in Accumulation Stage (averaging in): This short-term view of the primary trend is not relevant to most investors with a long time-horizon before retirement, who have chosen their appropriate risk profile, and who are continuing to add capital to their investment portfolio.  Those investors are probably best served by simply maintaining the allocation risk profile they have selected, and going about the business of earning money and saving as much as they can.

Since downturns don’t last forever, and periodic investments buy more shares during downtrend than in uptrends,  short-term trend information may be useful to those periodic investors who can squeeze their household budgets to increase periodic investments during downtrends.

Investors in Withdrawal Stage (averaging out): This short-term view of the primary trend is relevant for those who are in or near retirement who want to reduce the “risk of ruin” (outliving assets) due to  having to sell assets during a decline to fund withdrawals.  Note that retirement portfolios are depleted at an accelerated rate when selling assets during declines, increasing the risk of outliving assets.

For those investors in the withdrawal stage of their financial lives, a recent statement by Bill Gross (formerly CEO of PIMCO and noted bond manager) is relevant.  He said the current market is one for return OF capital more than one of return ON capital.

The risk of ruin is minimized for those investors in retirement who can live out of investment income without selling assets.  Dividend investors may have a lower risk of ruin if their dividend stocks have above inflation dividend growth rates, and thus they may have less interest in short-term trend changes.

Investors With a Desire or Need for a Tactical Overlay: Several sorts of investors occur to us to may find short-term trend information relevant:  (1) those withdrawal stage investors  relying on capital appreciation for a significant portion of their retirement income, (2) those accumulation stage investors who wish to increase periodic investments during downturns, (3) margin investors, (4) options investors, and (5) and other investors in any stage of their financial stage of life who prefer to engage in some form of tactical investing:

  1. Withdrawal stage investors who cannot live out of investment income alone (who must periodically sell assets to fund withdrawals) may wish to use trend information to modulate their debt / equity allocation between minimum and maximum investment policy levels to reduce risk of ruin
  2. Accumulation stage investors may wish to commit more money to regular periodic asset purchases when prices are declining than when rising to improve the average cost of their holdings.
  3. Long or short investors on margin, want to be in line with the short-term trend to avoid leveraged losses and margin calls
  4. Option investing/speculation is short-term in nature due to option expiration dates — they definitely need short-term trend information
  5. Some investors just have a desire to be tactical with a portion of their assets for one reason or the other; ranging from a gaming spirit to the need to sleep well at night.
If for any of these reasons, or mere curiosity, short-term stock market condition and direction is of interest to you, please read on.


The most important fundamental factor for most companies most of the time is the level and direction of profits. That picture for the S&P 500 is not good in the short-term past, and analysts have negative short-term expectations (although they expect 2016 overall to be a positive profits growth year).

These four charts illustrate the negative S&P 500 profits growth picture and the index price together. Each chart shows the price in vertical black bars; the moving average primary trend in gold; the quarterly GAAP reported profits in red; the earnings yield (inverse of the P/E) in the lower panel in black; and the dividend yield in the lower panel in green.

The upper left chart is for year-to-date. The upper right chart is for 3 months daily. The lower left chart is for 1 year weekly. The lower right chart is for 3 years monthly.

The charts show the gold primary trend line in decline and the price below the primary trend line. The 3-year chart, in particular, shows the downward turn in profits in 2015, and the corresponding flattening then decline in the stock index price.

(click images to enlarge)

2016-01-22 article 1

Operating earnings (equal to or less than GAAP earnings depending on various charges in GAAP reporting) is expected to be down in 2016 Q1, but then rise during the balance of the year as this FACTSET chart of quarterly operating profits shows:

2016-01-22 article 2

Revenue declined in 2015, but analysts expect it to revive in 2016 and 2017 – presumably in great part due to revival of oil and gas company profits (a major wild card).

2016-01-22 article 3

Profit margins have been squeezed, but are projected by analysts to revive after 2016 Q1, as this FACTSET chart shows:

2016-01-22 article 4

If you believe the analysts (take note of Adam Parker’s quote in the intro to the letter – then not much to worry about. If you focus on what is known and factual at the moment – then the picture is not very good.

Let’s keep these additional facts in the background too:

  • Global growth forecasts being lowered (still positive but lowered)
  • Fear of something nasty happening in Chinese markets
  • Europe struggling socially and financially with the flood of refugees from ISIS
  • Highly deteriorated internal breadth within the US stock indexes (narrow leadership with bulk of stocks in tough shape)


Technical analysis is viewed by many as hocus-pocus nonsense, and that may be true in theory, but the fact is that many people use and rely on technical indicators to make decisions.

The use of technical indicators by a significant group of investors makes them a force in the market, and therefore somewhat meaningful and relevant for short-term price behavior.

Certainly, technical indicators are not perfect or even close, but they do cause a significant amount of money to move in the market in response to them. Even if technical indicators have no theoretical basis, they can become self-fulfilling prophecies if enough investment money is moved on the basis of them.

Technical indicators should probably be looked at in combination and with the assumption that they will often be wrong, but if well used may be right more often than they are wrong – or may be wrong as often as right, but able to stem losses and let profits run.

A significant portion of professional money managers use a combination of fundamental and technical (as well as thematic) approaches to make decisions. When the two approaches are used together, the fundamentals tend to be how securities are selected (what to buy or sell), and technical indicators tend to be used to make judgements about when to buy or sell.

Technical indicators range from tools that are fairly easy to understand and that seem on the surface to be reasonable and logical and are widely used; to other tools that are very complicated, hard to understand and not widely used.

Getting back to the client question, “where is this market going?” Let’s look at a few technical indicators that are comparatively simple.

There are three really basic judgements you must make in the following order to use technical indicators beneficially:

  • FIRST: judge the direction of the primary trend
  • SECOND: judge whether the recent price behavior is in the direction of the trend (“pro trend”) or in the opposite direction of the trend (“contra trend”)
  • THIRD: judge the probability that the price position (whether moving with or against the trend) is high or low.

With those three opinions in mind, technically based decisions can begin to make some sense and possibly work out beneficially.


  • 10-week exponential moving average (solid red) = DOWN
  • 40-week exponential moving average (solid gold) = DOWN
  • 120-week exponential moving average (solid blue) = UP
  • 3-month linear regression direction (dashed red) = DOWN
  • 1-year linear regression direction (dashed gold) = DOWN
  • 3-year linear regression direction (dashed blue) = UP

2016-01-22 article 5

One could use shorter-periods, in fact day-traders probably use ticks, and minutes and hours; but for our purposes, we think 10-week and 3-month views are short enough; and the 40-week (equal to the 200-day average) and 1-year views are most important. We put in the 120-week and 3-year views to show that the current price is even below those long-term trend indicators.

We like the 40-week (200-day) and 1-year time-frame best for primary trend.

Our judgement is that the primary trend is currently DOWN.


  • The 63-day (3-month) moving average is below the 200-day moving average (primary trend indicator) – PRO TREND
  • The 21-day (1-month) moving average is below the 200-day moving average and the 63-day average – PRO TREND
  • The price is below the 21-day and 63-day moving averages – PRO TREND
  • The way the 63-day, 21-day and price are stacked reinforces the PRO TREND judgement

Remember, the primary trend is down, so pro trend is “pro down”.

2016-01-22 article 6


The upper panel of this chart plots price position measured in the number of standard deviations it is from the 200-day primary trend line. Zero, means the price is on the trend line. These are called “Z-scores” (see Z-Score graphic below the chart).

Z-Scores have these meanings:

  • Based on a normal distribution curve, the price has a 68% chance of being between -1 and +1 standard deviations (Z = -1 to +1), and only a 16% chance of being out side of that range on either side (about 6:1 odds that the price will revert back to within the 1 standard deviation range).
  • The price has only about a 2.5% chance of being outside of the +/- 2 standard deviation range (about 40:1 odds that it will revert back to within the 2 standard deviation range).
  • The price has only about 0.1% chance of being outside of the +/- 3 standard deviation range (about 1000:1 odds that it will revert back to the 3 standard deviation range)

In the upper Z-score panel in the chart below, the dashed red line is for Z=0 (price on the trend line). The two solid red lines are for the boundaries of the 2 standard deviation range (Z= +/-2). The solid black line is for the boundaries of the +/- 3 standard deviation range (the upper black line does not show because the price did not get to that level in the period studied).

The interpretation of this chart is that back in the August Correction, unless there was a material change in circumstances other than price, there was a statistical certainty of a rally.

The current price is 2.08 standard deviations below the primary trend line which suggests further rally is likely, BUT the primary trend is down. So while the rally would take the price higher it would be short-lived, because it is a Contra Trend move. The kinds of material changes in outside circumstances that could change the primary trend and take the rally to new heights might be something like Saudi Arabia reducing oil production or the Fed backing off of a March rate increase.

2016-01-22 article 7

2016-01-22 article 8


Major index internal breadth is badly deteriorated and getting worse, not just for US stocks, but also for foreign stocks. Let’s look as some S&P 500 internal breadth data for the S&P 500. After the wild up and down week last week, the needle did not move much on breadth.

  • Median S&P 500 stock off its trailing 1-year high by 20.68% (minimally improved) versus the S&P 500 index off by 10.76%
  • % of S&P 500 stocks in 10% Correction or worse 77.48% (versus 82.56% the prior week – some improvement, but 77% in Correction is not good)
  • % of S&P 500 stocks in 20% Bear or worse 51.12% ( versus 52.94% the prior week – minimally improved and not a good number)

2016-01-22 article 9


2016-01-22 article 10


2016-01-22 article 11


OK, let’s see what other tools might suggest for price targets and support and resistance levels given our three judgements:

  • Primary trend is down
  • Current rally is contra trend
  • Current price position relative to primary trend line indicates a higher probability of more transient contra trend rally than more pro trend decline (absent material external change in circumstances)

So what do some quantitative technical tools say about short-term price targets – specifically 3 months out?

This chart plots linear regression trend lines based on 1 year, 6 months and 3 months of history; and with a 3-month extension. Those trend lines intersect the price scale at 1975, 1985 and 1760 respectively.

The chart also plots “price probabiltiy ranges” (“probability cones”) out three months based on 1 year, 6 months and 3 months of history using historical volatility and a 70% probability. 70% probability is very close to the +/-1 standard deviations range we looked at in the Normal Distribution Curve above.

At the end of 3 months volatility-based price range projections (at 70% probability) we see prices between 2225 and 1795 based on 1 year history; 2250 to 1775 based on 6 months history; and 2045 to 1780 based on 3 months history. (see more about Linear Regression)

2016-01-22 article 12

Note that the probability cones are agnostic as to direction, but if we mentally apply the primary trend judgement, it makes sense to expect more action in the lower half of the probability ranges than in the upper half over the short-term.

Well, what about price levels that might possibly create some resistance in a rally?

This chart uses Fibonacci intervals to suggest price level and time periods where resistance might be expected if stocks behave in accordance with the Fibonacci pattern that is so common in life, and perhaps in financial markets (see these links for more about Fibonacci Arcs and Fibonacci Retracement).

Fibonacci tools plot distance between peaks and troughs that are divided into Fibonacci intervals, and some technicians believe that those intervals more often than not represent points where investors hesitate and create resistance on the way up and support on the way down.

The Fibonacci ARCs (blue) divide the vertical distance between peak and trough into Fibonacci intervals and then use those distances and the radius of the Arcs to suggest both price and date for resistance.

The Fibonacci Retracements (dashed red) simply divide the distance from peak to trough, but do not include a time element. One might argue that where the two tools intersect is a likely resistance point on the way up and support on the way down.

For better or worse those points are 1935 (38.2% retracement), 1975 (50% retracement – not a Fibonacci number, but a Dow Theory number) and 2015 (61.8% retracement) .

The peak was 2134 back in June 2015, and the trough was 1812 in January 2016.

2016-01-22 article 13

Another simple quantitative measure uses Price Channels (boundaries based on trailing high and low prices see more about Price Channels). Using the 63-day (3-month) and 21-day (1-month) Price Channels; and assuming that the mid-point of those channels are decision points for investors to be more Bullish or to hesitate, we see possible resistance at 1948 and 1968.

2016-01-22 article 14

Last, we might look at what are called Pivot Points, that predict possible support levels and possible resistance levels. explains the calculations nicely here:

  • First support level is 1800
  • Second support level is 1693
  • First resistance level is 2025
  • Second resistance level is 2145.

They call them Pivot Points, because those are possible prices where investors (or traders) collectively will likely turn on their heels and pivot to move back in the direction from which they came.

The resistance levels are labeled R1 and R2 on the chart; and the support levels are labeled S1 and S2 on the chart.

2016-01-22 article 15



Si vis pacem, para bellum — If you want peace, prepare for war

Friday, January 15th, 2016

This is our letter to clients January 13, 2016

  • It illustrates the badly deteriorated and worsening S&P 500 market internals
  • It reiterates our view since last July that high cash positions are warranted
  • We have peace of mind because we prepared for this market war

Before looking at the letter to clients from two days ago, let’s view the charts for key regions around the world, including today’s (January 15) global stock markets turmoil.

  • SPY for the S&P 500
  • IEV for Europe
  • EWJ for Japan
  • VWO for emerging markets
  • GXC for China

Here are ETFs representing those key regions around the world daily year-to-date:

(click images to enlarge)


Here are the same ETFs weekly over the past 3-years:

2016-01-05_world_3Yr wkly

[ Below is our letter to clients on Jan 13, continuing to suggest more market pain ahead, and that defensive positions and high cash allocations are most appropriate, for those in or near retirement — there will be good entry points after the markets show clear bottoming behavior, but not yet.   That letter also makes sense today, January 15, after the strong sell-off around the world]


QVM Clients:

The stock market is in tough shape and the direction of change is strongly negative.  We have been expressing caution about market deterioration for months now, and have advised reducing equity holdings and maintaining high cash levels since July.  In those accounts where we have authority we made those changes with cash positions ranging from 40% to 70% depending on the account specific mandate.

The condition of the market continues to deteriorate, and today’s sell-off is just part of that.  It may well be that a rally will occur from this level which for the S&P 500 is more than 3 standard deviations below its 3-month daily average.  But even if there is a short-term reversion to the mean, the trend of the mean is still down. This is not the end of the world, and in the long-run all will probably be well, but for now this stock market is not good.

The longer 200-day trend line is also in a downward trend at this time, and the price of the S&P 500 is below that arbitrary 10% Correction definition.  Should the market decide to go to the so-called 20% decline Bear market, we would be looking at about 1700 on the S&P 500.  That compares to a price around 1900 now, and compared to December forecasts by major analysts for 2016 in the range of 2100 to 2300.  We might still get to those higher numbers, but for now cash is king, and better entry points are ahead.  Now is not the time to re-invest.  We need to see some clear bottoming behavior (prices rising above their averages, and the averages ceasing to trend down).

  • We are not with the Royal Bank of Scotland economist who this week said “Sell everything, except high quality bonds” – although it certainly would have been nice if we had gone that far back in July.
  • We do not agree with Denis Gartman, who said “This is a full-fledged Bear market” – although we are certainly on a path that has a full-fledged Bear as one possible outcome – no way to tell for sure.
  • But, we do agree with Jeff Gundlach who said, “This is a money preservation market, not a money making market”; and with Bill Gross who said it is more important at this time to focus on return OF capital than return ON capital.

Let’s stipulate that there are numerous Bulls out there too who point to fair valuations, broad equity index yields higher than 10-year Treasury yields, an economy that is OK, and that the US market is the deepest and safest one at this time; and that the yield curve is still supportive of growth.

However, beside the fact that earnings are declining (probably the first time for 3 quarters in a row since 2009) and margins are compressing, and revenue is declining; we are particularly focused on how all that resolves in the behavior of stocks – and particularly in terms of “breadth” (how the bulk of index constituents are behaving relative to the performance of the overall index, which is dominated by a few mega-cap stocks).

We normally do a breadth analysis of several US and foreign indexes each weekend after the Friday close, but given the nasty day today – and the nervous phone calls we received today, we did a quick breadth study of the S&P 500 (Jan 1, 2014 weekly through today).

Here is a summary of the results:

  • S&P 500 off of 12-month high by 11.56%, but median stock off by 20.24% (best level was off 1.70%)
  • Only 1.42% of S&P 500 stocks are within 2% of their 12-month high (best was 52.31%)
  • 80.77% of S&P 500 stocks off by 10% Correction or worse (best was 14.23%)
  • 50.61% of S&P 500 stocks off by 20% Bear or worse (best was 2.64%)
  • 26.52% of S&P 500 stocks of by 30% Severe Bear or worse (best was 0.61%)

The simple fact is that breadth is the worst it’s been in just over 2 years (probably longer, but our data only goes back to Jan 1, 2014) for the median stock, for stocks in Correction, for stocks in a Bear, and  for stocks in a Severe Bear.  For stocks within 2% of their high, the reading is close to the worst at 1.42% and far away from the best reading of 52.31%.

There is just no way to paint a pretty picture with these breadth data, and we do not think adding to risk at this time makes sense as long as these breath data (and profits) are in decline, regardless of interest rates or Central Bank policy; and regardless of Bullish views of some key institutional analysts.

[ Charts Legend: orange line is percentage distance of S&P 500 index from its trailing 1-year high.  Gray line is weekly data for parameter being studied.  Dashed black line is 13-week (3-month) average of the gray line. ]

(click images to enlarge)
















I will write to you in more depth about this along with other market indicator data this weekend.

Please feel free to call.




Put/Call Ratio Indication of Investor Sector Expectations

Wednesday, January 6th, 2016
  • Materials, Industrials, Utilities and Russell 200 high PUT/CALL ratios show investor concern about price vulnerability
  • Financials, Staples and Russell 2000 have recently elevated PUT/CALL ratios that show a negative change in investor sentiment toward them

The ratio of PUTs-to-CALLs on a security may be an indicator of aggregate investor negative-to-positive sentiment or expectations for that security.

A review of PUT/CALL ratios over the past year for the SPDR S&P 500 sectors (and also ETFs for the S&P 500, S&P 100 and the Russell 1000) give a glimpse of where the most caution or concern lies in the minds of investors.

Materials, Industrials, Staples, Utilities and the Russell 2000 have the highest PUT/CALL ratios.  Financials, Staples and the Russell 2000 have the most apparent recent elevation in their PUT/CALL ratios.

The higher ratio ETFs and the recently elevated may be more vulnerable to adverse price movements than other ETFs in the group and deserve close observation for potential adverse price movements.

This table presents the current PUT/CALL ratio for sector and index ETFs as of mid-day January 6, 2015.



Each of the next three chars show the PUT/CALL ratio in yellow in the bottom panel over the trailing 252 market days.  The upper panel plots the price (with SPY in white plotted behind the security price), and with the 200-day average in orange, and the 50-day average in white.

(Click Images to Enlarge)






The next three 1-year “noise cancelling” Renko charts plot the price only when the price moves by more than 14-day average daily price change — note that in such a plot the horizontal axis of time is not linear, because sometimes the price moves rapidly and sometimes slowly.

Financials look vulnerable to a price decline.  Staples appear strong, but investors in PUTs and CALLs must feel the price is overdone or the sector is too crowded.  The Russell 2000 is visibly in decline.







The next three 10-year charts plot price in the traditional way, with an overlay of the dividends paid shown in red.

The Financials price has grown faster than dividends in the past couple of years, after a disastrous price decline and set of dividend cut in 2008-2009.  Staples price and dividends have essentially moved steadily higher together.  The price of the Russell 2000 has also outpaced its dividend growth in the past couple of years.






PUT/CALL ratios should not be used in isolation, but are one data point that may be of use in assessing short-term implications for a security.

30 DM and 22 EM Country ETFs Total Return Performance 1, 3, 5, 10 Years

Saturday, January 2nd, 2016

DM performance 2015-12-31

EM performance 2015-12-31