S&P500 resistance

It looks as if the S&P500 is facing a strong resistance level at around 2100 points. Right now I am only invested around 70%, the rest in cash.

Apart from the technical point of view, does anybody have a leading indicator which might suggest a marked retreat ahead of us?


I’m pretty sure I do not have a great one. I’m 100% invested, FWIW. Fast Money last night was wanting to put their money in the Russell 2000 if the dollar appreciated and in the SP500 if the dollar depreciated–based on the theory that the SP500 might have troubles exporting with a strong dollar while the Russell 2000 might benefit from cheaper imported inputs to production with a strong dollar.

I am beginning to look at the Leading Economic Index and it is still rising. This would, I think, suggest that there will not be a recession in the near term and perhaps, no large correction. The saying that economist have predicted 9 of the last 5 recessions is due to a high false positive (for recession) in the LEI but I think there are fewer false negatives. I may be wrong on this, however.

I’m not changing anything I am doing based on the above.

Sister - from a technical perspective, this looks like an impending breakout.
Steve

Sister:
Good question and - really - the million dollar question.
As long as the stock market exists, there have been (mostly futile) attempts to predict its future direction. Nothing has ever worked consistently and nothing ever will. The stock market is a chaotic beast that tends to surprise us all. Yes, there are gurus out there who get it right now and then. But never consistently. They all fail at some time.

If there was a way, then why would the guru come forward with the prediction and not invest all his money and bet on the direction of the prediction? Here is a recent attempt by a guru:
http://www.newsmax.com/Finance/MKTNews/Finance-Market-Stocks-Aftershock/2013/03/13/id/494569/

Sentiment does work well sometimes, if it is extreme. But there are many exceptions there as well. Sentiment can also be extreme much longer than people can stay liquid!

What gives? We do have imperfect indicators: Besides sentiment, the LEI, “Help wanted ads” (no kidding), disappointing quarterly results, “The Baltic dry index” was followed by many for a while…and many others.
http://www.cbc.ca/news/business/baltic-dry-index-drops-to-lowest-level-since-1986-1.2940711

Combined, all these indicators MAY give us a “feel”, a “hint” for the future direction of the stock market…
MAYBE or MAYBE NOT.

Werner

The Citi Economic surpirse index has been diverging for a while, and oscillators like the RSI and MACD seem to be diverging with the S&P when plotted in the long term, but there are other measures that are still positive, like the LEI’s ISMs, etc. For TA thoughts I like following peter Brandt. www.peterlbrandt.com.

I think he is right in that from a technical point of view, things are unclear for US stocks, but they should clarify soon as soon as it breaks the range that you pointed out above. Until it does though, probably better to stay with the trend. Lets wait and see…

I’m not a discretionary trader so I can’t really say, but I will say in my opinion this market doesn’t really top until people who were badly burned in the 2008/2009 move are convinced to get back into the market. What will it take to do that? Either time and or price appreciation. After the 29 crash, it took time (and a world war). I ask myself though, what if it melted up? What if a broad index doubled or tripled from here? At what point can these folks just not take it anymore?

My impression is that we still do not have broad participation, and the epic historical tops seem to require it. There also seems to be a ton of skepticism in the media at this level and articles keep talking about the impending dump / correction. It seems like a “wall of worry” to me.

I consider the S&P500 overvalued on several metrics. Not going to time off valuation but philosophicaleconomics did a nice piece on adjusted-CAPE.
EPS trend is not looking good by the P123 graphs. Energy is obvious issue, but so was tech in 2001 and financials in 2008.
The equity risk premium favours equities and the equity market has supportive breadth.
The fact that SPY:IEF is flat for a while means we are struggling in equities, yet VIX < 14. With high PE, this ratio of PE/VIX shows complacency.
For the next month I am long equities but have been buying a few Sep SPY puts with portion of profits on good days.

What are the degrees of freedom for policy here?
Fed Funds - same or up 25bps. June? Sept? Reported unemployment says hike already. Participation adjusted says hold, but also that policy measures are working very slowly. Increase in rates will strengthen USD, hurting exporters over domestics but will also spur lower inflation. I expect low rates for years.
Long rates - the world could notice that they get more coupon and a great FX trend, buy up US bonds in 5/10/30 and flatten the yield curve, which would increase the equity risk premium and might be the trigger for an equity melt up as everyone would be more fearful of interest rate hikes then.

Black Swans
Global slowdown - Fed will start QE4 and excess liquidity sloshes into financial assets…again.
Mergers - expect mega mergers as CEOs buy growth. This may lift multiples in market supporting rise.
ISIS invades Saudi Arabia - oil doubles, global recession, US led coalition into region.
Iran gets sanctions lifted - releases lots of stored oil, price falls hard, US consumer benefits
Bank of Japan - goes full retard on weakening yen and buying stocks but yen weakness runs away from it and confidence in central bankers questioned

Nice overview, Shaun.

Some of the recent US employment gains have been attributed to demand for energy sector workers. Look for those gains to be given back with the drop in oil prices. Schlumberger just announced plans to slashes 11,000 jobs globally, for example. What will the Fed do if unemployment ticks up and the dollar stays strong and we have disinflation/low inflation? Nothing, I hope.

Best,

Walter

Just took a peek at the SPY:TLT. It looks like it started to roll-over in Sept/2014 and the trend looks intact.

Walter

Check out a macro I posted yesterday (top of the public macro list). It is out of the market based on poor earnings expectations and high valuation.

Richard

Another Black swan is China. Panics always happen when their is a lack of transparency. Opacity is layered, Enron like, in China. They will not tell the outside world what their true economic conditions are, their internal states/cities will not tell their federal level what is happening and there is no open SEC like overseer to insure companies and entities are not lying. Many western companies earnings have grown to depend on China fueled growth and if China overnight decides to take a turn, and not tell anyone what it is doing, it could set off a worldwide panic. We have already seen their impact on commodities. That is the canary in the coal mine. I have never seen an article where someone modeled the impact on SP500 EPS at different, lower, China national growth rates. Has anyone seen this? China is already signaling this is beginning to happen.

David,

To put China in context, the issue is what percentage of US stock sales are to China and what pct of that will slow down and/or shrink temporarily. Ex: If US companies sell 5% to China and China slows down from growing 8%/year (and I don’t mean what the Chinese report but the actual growth) to 0% a year, then the impact to US stocks would be 8% of 5% which is -0.4% reduction in sales. (These numbers are made up for illustrative purposes). You would also need to factor the increased profit margins of some companies due to lower commodities prices and the increased sales to US consumers due to increased discretionary spending (lower gas prices) and the loss of US shale jobs caused by lower oil prices. I’m sure that I didn’t include everything yet. Guys, predicting macro is hard. Almost no one does it well consistently.

Hi again,

two month after my initial post the technical weakness of the S&P500 is now confirmed by the break below the support level.

I therefore am curious to know: Did anybody see this coming using any sort of market indicator / custom series or the like?


My Best(SPY-IEF) Market Timer has been signaling 25% stocks and 75% bonds or cash since mid-March 2015.
http://imarketsignals.com/2015/spy-ief-market-timer/


Sisters and all,

I published a free article on my website yesterday (and another last Wednesday) that predicted this week’s selloff based on technical analysis. I expect this to be a significant correction. It will probably be blamed on headlines out of Greece or some other such nonsense. But just like the sellof last October was blamed on a virus, the headlines are just market-writer’s attempts to answer what people want to know (why?). The real reason is easy to see from technical analysis. I know TA has a bad rap on p123, but check out these articles:

(Bad links now fixed. No password required.)

My portfolios have been mostly in cash for some time based on this type of analysis. Again, the articles are free and I’m not trying to sell anything. I am publishing all of my content for free now and will be publishing some of my portfolios into the free area as well because I am retiring soon (thanks to p123). If you have a question for me directly about the articles, use the Support link on my website.

The links ask for a password.

KJ

PS: They work now.

Christopher, what is a Major drop, what is a significant correction 10%, 20%, 30%?

I would consider a 20%-30 drop as healthy, it can not go up forever.
Yes, my port will “suffer”, but in the Long run there is only one risk for me:
permanent losses (e.g. never leverage, it takes you out of the game sooner or later!) and low Performance.
(At least that is the Definition of risk by Buffet.)
A nice drop, then come out of that bump with a Turbo recovery based on
value and momentum.

Today was noice, 2% Drop? Piece of Cake, in the 90s 3% swings where totally normal!

Szenario:
My port got 300k (I do not Need this Money the next 20 Years!), lets cut that in half, put 50k to it (thats what I can put away in one year).
So I got 200k after that very bad year.
All of my Systems recover fast and with a lot of bang to the upside, one year later I am where I began.
I will take that rollercoster, because I know I am not smart enough to time well.
The only Thing you have to do: Keep your emotions in controll!

The Kitchen is really cold now, it is going to be much hotter (if not, also okay)

I know, that is totally against the norm, just my stupid 2 Cents!

Regards

Andreas

(Bad links now fixed. No password required.)

Andreas, did you hold on through the creash of 2007-2009? My system had me out in October 2007 and back in on March 9, 2009. How about 2011? My system had me out in May of 2011 and back in October 9, 2011. I’ve found that by eliminating significant drawdowns, you can triple the returns of your portfolios. The articles above will explain some ways how.

That is the one thing that 98% of investors cannot do (witness the mass liquidation of portfolios in October 2008, near the bottom). This is going to be a doozy of a drop, not a few percent! Today was only the opening salvo in a selloff that could rage for months. You don’t have to be ‘smart’ to learn how to time the market. It’s simply another discipline, just like learning how to do quantitative analysis. By combining the two, you have a can’t-beat combination. Read my articles and see what you think.

I am not saying I do not time the market, get out when the 200 Ma is broken and Performance lots of my Systems improve as well (though not all,
some agressive 5 Stock modells do actually not care based on Performance (though mdd gets better with Timing).
Get out when the earnings are trending down and they improve even more.

My Point is: what if your Timing is wrong? Are you prepared for a 50% Drop?, if not, your are in Trouble, because if you can not
get trough it and give up at the wrong Moment, lets say 30% drop of you port and get into cash and see how your Modell snaps
back in no time, THAT will break your Performance much more, maybe even your ability to invest ever again (I got a lot of friends who got burn
2008 and they still wait for the next drop to get into the market again, they missed a multy year bull market!!!) And that is why most Investors “do not make it”.

And I got friends who get nervous, when the market Drops 10%, sorry, but that is plain nuts. If you can not controll your emotions, then
your need to work on them.

We are in a ring with a Gorilla, he will swing hard and we will knock you down one day. To believe to be able to controll all 100% of those swings
gets you in Trouble (as well as leverage) Be prepared for a 50% drop and follow your Modell even then trough.

All great Investors have their emotions in check. To have your emotions under controll is 100% of the game, it is a kick out
criteria (e.g. criteria not fulfilled = no sucess). You can have an average Modell + emotions controll = Success.
Best Modell in the wold + emotions not in check = no sucess!

That is the reason why everybody is in search of modells with 45 dregree angle going up with no dds, they
search a Modell where they do not need to have their emotions in check.
Well that road leads to deasaster.

I mean look at the modells of he great Investors. The free modells of p123 are mostly better then theirs.
They could not care less, because they just be able to make 10-20% year after year and ride out the bumps in between.

Think about it: why does buffet not time the market? Why could he not care less? In his case, he only cares
about the value of his stocks and he knows, that Long term the value will determine Price, he simply waits
until the market is “rationale” again. And so far that has worked since 1870.

I think it is okay to time the market, get out if the 200 ma on the markets are broken,
get out if the sp500 does not make a new high for more then 12 Months etc.

Fine! But be prepared when you are wrong, for that Moment you need to be prepared.
Work on your emotions!

Regards

Andreas

There is no sign of a coming recession in the US for the next months: unemployment is low, housing starts are in an uptrend but just half of 2006 bubble level, the 10-year / 3-month credit spread has not been inverted since 2007.
I use an aggregate indicator taking into account 10 elementary data. Its value is between 0 and 10, maximum risk is 7 and above, current value is 4. Of course, all is about probabilities, risk zero doesn’t exist (old mountaineer’s saying). Black swans are by nature unpredictable. I am about 60% hedged on my main trading account.
A 20% correction like in 2011 might allow this bull to live a happy a longer life.