Secular Bull and Bear Markets

by Doug Short

Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? At this point, over five-and-a-half years later, the S&P 500 has set an inflation-adjusted record high based on monthly averages of daily closes.

Let's examine the past to broaden our understanding of the range of historical trends in market performance. An obvious feature of this inflation-adjusted series is the pattern of long-term alternations between up-and down-trends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).

Click for a larger image

The key word on the chart above is secular. The implicit rule I'm following is that blue shows secular trends that lead to new all-time real highs. Periods in between are secular bear markets, regardless of their cyclical rallies. For example, the rally from 1932 to 1937, despite its strength, remains a cycle in a secular bear market. At its peak in 1937, the index was 29% below the real all-time high of 1929. For a scholarly study of secular bear markets, which highlights the same key turning points, see Russell Napier's Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms.

If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns (note that for the table below I am including the 1932-1937 rally):

The annualized rate of growth from 1871 through the end of December (the latest month for which we have an inflation rate) is 2.25%. If that seems incredibly low, remember that the chart shows "real" price growth, excluding inflation and dividends. If we factor in the reinvested dividend yield, we get an annualized return of 6.86%. Yes, dividends make a difference. Unfortunately that has been less true during the past three decades than in earlier times. When we let Excel draw a regression through the data, the slope is an even lower annualized rate of 1.76% (see the regression section below for further explanation).

If we added in the value lost from inflation, the "nominal" annualized return comes to 9.06% — the number commonly reported in the popular press. But for a more accurate view of the purchasing power of the market dollars, we'll stick to "real" numbers.

Since that first trough in 1877 to the March 2009 low:

• Secular bull gains totaled 2075% for an average of 415%.
• Secular bear losses totaled -329% for an average of -65%.
• Secular bull years total 80 versus 52 for the bears, a 60:40 ratio.

This last bullet probably comes as a surprise to many people. The finance industry and media have conditioned us to view every dip as a buying opportunity. If we realize that bear markets have accounted for about 40% of the highlighted time frame, we can better understand the two massive selloffs of the 21st century.

Based on the real (inflation-adjusted) S&P Composite monthly averages of daily closes, the S&P is 144% above the 2009 low and only about 1% off its record close.

Add a Regression Trend Line

Let's review the same chart, this time with a regression trend line through the data.

Click for a larger image

This line is a "best fit" that essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below. The slope of this line, an annualized rate of 1.76%, approximates that number. Remember that 2.25% annualized rate of growth since 1871? The difference is the current above-trend market value

The chart below creates a channel for the S&P Composite. The two dotted lines have the same slope as the regression, as calculated in Excel, with the top of the channel based on the peak of the Tech Bubble and the low is based on the 1932 trough.

Click for a larger image

Historically, regression to trend often means overshooting to the other side. The latest monthly average of daily closes is 91% above trend after having fallen only 13% below trend in March of 2009. Previous bottoms were considerably further below trend.

Will the March 2009 bottom be different? Perhaps. But only time will tell.

For a more optimistic view, see Chris Puplava's assertion a year ago that The Secular Bear Market in Stocks Is Over. Chris's commentary includes some interesting demographic analysis based on the ratio of the higher earning, bigger spending age 35-49 cohort to less financially empowered age 20-34 cohort. Unfortunately this ratio is being savagely trumped by a far more powerful demographic shift: The ratio of the elderly (65 and over) to the peak earning cohort (age 45-54). The next chart, based on Census Bureau historical data and mid-year population forecasts to 2060, illustrates this rather amazing shift.

In the chart above, the elderly cohort (red series) is dramatically increasing in numbers. The ratio of the two, the blue line in the chart, peaked in 2007 and began its long rollover in 2008, coincident with the beginning of the last recession. We have many years to go before this ratio approximately levels out around 2030.

Even more disturbing is the elderly dependency ratio, the label given by demographers to the ratio of the 65 and older population to the productive workforce, which for developed economies is usually identified as ages 20-64. The next chart illustrates the elderly dependency ratio with Census Bureau forecasts to 2060. Note that in this chart I've followed the general practice in demographic research of multiplying the percent by 100 (e.g., the estimated mid-year 2014 elderly dependency ratio is 24.3% x 100 = 24.3).

As the chart painfully illustrates, the elderly dependency ratio is in the early stages of a relentless rise that doesn't hit an interim peak until around 2036, over two decades from now. Given the unprecedented demographic headwinds for today's investors, I'm unable to share the Chris's confidence that the US is now in a new secular bull market.

See the original article >>

FTSE Stock Market Triple Top - The Golden Age of QE and The Fiat Endgame...

By: Clive_Maund

As you are doubtless aware we are living in a new paradigm - the age of global QE has arrived. Amongst the major power blocs it started with the US, spread to Japan, which adopted it with a particular gusto, after suffering from deflation for decades, and just has been taken up by Europe in a big way, after waiting for half its young people in many constituent countries to become unemployed due to the ravages of deflation. Smaller countries will have to join in or their currencies will soar and they will become uncompetitive.

It is vital to understand that, having become a universal policy, QE is here to stay - this is a genie that can't be put back into the bottle. The reason is that any attempt to reverse course and rein it in would quickly lead to soaring interest rates because of immense debt levels, a global market crash and a liquidity crisis, in other words a deflationary implosion. Another important to note is that in this "Golden Age of Fiat" where money does not have to be backed by anything and where our masters are accountable to no-one, they can indulge in as much QE as they like.

QE has a number of huge advantages for the ruling elites. First of all it allows them to remain in power indefinitely, because credit crises and the social strife that follows can be avoided by the simple expedient of printing ever more money - the European elites were slow to grasp this point, but judging from the magnitude of their just announced QE, they definitely understand this now. As we know, one of the maxims of the elites is to "privatize profits and socialize losses" - put crudely and simply, when they make money they keep it all to themselves, but when they goof up and lose money, they will push the bill onto the general population, the middle and lower classes - a brazen and glaring example of this being when the "too big to fail" banks and other big institutions in the US got society at large to bail them out at the height of the financial crisis via TARP, the Troubled Asset Relief Program, which of course was not put to a vote.

QE is just another enormous scam, a principal objective of which is to socialize bank and government debt by inflating it onto the masses. They print money (QE), hand as much of it as they please to their crony pals in banks and other powerful elite controlled institutions, and then the increase in money supply reduces the relative magnitude of government debt, since while the debt is nominally the same, there is much more money in existence to service it or pay it off. The public then picks up the tab in the form of inflation as the increased money supply drives up prices.

The reason for the bizarre mismatch where stockmarkets have been continually rising but commodity prices have been falling is due to the fact that the elites are awash with cash to play the markets, while the average poor schmuck on the street is getting poorer and aggregate demand is diminishing as a result, reducing the demand for raw materials. One would think that this must eventually impact stock prices as overall sales fall and profits drop, but in the crazy world in which we now live, we have to factor in the elites with their huge bags of free cash that they have to invest in something, which includes the big banks of course. Their cash mountains resulting from QE could overwhelm old fashioned considerations like corporate profitability and drive stock prices higher regardless. This can be a difficult concept for older investors, who grew up in an age of relative fiscal propriety, to grasp.

A crucial point to understand is that the world is now actually run by and for the benefit of the big banks, who are a "de facto" World Government. Governments and politicians universally do what these banks require of them, or they suddenly find themselves sidelined or usurped - or worse. The banks have encouraged everyone and everything to get into as much debt as possible to maximize profits - they spirit money into existence and then turn round and lend it out at comparatively vast rates of interest. They are using to QE to clamp interest rates at 0 (for them), so that they can maximize the differential with the rates they charge, resulting in, needless to say, huge profits for doing very little, and, as mentioned above they use the zero rates to stop their massive debts from compounding and use the QE to inflate them away at public expense.

The above is not abstract theorizing - it is necessary that we understand what the game really is in order that we have a greater chance of being on the right side of the trade. If we really are in the new age of global QE, then we are living in a very different investment landscape to what would otherwise be the case, with the Masters of the System now able to adjust the faucets to decide how deep recessions will be, and even whether there is a recession or not - and don't forget a recession to them is when the value of their investments falls, not when the guy on the street is broke or unemployed. This is why we have the situation where big Western stockmarkets like the FTSE in the UK or the S&P500 in the US are near to all-time highs, while the average middle class person is struggling.

Comprehending that we are in a new age of global QE, where they can print up as much money as they like at any time, changes the way one looks at markets. This gives the elites the power to manipulate markets on a grand, unprecedented scale.

A dramatic example of such gargantuan manipulation may be about to play out in the London stockmarkets. The normal interpretation of the giant pattern forming in the UK FTSE index which we looked at not long ago, using traditional Technical Analysis, is that a huge Triple Top is completing, but the government may be able to avert this outcome by simply doing QE on a sufficient scale to head this off and force an upside breakout. All they have to do is keep pumping money at a sufficient rate and make sure it reaches those whose task it is to keep the market levitated. This is the "new paradigm" that we wrote of near the start - never before have governments had such power to control markets. If they succeed in breaking the FTSE out the top of its gigantic Triple Top, where there is huge resistance, this index will soar. If it starts to descend from this Triple Top, things could get ugly in a hurry.

The markets' reaction to the Fed yesterday was negative, as we can see on the 6-month chart for the S&P500 index below...

If the FTSE does break out upside from its Triple Top, then US and other markets should soar too. The US should remain "leader of the pack" for various reasons. The obvious one is that its currency, the dollar, is the global reserve currency. The next is that it is "smelling of roses" right now because it is not doing QE, while other centers of economic power are, although the fact is that the Fed still has a huge tub of money from the last big QE to goose the markets. Still another one is that the US is geographically homogeneous and distant from world trouble spots, unlike Europe which is composed of potentially warring tribes. So while there might be some nasty shakeouts in the US markets over the short to medium-term, as might be occasioned by a disappointing earnings season, there should be plenty of cash sloshing about to drive them back up again. All this is a reason why we are looking at things like airline stocks, which stand to benefit also from the drop in the oil price.

The other side of this manipulation coin is that they also have to power to beat down things they don't like, such as gold and silver, by endless waves of naked shorting - but this will only work until the gap between the physical and paper price becomes untenably large. Given the rampant global QE now underway and the resulting destruction of currencies, and the fact that most of the available physical gold in the world has already been bought up by Asian countries, most notably China, their power to beat down the paper price of gold looks spent, and it is starting to rise again, after the onslaught of the past 3 years.

The end result of relentless global QE would be a hyperinflationary depression, where prices rise strongly because of the endless increase in money but get people get poorer as wages fail to keep pace. When you mention hyperinflation people think of it as prices rising by thousands of percent per year, like in the Weimar Republic in Germany or Zimbabwe at its worst, but it doesn't have to be anywhere near that bad to be hyperinflation - if prices only rise by 60% per year, most citizens would be ruined within 2 years. That could easily happen if this QE gets out of hand.

When we consider the outlook for gold and the impact on the gold price of all this relentless global QE, any fool can see that if you continually increase the money supply, the cost of something finite like gold is going to rise - and possibly rocket, especially as a lot of the physical supply of gold has already been soaked up by more shrewd players like China. This means that the jokers on the Comex with all their naked shorting are going to be way out on a limb, when the price gap between paper and physical gold yawns to untenable and unsustainable levels - it is already big.

So even though the blizzard of unbacked money created by the ongoing global QE can be expected to drive the prices of many investments like stocks higher and higher, gold (and silver) are not going to be left out for much longer. They are already starting to come to life. Older investors will recall that gold's gigantic bullmarket of the 1970's was punctuated by a big 2-year correction in the middle of it that corresponds to the big 3-year correction that we have just witnessed, before it took off higher again into a massive ramp and a spectacular blowoff top, which is what we should see repeated again, only this time round, given the unprecedented excesses that now exist, it is likely to be orders of magnitude larger.

The biggest danger to the system that could yet - and at any time- cause markets to crash would be a widespread failure of confidence in the banks and the system. So far investors don't seem to care about banks and governments destroying their children's future with their reckless QE programs, but should that change and investors "get cold feet" things could get nasty in a hurry. We are going to need to keep our wits about us.

See the original article >>

The VIX and the Stock Market

by Pater Tenebrarum

A Disturbance in the Farce?

We usually like to keep an eye on indicators that are not getting a lot of attention, in an attempt to circumvent the “what everybody knows isn’t worth knowing” problem. Recently, several noteworthy things have happened with the $VIX, or rather, the derivatives traded on the VIX. The VIX is a measure of implied volatility, referring to front month options on the S&P 500 Index (it used to be the S&P 100 back when OEX options were still the most liquid index options – the OEX version is these days called VXO). While the first OEX version used only at-the-money options expiring 30 days hence, the calculation has been expanded over time. Now it is a blend of front and second-month at-the-money and out-of-the-money options. Those interested in the precise calculation procedure can take a look at it here: CBOE VIX White Paper (PDF). The aim is to calculate the expected 30-day volatility of the SPX at a 68% probability (one std. deviation) as expressed by the options market.

Image credit: James Steidl / Thinkstock)

For some time VIX futures and options that reference these futures have been trading. Both the futures and options are extremely popular, as hedging instruments, but also as speculative vehicles. In addition, there are VIX ETNs (both long and short, some of which are leveraged), which are also highly popular. Since the stock market usually becomes much more volatile when it goes down rather than up, the VIX tends to rise whenever the market declines. In a steadily rising market with little volatility, the term structure of VIX futures tends to be in contango. There have already been two occasions in 2015 when the cash VIX traded above the futures curve, and even now (after a strong market rise on Monday), the nearest futures contract trades above the two subsequent ones.

On two occasions in 2015, the cash VIX was trading above the level of VIX futures. The term structure remains partially inverted – click to enlarge.

VIX futures curve – although the cash VIX ended below the futures curve on Monday, March and April futures are still in backwardation vs. February futures – click to enlarge.

When the first inversion of 2015 occurred in January, the event was subject to what could turn out to be an erroneous interpretation at Business Insider. While it is true that over the past year or so, the curve tended to invert close to short term lows, it didn’t invert right at those lows, but before they were made. It is also the case that generally, over the longer term, VIX curve inversions are actually a negative sign, as Gavekal points out here (with a chart that shows a lot more history than the one in the BI article). Prior to the 2008 unpleasantness the VIX term structure also went into backwardation. It was obviously not a good idea to buy stocks at that juncture (it was a good idea to buy VIX calls though).

The recent episodes of VIX futures curve inversion are still small, and may well turn out to be meaningless, similar to those seen last year. However, one needs to keep in mind a few things here: With the sole exception of the October correction, these inversions tended to last just one day in 2014, and were as a rule followed by a divergence (a lower low in the SPX, while the backwardation disappeared). This year we have had two of them closely grouped together on rather mild declines. If the phenomenon turns out to be persistent and the backwardation steepens, then it will definitely fall under the header “warning sign”.

“No More Hedging Required”

Moreover, the event needs to be brought into context – namely into context with what has happened with VIX options. We were surprised to learn what has happened in terms of call vs. put open interest in VIX options in January, and how this was rationalized, according to a Bloomberg report :

“Even with stock swings nearly doubling since 2014 and U.S. equities poised for their worst month in a year, traders aren’t signaling too much concern.

Investors own about 2.4 million options betting on a rise in the Chicago Board Options Exchange Volatility Index, compared to about 1.6 million contracts wagering on a drop. That’s around the lowest ratio of calls to puts in more than two years, data compiled by Bloomberg show, indicating traders don’t anticipate an increase in market turbulence anytime soon.

 

This seems to be the exact opposite of what VIX futures are signaling, as backwardation in VIX futures is always a sign of “concern.” Here is more about why speculators and hedgers alike seem no longer willing to bet on a rise in the VIX – in spite of the fact that it has actually clearly moved into a higher trading range this year:

“Traders have abandoned options betting on jumps in the VIX since November, even as the gauge spiked at least 18 percent three times this month. Stocks’ tendency to power past declines at the end of 2014 encouraged traders to shed hedges and speculative bets in VIX options they weren’t profiting from, according to Todd Salamone of Schaeffer’s Investment Research Inc.

“We’ve seen a massive drop-off in call open interest,” Salamone, senior vice president at Cincinnati-based Schaeffer’s, said by phone. “There’s been the lack of a big selloff or major volatility pop that hasn’t been short-lived, which could be responsible for that.”

Individuals use VIX options as a tool to protect their stock holdings from losses or to speculate on increases in market stress. The VIX moves in the opposite direction of the Standard & Poor’s 500 Index about 80 percent of the time. Investors have dramatically reduced their positions in VIX calls since September, when they owned about 4.4 contracts betting on upside in the gauge for every put, the highest ratio since February 2007.

Open interest in calls has plunged 50 percent since then, while ownership in options wagering on a VIX decline has grown 49 percent. The put-call open interest ratio in the contracts fell to 1.4 on Jan. 23, the lowest since April 2012.”

 

We believe there is a lot more speculative interest in VIX calls than hedging interest, but that is just a hunch. We also believe that those trading VIX futures are more likely to be professional traders, as the futures obviously involve a lot more risk than the options; more risk than for option buyers that is – option writers are exposed to very similar risk as futures traders.

We find it quite remarkable that call open interest in VIX options has plunged dramatically just as the VIX actually seems to be threatening to break higher. This definitely strikes us as a bearish divergence. It also means that the behavior of the term structure is most likely of the “warning sign” variety. In fact, it is suggested in the article that the lack of protection via VIX calls may be exacerbating stock market volatility this year (as non-hedged longs are more likely to use stops):

“The frustration level has steadily grown as people see these spikes in the VIX become more and more fleeting,” Breier, a senior equity-derivatives trader at BMO in New York, said by phone.

The stock market’s durability last year could have led to investors shedding unused protection and never replacing it, Salamone at Schaeffer’s said.

“Those that typically use VIX call options to hedge long portfolios could be giving up on those hedges,” he said. Through most of last year, “it wasn’t unusual for 90 percent of those calls to expire worthless,” he said.

The consequences endured by underhedged investors may have already surfaced in exacerbated stock swings. The S&P 500 has posted average daily moves of 0.9 percent so far this year, almost double the 0.53 percent average each day in 2014.”

 

What’s more though, hedging activity seems to have moved away from the options market to the futures market, indirectly confirming our above assertion regarding VIX futures mainly being the playground of professional traders. Incidentally, some of the rising open interest in VIX puts is possibly explained by the increase in long positions in VIX futures. Once again though we think one should not underestimate how much short term speculation there is in VIX options. It is as though traders in these options have “learned their lesson” and are now increasingly betting on declines in the VIX – quite possibly at exactly the wrong time:

“Even as VIX options traders give up on calling for more turbulence, hedge funds and other large speculators own the most such bets in VIX futures contracts since December 2009, according to data compiled by the Commodity Futures Trading Commission. These managers held about 86,700 long positions and 79,700 short ones through Jan. 20, CTFC data show. Hedge funds are expressing the view that volatility will gradually rise this year without trying to time when the VIX will spike, according to Dan Deming at Equity Armor Investments.

“Right now, there’s a belief from a trader’s perspective that owning VIX futures is a better strategy,” Deming, managing director at Equity Armor, said by phone from Chicago. Larger market participants “are buying downside puts because they’ve ramped up their volatility exposure,” he said.

The two most-owned options on the VIX are wagering on it to decrease within the next 30 days. Contracts expiring Feb. 18 with a strike price of 14 have the highest ownership, followed by options wagering on a drop to 15 by that same day.

 

Something has clearly changed – but the one factor that is most unlikely to have changed is that the options crowd will be wrong again. If so, then the VIX is set to rise.

Conclusion:

Investors and traders should keep a close eye on the VIX term structure and the put/call open interest ratio in VIX options. The term structure can be followed here, at VIX Central. Charts summarizing various VIX options-related data can be found here. If these recent trends persist, it could well prove to be meaningful.

Addendum: Bonds vs. Stocks

Here is one more chart that deserves to be looked at from time to time, and now is such a time. It plots the ratio of the 30 year treasury bond price vs. the SPX. As you can see, whenever this ratio has “broken out” to the upside, it too warned of an impending increase in market volatility. Its current rise may yet turn out to be a flash in the pan, but this also bears watching closely:

The ratio of the 30 year treasury bond price vs. the SPX – it seems to have bottomed in 2014, and now it is rising. So far the increase is small, but it may well turn out to be an early warning sign as well – click to enlarge.

See the original article >>

After the Perfect Storm in US Smaller-Cap Stocks

by Bruce Aronow

Last year was a tough one for US small- and mid-cap stocks, but there’s reason to think 2015 may be different. For investors who trimmed their smaller-cap allocation last year, we think it may be time to consider taking it back to its long-term target.

Over time, a steady allocation to the asset class has paid off. But first, let’s take a brief look at what went wrong in 2014.

Valuation was a big part of the problem. Smaller-cap stocks—especially biotech and Internet names—began the year with fairly rich valuations both absolutely and relative to their large-cap counterparts. When reported earnings failed to measure up to initial expectations—in many instances because of the unusually harsh winter—investors soured on the entire asset class. Earnings for their more diversified larger-cap peers held up much better.

Volatility also inflicted damage. A bout of market turbulence early in the fourth quarter, sparked by plunging oil prices and worries about the global economy, caused many investors to retreat from risk by paring back equity holdings in general and taking refuge in safe havens such as US Treasuries. Smaller-cap companies suffer disproportionally from declining risk appetites.

Put another way, 2014 served up something of a perfect storm for smaller-sized companies. The Russell 2500 Index of US small- and mid-cap (SMID-cap) stocks still provided a modest positive return in absolute terms, but it was well off the blistering pace set over the prior two years and well below what large-cap stocks delivered.

Smaller-Caps: Strong Historical Performers
Now let’s widen the lens. When we do, we find that over time, smaller-cap stocks have been stellar performers. As the Display below shows, US SMID-caps have comfortably outperformed not just US large-caps over the long run, but also international equities and intermediate maturity bonds.

In our view, too, the backdrop for the asset class has brightened. The strengthening US economy, which is expected to continue growing more swiftly than economies overseas, favors smaller, domestically-oriented firms because a larger percentage of their sales are US-based. That should benefit earnings growth at smaller-cap companies.

What’s more, small-caps look more reasonably valued today than they did at the start of 2014, when data from Russell Indexes showed the Russell 2000 was trading at a 20% premium to the large-cap Russell 1000 Index. By Dec. 31, that premium had been cut in half, leaving it roughly in line with the long-term average.

It’s Time Invested that Matters, Not Timing the Market
As a result, we think investors who cut their smaller-cap allocation during last year’s turmoil might want to think about restoring it to its long-term target. As the following Display shows, missing just one month of the average small-cap bull market would have cut average annual total return by about 15%. Sitting out for five months would have more than halved it.

SMID-Caps: Often Misunderstood, Mispriced
To be sure, smaller-cap stocks are more volatile than large-caps. One reason for that boils down to neglect. Smaller companies everywhere receive less research coverage than large ones. The average stock in the Russell 2000, for example, has fewer than seven analysts covering it, compared to 16 for the average Russell 1000 stock.

As we’ve seen, this neglect often causes smaller companies to be misunderstood and mispriced. But it also gives active managers more opportunity to add value, especially if they have the research resources needed to dig into company fundamentals.

In our view, investors should look beyond last year’s performance and consider maintaining a consistent allocation to smaller-cap stocks. If 2015 turns out to be the year the US economy finally shifts into high gear, the ride’s likely to be a lot smoother.

See the original article >>

The Longer Outlook in ….. The Russell 2000

by Greg Harmon

Small cap stocks are often looked to for leadership in the stock market. This is because on average over time they produce better returns than large cap stocks. This makes sense as a small company has one more worry that a big company does not have: survival. They are riskier companies and therefore should create higher returns. With greater sensitivity it is often possible to see trends that are beginning sooner. This is good in practicality for a long term investor and in theory for a trader. But as an observer of price action one thing I notice is that small caps are not always able to push the large caps around. It is better to study small caps on their own.

The chart above of the monthly price action in the Russell 2000, the small cap index, offers some interesting information. First notice the original ‘V’ bottom that was created with the financial crisis. The Russell was quick to move back to pre-crisis levels, faster than the S&P 500, but actually the Nasdaq 100 moved quicker.

The hiccup in May 2010 created an Inverse Head and Shoulders pattern that upon breaking the dotted neckline set a price objective of 1115. It reached that milestone in October 2013. And since then it has done nothing. Certainly no leadership for over 15 months. But is that a concern? Maybe not.

There is a second Inverse Head and Shoulders as well. This one uses the red neckline and has a much smaller left shoulder than right shoulder. It was triggered on a break of the neckline in December 2012 and carries a price objective to 1390. The 15 month consolidation comes right in the middle of the move to the price objective. Almost like a bull flag, waiting to gather strength for a move higher.

If you look at the price series from an Elliott Wave perspective, it could have a lot higher to move still. Looking at the move lower in the financial crisis as an A-B-C corrective wave, then the move from the 2009 low may just be in Wave IV of the V Wave Impulse higher. These Impulse Waves alternate between trending and corrective, with the two corrective waves having different character. That is to say that if one pulls back then the other is generally flat, like Waves II and IV. The current consolidation would make sense then. Using a little math then and assuming that Wave V extends as long as Wave I but not longer than Wave III gives a range of 1575 to 1650.

The momentum indicators are not quite as bullish though. With the RSI drifting lower there is some small weakness. But it looks like the bleed off in momentum is acting out in a sideways consolidation, not a pullback, and that RSI has now worked off the overbought condition but held very strong. The MACD is a similar story. Pulling back and crossed down, gives cause for a pullback. But the trajectory has been quite shallow thus far.

So it looks like the long train ride higher has yielded to a pause, not a correction. That is strength. If the Russell were to close materially below 1100 on a monthly basis, then you can start to look for more downside and maybe a test of the 50 month SMA at 950 or even the neckline at 900. But until the intermediate bias is sideways within the long term uptrend.

See the original article >>

Market Oversold Enough For A Bounce

by Lance Roberts

Since I was traveling this past weekend for the 2015 World Economic Conference, I did not have a chance to analyze the short-term market dynamics thoroughly in this past weekend's X-Factor Report. However, there is some excellent commentary worth your reading from Authur Hill, Bill Gross, and Crispin Odey.

However, I did want to send out a quick note on the very short-term oversold condition of the S&P 500.

The bounce at the end of the day yesterday, driven by news flow out of Greece, was likely the beginning of a short-term oversold retracement of the recent decline. It is important to keep in context that the recent decline, despite the media's incessant hand-wringing and panic, has been a mere 3% since the beginning of this year.

Nonetheless, during any correction, or more importantly during a mean-reversion process, the financial markets do not move in a singular direction but rather like a "ball bouncing down a hill." For investors, it is these short-term bounces that should be used to rebalance exposure to "portfolio risk."

As shown in the chart below, the S&P 500 has gotten oversold on a short-term basis and is due for a bounce to the current downtrend resistance line. Importantly, the market is sitting on what has been very important support in recent months at the 150-day moving average.  A failure of this support will lead to a retest of the October, 2014 lows.

A rally from this support line could last several days to a couple of weeks. It is advisable to use the rally to "clean up" existing portfolios by selling laggards, reducing high-beta risk and rebalancing winners by taking profits and rebalancing back to target weights.

(Important note:  Notice that I did not say "rebalance portfolios" which implies selling winners to buy losers. The goal here is to let winning positions continue to flourish by simply "pruning" the position, and "weeding" the portfolio by selling the losers dragging on overall performance.)

The chart below shows a listing of the major markets and sectors in terms of relative performance to the benchmark index. This helps to identify areas that should be paid attention to in portfolios currently.

As shown the areas to pay the most attention to in terms of laggards are:

• Financials
• Technology
• Energy
• Emerging Markets

Areas to focus on for positions to hold, or remain underweight, at the moment are:

• Basic Materials
• International

Lastly, clear winners to hold/take profits and rebalance back to portfolio weights are:

• Industrials
• Mid-Capitalization
• Small-Capitalization
• Discretionary
• Real Estate
• Staples
• HealthCare
• Utilities
• Bonds

Importantly, it is worth noting that the bulk of the winning sectors have been, and continue to be, defensive areas in nature that are primarily large cap and dividend yielding.

The chase for yield over the past couple of years has pushed these sectors to extreme deviations from their long-term means. This suggests that during a major market reversion, when it occurs, that the defensive sectors are at risk of not providing the "shelter" that is suggested by their historical tendencies.

Lastly, the long-term chart of the markets are beginning to flash warning signs that this extremely long bull-market cycle may be at risk. While it is still too early to make a more defensive call now, there are signs of significant deterioration in the overall "momentum" of the market.  In the weekly X-Factor Report, I run a model for managing 401k plans that consists of the three (3) buy/sell indicators. (Subscribe for free e-delivery)

The chart below shows two of the three indications on a monthly basis labeled S1 (sell signal 1) and S2 (sell signal 2). There have only been three periods since 1998 where the S1 indicator has been triggered.  The first was in late 1999 as the markets climaxed toward their peak in 2000; the second was in late 2007, and the third was in January of this year.

Considering that market momentum is waning, deflationary pressures are rising and economic growth is slowing on several fronts (along with a rather rapid decline in corporate earnings) it certainly suggests that risks are beginning to significantly outweigh the rewards. Is this suggesting that the next major bear market is underway? No. It does suggest, however, that investors should pay much closer attention to the inherent risk in portfolios currently.

The S1 signal could be reversed with a very strong rally that propels the markets to new highs. While this is certainly possible, it has historically not been the case. However, the market over the last few years, due to massive Central Bank interventions, has repeatedly defied statistical analysis and historical comparisons.

The next couple of weeks will be extremely important for the markets to regain their "mojo" otherwise the risk of a much larger correction remains a dominant threat. As we saw with the Seattle Seahawks during the SuperBowl, making the wrong call late in the game can have disastrous consequences.

See the original article >>