I Hope "It's Different This Time."
November 6, 2017
AT A GLANCE: The Summary Index hit bottom with the market at an all-time high. Similar events include both the 2000 and 2007 market tops. The S&P 500 closed higher in 47 of the last 60 sessions -- an occurrence that has been unsustainable in the past.
We continue to wait for the regular Summary Indicator buy signal that is in the works. When it occurs we'll see what's recommended by the GPS program and add to our QQQ position. However, for reasons discussed below, we'll use closer stop losses than usual.
In addition to the GPS program we run for ETFs, we continue to run one for the S&P 100 and one for the NASDAQ 100. We do this more for market information than for trading. In the last 9 trading sessions holdings were cut 29% from the NASDAQ 100 recommended stocks and a whopping 47% from the S&P 100.
It is not usual to see such wide swings. It is more likely that sales were related
to the underperformance of the majority of stocks. Just a few have been pushing
the indexes higher, like Apple and Amazon for example.
A list of current and closed trades appears with the table above at the regular link (Discretionary GPS Portfolio), which you can also find among the links at the beginning of every report.
The NASDAQ and S&P 500 finished in their most frequent arrangement, (N++S+). The Dow Transportation and Industrials finished T-I+ for the 13th time in three months, twice the average frequency since 1972.
only has T-I+ occurred more frequently, but it has also been a winner the next
day in 92% of the last 13 occurrences, while its usual success ratio has been
In spite of the strong
recent record for T-I+ alone, when the two arrangements occurred together since
1972, the market has moved higher less frequently than average, just 51% of the
The most reliable combinations are those in bold type. The very best performers are colored green, while the very worst are in pink. The tables will be updated each week so we can follow the results going forward. Additional explanatory material was posted here, here and here.
General Market Comment
Since 1995, the S&P 500 has never advanced more than 42 days any 13-week period, until Friday when it extended its record to 43 days. The previous record of 42 days was made December 18, 2006.
The highs reached by the black line below represent previous long strings of new all-time highs by the S&P. The good news is they they appear to have a tendency to occur before minor corrections, rather than before major market declines.
Appearing simultaneously with the new all-time highs reached by the market on Friday, was a record low by the Summary Index. The last orange marker in the chart below represents the decline to 2.3 by the SI. Click here to enlarge chart.
Markers call attention to the times in the last 18 years when the Summary Index fell to, or below its current level of 2.3. Several important rallies followed when the SI subsequently gave a buy signal above 4.5, but when the Trend Indicator (TI) (light gray line) was above 13 at the time of a buy signal, most rallies were not very good, and some were very bad.
The NASDAQ extended its week-long rally. It finally pushed its ratio to the S&P 500 above its September 22 high. This will likely delay a correction, just as it did following previous peaks in the last 45 years (red vertical lines).
The S&P 500 MACD indicator changed directions several times in the last few weeks, but it remains below its sell signal line (red-dashed line).
The sell signal by the MACD indicator has been confirmed by the majority of S&P 500 stocks with negative MACDs. Just 210 stocks are positive, up from the Wednesday low of 196.
The Dow final hour trading indicator has not given a new 20-day buy signal since September 13. However, it gave a sell signal on Tuesday (orange marker). As evident from the markers, just 1/3 of the sell signals have been successful (green markers), but it should be noted that most of successes (profitable short sales) occurred near the ends of long market advances.
Confidence has been restored following a brief decline last summer. However, confidence by professional investors is still slipping. We also take a look behind the record highs in the price of lumber. To skip to the technical indicators, please click here.
The Conference Board Consumer Confidence Index (dashed line), which is based on a survey of 5000 US households, has fully recovered from its brief pause last summer.
The index is a blend of survey participants' opinions about the present situation (brown line) and their expectations (green line) for the next six months. Expectations have not yet recovered from a dip last summer, but confidence in the present situation has reached a 12-year high.
In spite of the display of confidence in the economy by the survey of American households -- the State Street Global Confidence Index, which is based on an analysis of the actual dollars invested by institutions in North America, Europe and Asia -- shows waning confidence in North America investments.
Arrows mark periods when European investments were outpacing North American investments. They have proved to be profitable for the S&P 500 in the past, but at present, Europe is unfortunately still lagging.
While institutional investors reduce their North American investments, investors in the US have driven margin debt to a brand new all-time high of $569.6 billion. The 3-month average also reached a new high.
However, an increase in the free credit held in margin accounts suggests some profit taking may be occurring. We get to see these data a month late, so we know only what has happened through September. However, the monthly rate of growth continues to be high at 1.59%.
In the past the S&P 500 did not turn lower until a month or more after margin debt peaked, so we will anxiously wait for the October figures.
Construction spending has been decreasing since April. Nonresidential construction is falling at an annual rate of 2.2%, while public construction is decreasing 3.2% annually.
Total construction grew 2.7% in the last 12 months thanks to a 10.9% increase in private residential construction, according to data released by the US Census Bureau.
Thanks probably to an increase in home construction, lumber prices exploded higher again in October. In the past, prices this high have occurred just as an economic boom was getting underway, but at an 11-year high of 458.40, lumber may approaching a blow-off.
With total construction expanding slowly, some of this strength may be the result of import restrictions newly in place for Canadian lumber.
After just a few days at elevated prices, the VIX Index is back in oversold territory. It fell to 8.09 while the VIX Oscillator returned to neutral territory. The VIX hasn't duplicated the all-time low of 6.32 reached in July, but once again it reflects a runaway market supported by just 1 of the 29 indicators in the Summary Index.
All three Short Trend Indicators (STI) remain positive, as do the Dow and NASDAQ Swing Indicators (SWI). However, the S&P 500 SWI is in negative territory and falling, since its sell signal last week.
Combined sell signals are not possible for the Dow or NASDAQ, but the S&P can produce one the next time its SWI turns positive.
The Summary Index has fallen steadily since October 6. It closed at 2.30 Friday, a low since January 2016 at the end of a 15% market correction.
That's what's different about the current market. There has been no correction. The indexes stand new all-time highs and yet the SI is at a two year low with only 1 positive indicator remaining.
As mentioned above, it is likely that the inevitable SI regular buy signal, which will occur when it moves above its buy signal trigger at 4.50, will usher in a weak rally. This has happened in the past when the Trend Indicator was elevated at the time of the signal.
In spite of recent market strength, just one negative indicator turned neutral last week. The SI finished at 2.30, and it will fall as low as 1.50 on Tuesday if there are no changes in the indicators. However, it will then reverse and finish the week at 1.60.
The pending upside reversal by the SI should not be taken as a promise that a buy signal will soon follow, it will be more a sign of fatigue.
The S&P 500 200-day moving average (green line in the chart above) gained 7.73 points to 2426.03, while the 50-day moving average (blue line above) gained an impressive 14.11 points to 2522.41.
The Trend Indicator (TI) (pink line below) gained 0.01 points after dancing around last week. It remains in the Uptrend state at 13.88, but it has not made much progress in since the election and will quickly reverse on any weakness.
The S&P 500 14-day Relative Strength Indicator (RSI) has also bogged down. It was close to the center of its range at the end of the week, at the devil may care level of 66.6%. It will remain in this vicinity during the week unless there's a major move by the S&P.
The S&P 500 Price/Volume Chart moved in the positive direction, from the lower left to the upper right, but I can not remember seeing as erratic and jerky a move as has just been produced.
The pattern is in danger of turning into a counterclockwise basic sell loop by moving along the red dashed arrow.
The iShares Silver Trust (SLV) is holding up well in comparison to GLD, since it gave a combined buy signal two weeks ago. However, neither one is attractive at this moment.
The Average Signature continues to be neutral, as it has been for so many months.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. To send Fred your questions or comments, click here: Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. Copyright©2001-2017 Fred Goodman. All rights reserved. For information purposes only, offered as a periodical of general circulation; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources believed to be reliable, but no warranty is made as to accuracy.