Following the Leader?
Monday, April 8,
AT A GLANCE: The Summary Index indicators got a jolt last week when 17 out of the 29 representing it improved. The SI was boosted to within a week of reaching its Sell Signal Trigger at 17.00. This makes one wonder if the indicators are leading the market, as is their task, or if they are being dragged along behind it.
The S&P 500 closed within six points of 2898.31, the 3% confirmation of its March 13 breakout above 2813.89, where it repeatedly met resistance since October.
Some readers reentered the market after the March 29 Quick Summary buy signal, while other did so last week when the 50-day moving average moved back above the 200-day to produce a Golden Cross. However, the GPS Portfolio followed the more cautious pathway and remained in cash.
By the way, we use the Federated
Investors Government Obligations Fund (GOSXX) as our money
market fund. It is currently paying an annualized yield of 2.03%.
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 preferred ETFs for trading are QQQ, SPY, XLB, XLF, XLK, XLU, XLV and XLY.
The Dow Transportation
& Industrial averages, and the NASDAQ & S&P
500 indexes finished T++I+ and N++S+ as they did a
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 is posted here, here and here.
General Market Comment
The S&P 500 advanced 7 days in a row and now stands at 2892.74, less than 6 points short of confirming its breakout above 2813.89. Once accomplished, the index will still have 32 points separating it from a new all-time high at 2930.75, and it must penetrate the round number of 3000 that is likely to draw considerable attention from traders.
With the Summary Index approaching its sell signal trigger at 17.00, the market is likely to at least pause before confronting these significant psychological resistance levels, but its recent devil-may-care performance makes it more difficult to predict than usual.
As explained a week ago, "The indicators are not yet supporting either decision definitively, as one can see from the Quick Summary Index buy signal just 5 days after a QSI sell." Normally we expect indicators to help us predict levels of support and resistance and to estimate the timing of reversals. However, the big surge by so many indicators last week felt more as if the market were leading the indicators rather than the other way around.
The failure of the 20-day sell signal by the Smart Put/Call Indicator (SPCR) on April 4th was its ninth of the 28 sell signals since 1995. The short sale success ratio is now 67.9%, but that may soon change, since the indicator doubled down Wednesday when it gave a new 20-day sell signal that will expire on May 9.
The MACD indicator gave a buy signal on January 2, just 5 days after the S&P 500 hit bottom on Christmas Eve. It then gave a sell signal on February 8, 3 days after the index reached an interim high. Since then, there have been two upside reversals producing buy signals from high levels, when the indicator moved back above its signal line (red-dotted line below).
The blue arrows demonstrate that similar bounces by the MACD, following a major reversals at high levels, are not uncommon, but one that leads to a new high by the indicator from a high level is not common, and it may lead to further market gains. We won't have to wait long to see if this will happen, the indicator will move above its recent high Monday, unless the S&P gives up more than 8.92 points on that day.
Following five lethargic weeks, the number of S&P 500 stocks with positive MACDs finally made it above the 50% level Monday when 76 stocks joined 194 others. As the week progressed, another 73 stocks reversed to give us a total of 343 stocks with positive MACDs at its end.
The MACD Indicator gave a 20-day buy signal at 2818.46 on March 26. It will will end on April 24. The current win ratio for the indicator from a low level (brown line at 36 or less) is 69.2%. There have been 27 wins and 12 losses in the last 10 years. This is a high win ratio, but it is even higher when signals are generated with the brown line above 77.5.
Employment remains strong, but chinks are appearing in the armor. To skip to the technical indicators, please click here.
The initial jobless claims report from the Department of Labor shows an decrease in the number of weekly claims for unemployment insurance since reaching 269 thousand in late January. However, they are still considerably higher than the October low of 179 thousand.
Claims are plotted on an inverted axis below with vertical blue lines to relate previous upturns in new claims to stock market tops, or to periods of reduced expansion.
In spite of the improvement in initial claims, an increase in layoffs reported by Challenger Gray & Christmas in their monthly job-cut report for March, puts them at a 3-1/2 year high and suggests an increase in unemployment claims is likely in the next month or two.
It is also clear from the independent National Employment Report from Automatic Data Processing, Inc. (ADP) that growth in employment has reached a plateau after the high reached in December.
The VIX Index has fallen more rapidly than is considered appropriate for the current degree of risk. It has become 16% oversold, more than at anytime since early February, when the S&P reached its first recovery high and then corrected.
The VIX Volatility Oscillator finished the week still above the current trend of higher highs and higher lows that has often preceded, and then accompanied, periods of market weakness.
The three major Short Trend Indicators (STI) are positive. Two of the three Swing Indicators (SWI), representing the S&P 500 and NASDAQ, have recovered sufficiently such that each will produce a combined buy signal following a one-day rally. However, it will take the Dow a week or two to join them.
After spending the the recent quarter with an average of 10 positive indicators and ending it with 8 negative, 14 neutral and 7 positive -- last week 17 indicators improved, leaving them arranged 2 negative, 9 neutral and 18 positive.
This makes the Summary Index vulnerable to another Quick Summary sell signal with an addition of 5 negative indicators before Friday. On the other hand, the SI finished the week at 12.20 and will reach the sell signal trigger at 17.00 on Friday if there are no further changes in the indicators.
The rapid improvement by indicators last week is a double-edged sword. It represents strength, but at the same time it is close to the extreme from which pullbacks are started.
The S&P 500 200-day moving average (green line in the chart above) gained 2.53 points last week to 2758.82. The faster moving 50-day moving average (blue line in the chart above) gained 23.19 points to 2778.80 where it stands 20 points above the 200-day average.
A penetration of the 200-day average from below by the 50-day average is called a Golden Cross. It is considered to be "golden" because it has a history of preceding further market gains. However, even with its positive history, its timing has not been as consistent as that of its sibling, the Death Cross, which has often occurred on the way to new market lows.
The Trend Indicator (TI) (pink line below) is also positive. It is in its Uptrend state -- above 10.75 and moving higher.
The S&P 500 14-day Relative Strength Indicator (RSI) is neutral at 63.8%, where plenty of room remains on the upside. However, it will reach 89.1% on Friday if the S&P stays where it is, a level from which market pullbacks have often gotten underway.
The S&P 500 Price/Volume Chart completed a buy loop a week ago on Friday (orange line on the right), but it was invalidated by the remove one day rule. If the point indicated by the short orange arrow on the right were removed, the buy loop would disappear, as demonstrated by the longer orange arrow on the left.
The Average Signature gave a buy signal two weeks ago that is still in effect. The main chart remains positive at 731 and is supported by one newly positive, and one neutral chart . The main chart will quickly turn neutral if the Average Signature falls below 645, and it will turn negative if one of the other two charts does.
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©2001-2019 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.