Stocks were up on Friday as the Dow gained another 121-points. The broader indices were more mixed but still mostly positive with the S&P gaining 0.44%, the small caps leading the way, and large tech Nasdaq 100 stocks up just 0.16%, while the I-fund was down.
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The market continued to celebrate the global Central Banks' decisions to remain dovish and keep interest rates low and money easy to come by. What that tells us is that the global economies are not strong enough to withstand normalized rates. Over the last several years, this has been the most important component of the stock market rather than strong earnings and economic growth. If investors haven't adjusted they most likely lagged the market index returns.
We have seen higher ratios in the last two decades, possibly because of Fed interference, but that tends to lead to sharp market corrections, or as in the case after the dot com, housing, and financial crisis bubbles, severe bear markets. Before the Fed got deep into market protection policy, a P/E of over 20 was considered very high. Certainly the technology boom has been a catalyst for the higher P/E's but stock prices would have to be cut 40% to 50% to see a P/E ratio of 11 to 15, which was about the average ratio from 1900 to the 1980's.
The technical picture has improved dramatically over the last month but we know stocks don't go straight up or down forever, and stocks have gone virtually straight up for the last 5-weeks taking the S&P 500 back to about where it started the year.
There is a lot going on in this chart of the SPY (S&P 500 / C-Fund) and it tells a lot of stories. The red boxes represent what I see as 4 phases of the rally off the double bottom lows, both the September low, and the February low. We seem to be in the latter stages of phase 4. Now whether we repeat the action after the 4th phase of early November is the question.
The head and shoulders pattern, which is in light orange above, appears to be testing the middle of the head that formed between October and December of last year. The overhead gaps have been filled and now we'll just have to see if the H&S head test finds resistance as they often do.
The longer-term chart shows a possible large rounded topping forming and if the S&P 500 can move above that blue line with any authority, maybe we can stop talking about a bear market. But until then, this looks a little concerning for the longer-term and potentially the short-term as this rally is nearly testing it now. 2050 and about 2075 look to be the lines in the sand as a move above both would break the current long-term downtrend that started at the August lows and the November peak.
The price of oil has rallied sharply in the last several weeks which has helped propel the stock market higher as the coupling between the two continues. Like the S&P 500, the chart of crude oil is now against some long-term resistance in the form of the 200-day SMA and EMA. If the rally can continue and we start seeing $50 quotes, we can probably stick a fork in the long crude oil bear market.
The DWCPF (Dow Completion Index / Small Caps) has just about filled another open gap and there is one more above at about 1009. If that can get filled, the only open gaps would be the three down below 925. The 200-day EMA is also about to be tested.
The Dow Transportation Index has been the leader off the lows and it has made some great strides in the technical picture, although it is overbought and near the top of a rising trading channel. It bottomed out well before the other indices, and since this index started the bear market in early 2015, perhaps this is the leader that will take us out of it.
Today is trading day #15 in March and it is the start of a stretch of negative average returns to end the month.
Chart provided courtesy of www.sentimentrader.com
The VIX is now at 14.0 and while it has been lower in the past, it is nearing possible complacency levels as volatility has dropped dramatically. Recent readings in this area during the tumultuous second half of 2015 have led to some market peaks.
The AGG (Bonds / F-fund) broke above the pennant formation as we suspected. It is not uncommon to see these come back to test the top of the pennant for support at some point, but this looks like a bullish sign for bonds even if we do see a minor pullback from here.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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The market continued to celebrate the global Central Banks' decisions to remain dovish and keep interest rates low and money easy to come by. What that tells us is that the global economies are not strong enough to withstand normalized rates. Over the last several years, this has been the most important component of the stock market rather than strong earnings and economic growth. If investors haven't adjusted they most likely lagged the market index returns.
This "Chart of the Day" shows how much the Price / Earnings ratio of S&P 500 stocks has risen in the last 5 years (from 15 to 22), and that is a result of not only stock price appreciation, but more so that earnings and estimates have fallen sharply while stocks have rallied back near their recent highs.
We have seen higher ratios in the last two decades, possibly because of Fed interference, but that tends to lead to sharp market corrections, or as in the case after the dot com, housing, and financial crisis bubbles, severe bear markets. Before the Fed got deep into market protection policy, a P/E of over 20 was considered very high. Certainly the technology boom has been a catalyst for the higher P/E's but stock prices would have to be cut 40% to 50% to see a P/E ratio of 11 to 15, which was about the average ratio from 1900 to the 1980's.
The technical picture has improved dramatically over the last month but we know stocks don't go straight up or down forever, and stocks have gone virtually straight up for the last 5-weeks taking the S&P 500 back to about where it started the year.
There is a lot going on in this chart of the SPY (S&P 500 / C-Fund) and it tells a lot of stories. The red boxes represent what I see as 4 phases of the rally off the double bottom lows, both the September low, and the February low. We seem to be in the latter stages of phase 4. Now whether we repeat the action after the 4th phase of early November is the question.
The head and shoulders pattern, which is in light orange above, appears to be testing the middle of the head that formed between October and December of last year. The overhead gaps have been filled and now we'll just have to see if the H&S head test finds resistance as they often do.
The longer-term chart shows a possible large rounded topping forming and if the S&P 500 can move above that blue line with any authority, maybe we can stop talking about a bear market. But until then, this looks a little concerning for the longer-term and potentially the short-term as this rally is nearly testing it now. 2050 and about 2075 look to be the lines in the sand as a move above both would break the current long-term downtrend that started at the August lows and the November peak.
The price of oil has rallied sharply in the last several weeks which has helped propel the stock market higher as the coupling between the two continues. Like the S&P 500, the chart of crude oil is now against some long-term resistance in the form of the 200-day SMA and EMA. If the rally can continue and we start seeing $50 quotes, we can probably stick a fork in the long crude oil bear market.
The DWCPF (Dow Completion Index / Small Caps) has just about filled another open gap and there is one more above at about 1009. If that can get filled, the only open gaps would be the three down below 925. The 200-day EMA is also about to be tested.
The Dow Transportation Index has been the leader off the lows and it has made some great strides in the technical picture, although it is overbought and near the top of a rising trading channel. It bottomed out well before the other indices, and since this index started the bear market in early 2015, perhaps this is the leader that will take us out of it.
Today is trading day #15 in March and it is the start of a stretch of negative average returns to end the month.
Chart provided courtesy of www.sentimentrader.com
The VIX is now at 14.0 and while it has been lower in the past, it is nearing possible complacency levels as volatility has dropped dramatically. Recent readings in this area during the tumultuous second half of 2015 have led to some market peaks.
The AGG (Bonds / F-fund) broke above the pennant formation as we suspected. It is not uncommon to see these come back to test the top of the pennant for support at some point, but this looks like a bullish sign for bonds even if we do see a minor pullback from here.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
