The chart vs. indicators

2/09/12

After a strong start on the first trading day of 2012, stocks drifted slowly lower the rest of the week, although the major indices held onto solid weekly gains. On Friday the Dow lost 55-points in a "sell the news" reaction to a better than expected jobs report.

For the TSP, the C-fund lost 0.21% on Friday, the S-fund slipped 0.05%, the I-fund fell 0.70%, and the F-fund (bonds) was up 0.16%.

For the final weekly TSP returns, please see our recent TSP Weekly Wrap-Up.

There are plenty of positives on this chart but with the indicators showing us that we could see some selling in the short-term, the current bullish inverted head and shoulders pattern could turn into what we saw last spring when we had a similar inverted H&S breakout fail.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The economic data has been much better than what we had last spring, but the S&P 500 has already risen over 10% since the lows made the week before Thanksgiving.

The overbought / oversold indicator is off its +500 reading but still on the overbought side. This is not much of a concern.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Here is where I get a little worried. The dumb money has come to life and they are as bullish as they have been in a long time. The CBOE is not only at 5-month bullish highs, but it is also at the top of a rising trading channel, while the Equity ratio is testing 5-month bullish highs.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The smart money of the OEX put/call ratio is over 2 to 1 which makes them as bearish as they've been since the November highs and the multiple peaks last spring.

Here are a couple of less than positive stats from SentimenTrader.com for the next few weeks.

The first one I showed on Friday and it shows how the S&P 500 performed after the January jobs report. Whether the report was good or bad didn't matter. Three weeks later it was only positive 38% of the time.

Charts provided courtesy of www.sentimentrader.com

The chart on the right above shows us that when the VIX hits a 3-month low in early January, which it did last week, stocks tend to underperform the rest of the month. Since 1986 it has only happened 10 times and only one time did we see a gain through the rest of the month.

Our TSP Talk Sentiment Survey came in at 47% bulls, 39% bears for a bulls to bears ratio of 1.21 to 1. The system moved to the bull market rules last week when the 50 EMA crossed over the 200-day EMA, and 1.21 to 1 is a buy signal in a bull market for this week.

A quick check on the dollar shows that, despite recent signs of fatigue, it continues to push higher mainly because the euro has been weakening so rapidly. The sharp 3-day rally helped put pressure on the stock market last week.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk


Thanks for reading! We'll see you back here tomorrow.

Tom Crowley

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[anthony]

Tom, I understand you are using daily EMA's relative to index price to decide bull vs. bear market rules for sentiment. Have you considered backtesting to see what happens when you use monthlies? Here's an interesting link on the topic: http://advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php. By Doug Short's measure with SMAs we'd still be on bear market rules, but with monthly EMAs we would have switched to bull rules 1 Nov. On a separate note about sentiment, I'm sure you noticed that AAII's sentiment hit a one-year high bull-bear ratio (74%) and a new sell signal last week. Last time it was over 70% was three consecutive weeks from late Dec 2010 to early Jan 2011. The market went up 5.6% over a month-and-a-half from there, but was flat to lower by mid March. Seems like circumstances were different then too though. Interesting.

 

[tsptalk]

Anthony -

Thanks for the link. I'll check it out.

The only reason I use the EMA crossover is because that is what decisionpoint.com uses, and they have a good track record. It is also their default on their charts that I post regularly. Because of that, I incorporated it into our sentiment survey system for the bull bear market signal. I assume if the SMA's don't cross any time soon, the EMAs will quickly cross back over to bear as well.

I mentioned the AAII on Friday but hadn't looked at the last time that happned. Thanks.