I make a few US Index technical comments and observations here below.
Firstly on market breadth looking for clues as to the significance of this recent correction in equity indexes.
Here we see the number of S&P500 stocks making 52 week lows over the last 3 years.
This may look like noise initially on viewing this chart but i believe there are some significant clues here for us. Consider what your looking at. Recall the Sp500 is a clear 22% higher than she was in mid Feb 2013 ie the 52 week period. You would be surprised to see, even on the recent sell of 5% or so, for many stocks to be making 52 week lows. But we can see here the contrary. The number of stocks making 52 week lows rose very quickly on the recent correction indicating there is much weakness and poor market breath across this market. Not since Nov 2012 have we seen so many stocks making 52 week lows. This is therefore meaningful and needs to be registered. The winners circle is narrowing just as the loser’s circle is broadening. Usually such structural issues emerge in late cycle bull markets. This is classic confirmation of a more severe to come correction.
Here the medium long term technical problems of breadth within the sp500. according to the 200 dma chart (here over 3yrs).
The Dow Jones30 trend continues unabated. She will need to really add price momentum to make much of a dent in her obvious technical issues.
A good question here did the tactical call to short the nasdaq100 index as the likely major US index to provide a + beta to the downside play out from a technical breadth perspective?
Although index wise the nasdaq100 failed to provide the +beta to the falls she was indeed, in terms of breadth the weakest of the major US indexes with a clear 7% of her index components making fresh 52 week lows on the recent sell off. Some you win some you lose. To lose on a good trade is fine. Technically the weakness in the nasdaq100 has sustained even as she failed to print a better performance to the downside than her peers.
And nasdaq100 over their 200dma (smooth averaged over 10 days):
And here the broader NYSE stocks over their 200 dma also demonstrating much weakness:
The take away here from these charts is that this correction was not deep enough to fix the technical issues in this market. We are very unlikely to have found fresh buyers here. Fewer and fewer stocks are finding fresh buyer and more and more stocks are finding fresh sellers.
Enough on the breadth issues that we all are doubtless well aware of. Lets look at put call ratios as a good indicator of market sentiment. Financial speculators accumulate puts options as a hedge on their long positions and calls when to add a low risk leverage beta to their long portfolio. Ratios of actual put call positions across equities and indexes is usually therefore a strong contrarian indicator and has a far far better methodology when compared to other sentiment indicators (eg the AAII).
Here then the equity and index overall put call ratio at present and over the last 3 years (unaveraged).
We see here above, assuming you can cut through the noise of this chart, that the ratio has moved back to a -1sd from the mean. And on the depth of the sell off moved back to the long term mean average ratio. But I want to say this. The ratio has moved ever downward during the recent wave of this bull market. On a correction of -5% or more to see the put call ratio not manage to get above her mean score is not healthy. It shows participants remain extremely bullish. There actions, as opposed to the AAII junk survey, tells us clearly participants are not hedged here. They are uniformly holding a low number of puts and high number of calls. The ratio remain in contrarian territory post this sharp sell off. Look at prior sell offs for evidence of this. There is immense bullish sentiment amongst participants which this recent correction has not dented.
And hedging activity is usually a function of both sentiment and, importantly, volatility. Financial speculators, institutions, pension funds and corporates are the customers of option hedging strategies. They accumulate hedges when sentiment is damaged and also in a response to volatility. Volatility is a cost for professionals in the market as if it increases it demands hedging responses. What do we see from volatility in the VIX (The sp500 volatility index), averaged over 20 days.
On the average, volatility has greatly increased. In response to this and the price correction across US indexes we would expect speculators to be showing a quite different put/call ratio than is the current print.
Putting it all together, what does this tell us?
This tells us whilst on the short term price may drift higher that unless significant new price momentum returns to stocks that this current wave higher is unlikely to sustain for long. That the technical issues will return and that, importantly, speculators are far too bullish and are unprotected from directional downside risks and volatility. Given the above I’m going to re-enter some hedging positions using 3 to 6 month put options initially. On price confirmation of weakness, according to usual price patterns, I will sell futures more aggressively but only on evidence.
And finally a very quick warning comment on price momentum associated with this recent correction. It was very unusual in summary. AV shaped recovery by price. Momentum gave no indication the correction was over, at all, on the daily at least. On short time scale charts there were momentum indicators of the turn confirmation but not on the daily. Not even close and that folks is usually very dangerous. Price needs to retest to the downside at the least for the health of this bull market. Chart here:
Ill have to leave it there for now but just finally I want to add that the inverse correlating instruments, Bullion in particular are seeing large inflows here. These also suggest the recent weakness in equities may see an extension shortly. Fixed income also has stayed at an elevated level. The $ has not see inflows as yet which also helps to explain the move to the alternative reserve currency ie gold.
At the least this all indicates caution with longs and some long range hedging.
All the best
Rich
