CURRENT STATE OF THE MARKETS: A SEASON OF MISGIVING
Subversion in the world of finance should be encouraged as a means of challenging conventional wisdom regarding analytical methodology that far often falls flat. There is very little in the way of originality in thought or behavior among Wall Street participants, leading to a singularity in underperformance that has become nearly impossible for most to overcome. The world of technical analysis is no different. The dissection of price behavior should be a dynamic process that functions as an interpretive art rather than a predictive one. Often times those who look at price will get caught up in a trend following mentality that renders them unable to interpret turning points, instead relying on the trend to predict further upside with the foundation of their analysis being the trend itself. This functions as one of the many avenues towards underperformance on Wall Street. Robotic behavior has no place in this venue. Proper dissection of price is an invaluable tool for any investor. It accelerates performance over time. It allows for controlling overall portfolio volatility. It will lead to a strategy that relies on fluidity in rotation, as opposed to a portfolio that is sluggish in adaptation due to fundamental data that severely lags price. Those investors who ignore it are typically intellectually arrogant discounting anything that cannot be properly theorized within an academic setting. Their below average returns often prove that a leg of their strategy is wobbly at best, with misunderstanding of price behavior being the most common culprit. Those investors who embrace the interpretation of price, pairing it with a vibrant fundamental strategy, can create well above average returns over the long-term. With that said, the markets at this juncture are sitting in a precarious position. Leadership names, as you will see below, are beginning to show signs of agony as they roll around without much direction. Important leadership, such as the SOX, is coming up against a very important trajectory as discussed this past week. And we are in the midst of the summer trading season within a year that has been choppy and tedious in its behavior. This type of circumstantial concoction of time and price makes this market observer a bit nervous. Let's first look at important leadership names, with AAPL once again rising to the top of the list of technology with its recent surge: You will notice that AAPL has rolled up against a trajectory point here and begun to fade a bit. The volume surge on Friday seems to be triple witching related so I wouldn't read into that much. However, if anything, AAPL is telling us that it is moving into a...
BEWARE THE SOX
The reasons why one should beware described elegantly below. Enjoy with a hibiscus flavored beverage and vanilla wafers, ideally. click chart to enlarge
THE CURRENT STATE OF THE MARKETS: WHAT HAPPENS ON WALL STREET STAYS ON WALL STREET
In the May 11th edition of "Current State," the conclusion after various points of analysis was that the markets were poised to break higher after digesting the breakdown in key growth names in a graceful and elegant manner. With last week's close at record highs for the S&P 500, the market is slowly revealing its hand to a mostly unconvinced constituency that is more concerned with harboring psychological scars of the past than profiting aptly from the present embodiment of a bull market. This fact is revealed in both the volume and tedious nature of the price action. There is by no means a rush for entry back into the markets by those who feel that equities contain a disproportionate degree of reward from this point forward. In fact, it has been a hallmark of the current bull market to tiptoe to the upside in a manner that has caused concern since the very beginnings of this bull market in 2009. The tiptoeing nature of this bull market continues to cause confusion for investors who have been brought up in the school of violent moves to the upside coming about on above average volume. A trait of the markets that was left behind in the 90s alongside Pets.com, CMGI and Iomega. The modern day secular bull market is built on such a wide array of available options for equity exposure that it would be foolish to think that volume would be able to be interpreted as it was in the past. Additionally, there is a chronic absence of conviction among market participants that shows up in both volume and price action. Let's start by looking at a weekly chart of the Dow, which is setting up as powerful a pattern below a critical area of resistance as can be found: What is important to note about the weekly Dow chart above are two things in particular: 1. The extremely tight nature of the consolidation above the previous short-term highs from the middle of last year. 2. The extremely tight nature of the consolidation below the extremely important generational trajectory that has its origins at the 99-00 bull market high. The fact that the Dow has chosen to put together one of its tightest shows of consolidation in recent memory below a generational trajectory is extremely bullish. It tells of a market that may actually run from here further than any of us expect. Moving onto technology next. According to the Nasdaq Composite, the downtrend that has plagued the market since March is now officially over. The obvious target for the Nasdaq is the old highs right around 4370. The...
THE CURRENT STATE OF THE MARKETS: WHAT IS OBVIOUS IS OBVIOUSLY WRONG
In looking over the situation facing investors, at present, it seems we are all faced with a series of relatively simple judgments to make in order to assess the portfolio allocation that would create the greatest expected value going forward. The decisions are as follows: 1. Does the fact that the S&P 500 is pinned to its all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 2. Does the fact that the Dow Jones Industrials and Transports are pinned to all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 3. Are both of the above mentioned questions negated entirely by the fact that the Nasdaq and Russell have been demonstrating the exact opposite behavior? In other words, both the Russell and Nasdaq have been declining with volatility attached to the move. The third question is the most important as it seems to garnering the most attention. More importantly, it is creating the most fear and emotion among market participants. Before we get to the indices that have broken down, here is a look at the S&P 500 on a weekly basis. The most important aspect of the current price action is the fact that volatility is so well contained along a key trajectory (in blue) and directly below another key trajectory. The behavior strongly suggests that the S&P is eyeing the trajectory (in red) sitting around 1950. A move of some 3% higher from current levels. In a very simple sense, the S&P 500 is telling us what to think. In this case, it is telling us that the issues of the Nasdaq and Russell are of no concern. It is the choice of market participants to believe that there are shadows lurking behind every corner. Volatility demons with jagged teeth looking to rip into the flesh of investors. That is an issue of investor imagination, rather than reality. The answer according to the S&P 500 is very clear if you choose to accept it: The markets are preparing to move higher. Let's look to see if the Dow agrees with the S&P 500. This is a look at the Dow on a monthly basis. What you see is an incredibly bullish picture the Dow is painting when you zoom out with a monthly view. Especially given the fact that it is occurring below a key trajectory that has acted as resistance for the 2000 top and the 2007 top. At present, the Dow is simply consolidating along this trajectory with a series of tighter monthly ranges. This is a continuation pattern in the direction of the primary trend. And it...
A DEEPER LOOK INTO THE COMPARISON BETWEEN THE MARKET OF 2014 AND 1996
Comparisons to the bull market of the 90s can certainly act as a point of guidance for the current market. One analog that been getting increased attention is the comparison between 2014 and 1996. Here is a look at both markets from a price perspective: If you look beyond pure price movement and the similarities in terms of the number of years we have been rallying at present compared to 1996 etc., you will notice one striking characteristic in the internal dynamics with 1996 vs. 2014. In 1996, before the internet really became a buzzword, with companies like YHOO and AMZN either just coming to market or being pre-IPO, the semiconductor stocks were the go to momentum plays. They powered the Windows PCs that you would run on your desktop that would get you onto AOL or Earthlink. Companies like MU, LRCX, LSI and AMAT ran the show back then. They were technology. They were momentum. When you wanted returns in excess of the benchmarks you went into these names. Much like the FB, YELP and TSLA of our current market. Something peculiar began to happen to the semiconductor names around late 1995, really gathering momentum by the middle of 1996. They completely ran out of steam,with a majority of them suffering declines far greater than 50% from their 1995 peaks. These were stocks that had appreciated hundreds, even thousands of percent the previous few years. Investors were all in, not realizing that serpents thick, scaly tail was being wound up to knock them head first into the deep ravine below. How much had semiconductor names made investors? LSI Jan 1993 $2.69 per share October 1995 $29 per share MU Jan 1993 $1.89 per share October 1995 $40 per share AMAT Jan 1993 $1.05 per share October 1995 $6.39 per share INTC Jan 1993 $2.72 per share October 1995 $7.52 per share Investors were happy. Too happy, in fact. The stocks stalled in October and began declining in earning in early 1996. By August of 1996 the declines in the stocks of the companies mentioned above were as follows: LSI -66% MU -75% AMAT -53% INTC +23% one of the few exceptions of the group For a majority of the time that these growth driven leaders of the market declined the S&P 500 did nothing, as you can see above. The decline in semis only interrupted the upside momentum in the market by stalling the uptrend, creating a frustrating, sideways market....
HERE ARE THE ONLY TWO CHARTS YOU WILL NEED FOR THE REST OF APRIL
Simplification of seemingly complex situations in the markets is key to longevity in this business. If a situation cannot be simplified to the point of being explained on the back of a paper napkin then it is likely an endeavor of ego, pride or false hope. In any case, the situation being constructed or deconstructed will have a negative expected value right from the onset. In the spirit of simplicity being the basis of proficient market analysis, I present to you the only two charts you will need for the rest of April. Here is the Nasdaq Composite followed by the Nasdaq 100. Behold: click chart to enlarge...
4 CHARTS DEMONSTRATING A MARKET THAT IS HOME FROM THE HILL IN THE WEEK AHEAD
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