Thursday, October 27, 2016

Another pivotal ratio chart

I like ratio charts because sometimes they help you to identify important inflection points that you can not see on individual price charts.

About 3 weeks ago, I posted an article on several ratio charts and suggested that small caps should start showing relative weakness and such weakness usually coincides with an overall market sell off.

Divergences and Intermarket Relations are giving the same message

Those charts look like this now:

 Since the article, the market dropped a lot but more importantly small caps dropped significantly. Also the negative divergence between SP500 and SP500 Equal Weight Index got worse.

Today I want to show another ratio chart that works just like RUT/SPX and RUT/DJI ratios. One of the largest sectors weighted in SP500 is banks. When BKX (Bank index) reverses down, it drags the entire market down more or less.

SPX vs BKX/SPX ratio

Monday, October 24, 2016

My read on long term sentiment

We have some interesting AAII numbers. Before you get all bulled up on these numbers, remember that in bear markets, there is a consistent lack of bulls and bearish sentiment is persistent.

50 week SMA of AAII Bulls

50 week SMA of AAII Bulls/Bears ratio 

While bearishness in AAII numbers seems to be elevated, it is nowhere near as extreme as the drop in AAII Bulls. This means there are few bulls (buyers) left but also not many bears (shorts) exist.

In fact when we look into Rydex numbers, we can see that there is an extreme case of lack of bears.

5 SMA of inverse Rydex Cumulative Cash Flow Bear and MM funds

We can also see a similar behavior from insiders. Since late 2014, they are not buying

And 40 week SMA of Wall Street Bulls/Bears is about to drop to the level where large corrections / bear  markets began

40 week SMA of Wall Street Bulls/Bears

So my conclusion is: Bullish sentiment numbers dropped significantly over the last year but there is no proportionally extreme bearishness. When we look into Rydex money flows and allocations, we see a contradicting picture, an extreme case of lack of bearishness in actual investments. Are people not bullish but staying excessively long? This is a recipe for a sudden awakening move.

Unlike many blog and article publishers who post a bearish piece then states they are long stocks, I like to finish by saying that my current read on the market is decisively bearish and I am short index futures.

Tuesday, October 4, 2016

Divergences and Intermarket Relations are giving the same message

These charts are self-explanatory and most of the educated investors know what they mean. I will briefly explain;

In bull markets or healthy up trends, certain leaderships and intermarket relations must be maintained because they are a symptom of economic expansion and positive money flow. When the bull market leadership no longer leads and the intermarket relations between certain asset classes are broken, negative divergences show up. These divergences are a direct product of price therefore trend line analysis works on them as good as any other price based technical analysis does.

The first chart below compares SPX to RUT/SPX ratio and RUT/DJI ratio. As you can see there has been a large negative divergence between Russell 2000 small cap index (RUT) and SP500 (SPX). It also shows a similar divergence between RUT and DJI (Dow Jones Industrial). Furthermore both ratio charts are now backtesting long term trendline which suggest a downside reversal for the ratios is imminent. When RUT/SPX ratio or RUT/DJI ratio goes down, the whole market usually goes down. 

The second chart below compares SPX to SPXEW/SPX ratio  (SPXEW=SP500 equal weight index) as well as to SPX/TLT ratio. As the name implies, SP500 Equal Weighted Index  is an equal weight version of the popular S&P 500 Index and  includes the same constituents as the capitalization weighted S&P 500, but each company in the SPXEW is allocated a fixed weight. Therefore its performance is a measure of broad market participation. When SPXEW negatively diverges from SPX, it indicates that SPXEW underperformed SPX and the extra strength in SPX was created by a few over-weighted components while  the rest of the stocks didnt perform as good as the few large components.

Bottom portion of the chart shows the ratio of SPX/TLT.  TLT is an ETF tracking 20+ year T-Bonds. In a bull market or healthy uptrend, SPX outperforms TLT because money prefers stocks (risk) over bonds (safety).

On the chart below, we can see that both SPXEW/SPX and SPX/TLT ratios formed massive negative divergences. Also note that SPX/TLT ratio is sitting near its long term uptrend line despite SPX rallied more than 300 points since its Feb low. If this ratio breaks below the trend line, it will create a sharp move down in the ratio which will mean SPX will sharply drop while TLT rallies.

These charts support the other long term setups and signals we showed you before. They all imply that the bull market is about to end. But the big question is, what FED and other CBs will do when the bear market become apparent to masses. More importantly, will the next administration let FED to target and manipulate the stock market at the expense of our future.