ChartWatchers Newsletter

S&P 500 Seasonality and the Dog Days of Summer

The chart below shows the seasonal tendency for the S&P 500 over the last twenty years (1998 to 2017). The number at the top of each bar shows the percentage of months the S&P 500 advanced for that particular month, while the number at the bottom shows the average gain/loss (percentage) for that month. For example, the S&P 500 rose 55% of the time in June and the average gain is actually a loss (-.5%). 

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DecisionPoint Bulletin: New PMO SELL Signal on Weekly Chart for SPX

Price trends may be up, but momentum is clearly down in the in the short and intermediate terms. The NDX escaped a weekly PMO negative crossover SELL signal by only a small amount and that is because techs had a great run over the past month or so. FYI - LT PMOs are still rising nicely on the monthly charts so the long term still . To see daily, weekly and monthly charts annotated for these four indexes, go to the DecisionPoint ChartList. The link is at the top of the DecisionPoint blog.

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Narrowing Spread Between Treasuries and Foreign Yields Are Bad For the Dollar

The U.S. Dollar has had a bad six months. And things got even worse this week. The driving force between currencies is the relationship between global interest rates. The 10-Year Treasury yield remains higher than foreign developed yields. The problem is that the difference between them is narrowing. The green bars in Chart 1 show the U.S. Dollar Index over the last year. The blue line plots the difference between the 10-Year Treasury yield and the 10-Year German Bund yield. After rising during the fourth quarter, they peaked together in December and have both fallen to the lowest level of the year. That reflects the fact that German yields are rising faster than Treasuries. That was especially true this week when the 10-Year German yield jumped 20 basis points (through Thursday) versus a 12 bps bump in Treasuries. That's good for the euro but bad for the dollar. The 10-Year UK Gilt yield jumped 22 basis points. The red line in Chart 1 shows the difference between Gilt and Treasury yields also narrowing. That boosted the British pound against the dollar. That suggests that dollar weakness is more a reflection of what's happening in foreign markets as foreign central bankers start moving toward normalization of interest rates. The fact that three bank chiefs in Europe, Britain, and Canada suggested that in the same week strongly hints at a coordinated plan to start lifting global rates. The Fed started that process in October 2014. Foreign bankers are just getting started. That means they have a lot of catching up to do. That's bad for the dollar.

The next chart show the impact that global QE programs have had on the dollar. And are likely to have now. The first three red arrows in Chart 2 show the three bouts of quantitative easing (QE) initiated by the Fed at the end of 2008, November 2010, and September 2012. With the Fed ahead of the rest of the world, those three moves kept the dollar down relative to foreign currencies. Japan started their own QE program in the spring of 2013 (start of Abenomics) and again in October 2014 (which weakened the yen). The Fed ended its QE program in October 2014 (green circle). That helped launch a bull run in the dollar. The ECB launched QE at the start of 2015. That helped boost the dollar against the euro. Since 2014, the dollar has benefited from the fact that foreign central bankers have been in an easing mode while we were starting to tighten. Judging from comments from foreign central bankers this week, and big jumps in foreign yields and currencies, it appears that the U.S. is now losing that yield advantage. That may be signalling a major peak for the dollar. But possibly a bottom in commodities.

What the Market Needs now is...Earnings

The market moved into a rare funk last week as traders decided in unison to take profits, especially in the tech heavy NASDAQ. This is quite understandable with all three of the major indexes hitting record levels during the month of June.

There are various theories as to why stocks took a tumble from being overpriced to worries about the lack of progress with the health care bill to quarter end window dressing to a more aggressive Fed. Whatever the reason, there's always one good remedy that seems to cure all market ills; solid earnings.

Just take a look at the chart below of the S&P and you will see how the market perked up right after earnings season began in January for 2016 Q4 and then again in April for 2017 Q1.

The good news for the bulls is the 2017 Q2 earnings season will kick off over the next few weeks and for a solid month+ we'll be getting earnings reports galore. And if companies continue to show earnings growth it could help to get stocks back on track.

Of course we'll continue to see headlines that stymie the market but those headlines will become less important once actual numbers start to get released. This is because when everything is said and done the one thing shareholders care about more than anything else is the bottom line.

One of the things we do at EarningsBeats is scan for companies that beat earnings and have solid charts. These are the types of stocks that grab the attention of traders. And with earnings season right around the corner our list will grow. If you would like to see a sample just click here.

The bulls have done a great job of holding key levels on pullbacks consistently since the market bottomed last November. Can they hold the line this time as well? Maybe, but traders are going to be looking for proof that earnings continue to be strong since nothing compares to strong numbers when everything is said and done.

Why Breadth Matters Today

The US markets and Canadian markets are totally different beasts right now, but it makes a great learning moment to look at both of them to understand how markets break down.

The chart below is the Bullish Percent Index for the Nasdaq Composite ($BPCOMPQ). I have two other plots on the chart. On top is the plot of the Nasdaq Composite ($COMPQ) and the other is the Percentage Of Stocks Above The 200 DMA ($NAA200R). To read more about the Bullish Percent Index, read the ChartSchool article here. Bullish Percent Indexes (BPI). As a quick comment, the BPI keeps track of the percentage of stocks in a group that are on a buy signal meaning they are making higher highs. 

On the charts below, the green lines on the panels that I have placed there manually are the current market levels. I have placed two red lines on each of the indicator plots. The top one is when the market is Big Bull", the other is the level that the market usually finds support in a big bull market. When the Nasdaq Composite Bullish Percent Index ($BPCOMPQ) is above 65, the market can roar forward. Recently it spent from December to March above that level. In April, May and June it has hovered around 60% and we can see the market still roared ahead. That is fine, the lower level is more for brief pullbacks. When it starts to fall under these levels, the market is usually in a correction of some sort. However, the BPI is slower to notify than the $NAA200R in the bottom panel. When a stock is below the long term 200 day moving average, technicians call that condition bearish. This chart keeps track of all of the stocks on the Nasdaq Composite and currently shows a level of 59% (green line in zoom box). If you look left on the chart, corrections usually start around the 58% level. These are eyeball levels based on the charts history and are different depending on the group of stocks you are looking at as I will explain later. In 2015, the market started to break down below these levels as an example. The late October 2016 4% pullback showed this chart pulling back to 54% roughly. In broad terms, if enough stocks are currently participating in the bull market (59%), the overall market can still push higher. We refer to this as the breadth of the market. The more individual stocks in uptrends, the better the 'breadth' of the market.

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Charles Dow and Leonardo Fibonacci Walk into a Bar

The bar was 61.8 inches off the floor, but Leondardo still did not see it. All (bad) joking aside, I would like to look at corrections through the eyes of Charles Dow and Leonardo Fibonacci. These two may seem miles apart at first glance, but the numbers suggest otherwise. In fact, Dow and Fibonacci are pretty much on the same page when it comes to retracement amounts. Charles orders a frosty mug of beer, Leonardo orders a glass of Tuscan red wine and they start talking technical analysis. 

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S&P 100 Flips Back to IT PMO SELL Signal - DP Scoreboard Weekly Charts

On the last trading day of the week, the DecisionPoint IT Price Momentum Oscillator (PMO) signals go "final". Today saw a new weekly PMO SELL signal on the OEX. Some may recall that just last Friday the OEX triggered a weekly PMO BUY signal. Don't let the very "green" Scoreboards fool you, there is deterioration in momentum on nearly all daily and weekly charts for these four indexes. To see the daily, weekly and monthly annotated charts for these four indexes, you can go to the DecisionPoint LIVE shared ChartList here or use the link at the top of the blog.

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Falling Commodity Prices Are a Big Reason Why Inflation Is So Low

Ever since Wednesday's Fed rate hike, and the press conference by Janet Yellen, I've been thinking a lot about inflation. I believe the Fed is underestimating how weak inflation really is. I also believe that's because it's looking in the wrong places. Or, more to the point, it's ignoring the weak signals hiding in plain sight. Namely, falling commodity prices. Chart 1 shows the Reuters/Jefferies CRB Index falling this week to the lowest level since the spring of 2016. Ms. Yellen may refer to that falling trend as "noise". To a chart reader, it's called a downtrend. The CRB Index includes 19 actively traded commodities which include energy, industrial and precious metals, and agricultural markets. [The Bloomberg Commodity Index has also fallen to the lowest level in a year]. Ms. Yellen said that the Fed views the recent decline in inflation as transitory. She referred to a temporary drop in the cost of cellphone plans as an example of why inflation could bounce. Is that really what the Fed is relying on? What about falling food and energy prices. Then again, economists don't include those in their calculations for "core" inflation. [They consider them too volatile, whatever that means]. But that omission helps explain why they've been so wrong for so long on inflation. The implications are important. If the Fed is wrong on inflation, then it's plan to keep raising rates is misguided. Falling bond yields, and a flattening yield curve, suggest that bond traders are already suggesting that.

After falling for two decades between 1980 and 2000, commodity prices rose between 2002 and 2008. That rise was mainly the result of a plunging U.S. Dollar. Chart 2 shows a dollar 2008 bottom, however, coinciding with a major commodity peak. A second dollar rebound in 2011 produced another CRB downleg. A third dollar upturn in 2014 produced an even steeper commodity downturn (see arrows). At the start of 2016, the CRB fell to the lowest level since the 1970s which raised fears of a dangerous deflation. They rebounded during 2016, but are falling again. Here's why that matters. The inflation pipeline has three stages. The first stage is the price of raw materials. The second stage is the price companies pay for raw materials (producer price inflation). The third stage is what companies charge consumers for their products (CPI inflation). It all starts with the direction of commodity prices. Strangely, that's the part that economists (and the Fed) pay no attention to. How can economists expect to predict the final stage of CPI inflation, if they ignore the first stage which is the direction of commodity prices?