Published by Raymond James & Associates Andrew Adams, CFA, CMT, (727) 567-4807, Andrew.Adams@RaymondJames.com November 29, 2017 Charts of the Week : "Charts of the Week" There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you. Larry Hite, interviewed in Market Wizards by Jack Schwager The quote above from Larry Hite is just one of the many fantastic nuggets of wisdom contained within Jack Schwager s Market Wizards series of books that has stuck with me throughout the years. As discussed in previous comments, my market knowledge has come mostly from an autodidactic process of reading books, studying market history, and figuring myself out what works and what doesn t through trial and error. Like a lot of new traders/investors, my journey began with a quest for the Holy Grail of trading that collection of indicators or market patterns that would produce consistent gains with few losses only to eventually find the real Holy Grail was contained right there in the advice I had heard since day one from the many successful traders who had already gone through their own respective journeys: Take good bets, hold the ones that work, cut the ones that don t. We always try to point out good bets in the market and steer everyone away from the bad bets. Not all good bets will pay off, of course, but if you take enough of them and manage the risk on the ones that don t work out, the game simply becomes a lot easier. Along that line, the U.S. stock market still seems to be a good long-term bet to us despite being a little extended in the near term. We are just not seeing the red flags in price and breadth that make us overly concerned, and while there is plenty one could point to as a potential deterrent to higher future prices, that never ceases to be the case. We are also finally seeing some flashes of life in once dead areas like Energy and Retail (pages 15 and 16) that could provide some good bets over the short to intermediate term for those of you looking to buy into the end of the year. We keep getting asked what it will take to push stocks down, and, barring a true black swan, it seems a conclusive decision regarding the tax bill is the most likely candidate. At this stage, it is unclear how much of tax reform the market has already priced in, but it would not be surprising to see at least a short-term top coincide with either a favorable or unfavorable outcome on the bill itself (as trader/author, Stephen Burns, wrote yesterday: How many times can the market rally on tax reform? ). If passed and signed into law, it does have some potential to be the ultimate buy the rumor, sell the news scenario after all the attention it s received, and if it does fall through, there s a very good chance investors will not be as forgiving as they have been with other political headlines so far this year. For now, though, all systems appear to remain a go with respect to the charts. The S&P 500, NASDAQ Composite, Dow Jones Industrial Average, and Russell 2000 all hit new all-time highs yesterday, and the Advance-Decline lines we monitor also remain at their highs. These things just don t happen when the market is in trouble! And with that, here are the Charts of the Week International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863
S&P 500 Last 5 Sessions (5-minute chart) International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 2
The Market Matrix With the strong session yesterday, both the S&P 500 and NASDAQ Composite are in overbought territory compared to their historical volatility, and the Russell 2000 is getting very close. The overall market remains quite extended and could pull back at any time. THE MARKET MATRIX S&P 500 NASDAQ Composite Russell 2000 Price % Above/Below 10-Day Moving Average 1.36% 1.32% 2.32% Price % Above/Below 50-Day Moving Average 2.62% 4.04% 3.03% Price % Above/Below 200-Day Moving Average 7.23% 10.50% 8.31% Relative Strength Index (RSI) (Overbought = 70; Neutral = 50; Oversold = 30) 65.11 69.66 78.17 Overall Near-Term Opinion Overbought Overbought Neutral White = Neutral; Yellow = Slightly Overbought; Red = Very Overbought; Dark Green = Slightly Oversold; Bright Green = Very Oversold Note: Overbought/Oversold levels may vary for each index based on historical volatility Source: Worden TC2000; Raymond James research; as of 11/28/17 International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 3
The Breadth Box Breadth continues to improve off the levels of a few weeks ago. All our indicators below rose for the second week in a row and have returned back up to mostly strong levels. Obviously, we want to see breadth continue to get better or at least hang in there to help support higher prices across the market. THE BREADTH BOX This Week (11/28) Last Week (11/21) 4 Weeks Ago (10/31) Current Percent of 5-Year Range* NYSE % of Stocks Above 50-DMA 62.23% 57.20% 62.91% 66% NASDAQ % of Stocks Above 50-DMA 57.32% 53.50% 57.51% 67% NYSE % of Stocks Above 200-DMA 67.66% 66.37% 66.68% 77% NASDAQ % of Stocks Above 200-DMA 59.94% 58.22% 58.87% 76% U.S. Stocks New Highs New Lows (5-Day Total) 1675 860 766 84% NYSE Bullish Percent Index 67.67% 66.67% 68.44% 79% NASDAQ Bullish Percent Index 63.01% 61.38% 63.70% 80% S&P 500 Average % Below 52-Week High 10.1% 10.4% 10.4% Russell 3000 Average % Below 52-Week High 16.2% 16.4% 16.2% * 100% would be the highest point of the last 5 years, 0% would be the lowest point in the last 5 years, and 50% is the mid-point of the 5-year range ; Bloomberg; Raymond James research International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 4
S&P 500 Timing Chart Historically, the lower standard deviation bands have often provided more favorable entry points. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 5
S&P 500 Continues to Defy Gravity The S&P 500 appears unstoppable and continues to even amaze bulls like us. Our near-term call for caution has been clearly wrong, but the index is now approaching the resistance line once again that slowed it back in October (red line). This is our best guess for where it could run into some trouble, but it s hard to give an exact level since the line is rising and will, therefore, increase a bit each day. There also remains quite a bit of likely support underneath the index that should help prevent anything major on the downside. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 6
What Can Stop Stocks? The S&P 500 has eclipsed several resistance levels over the last few years, and it is not showing signs of slowing down. The most recent hurdle on the weekly chart is a line drawn from the late 2014 and early 2015 highs that kept the index in check recently, yet this resistance line now appears to be have fallen. A weekly close above the line would provide confirmation of another bullish breakout, while pulling back below the resistance would indicate weakness could finally be coming. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 7
In Case You Missed It We included this chart last week, but, since it could have been easily missed given the Thanksgiving holiday, we wanted to provide it again for some long-term perspective. If all the S&P 500 does is maintain a similar trajectory to the one it s had over the last 40 years, it is in line to hit some pretty major milestones over the next 20 years (3100 by 2020, 4700 by 2025, 7000 by 2030, 10000 by 2035, and 15000 by 2040). The ~285% bull market since 2009 also looks fairly mundane compared to the ~1400% rise from 1982-2000, and keep in mind we are still building off of the 2000-2013 period during which the index went nowhere. The point of this exercise is not to say that the S&P 500 WILL be at 15,000 by 2040 but that it very well COULD be at 15,000 by 2040. We, as investors, must therefore make decisions on what is actually happening in the markets instead of what we think should be happening. A similar 1400% move off the 2009 bottom would take the S&P 500 to around 10,000. Source: Worden TC2000 S&P 500 Advance-Decline Line International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 8
As pointed out in previous editions, the tops in the S&P 500 in 2000 and 2007 were both preceded by declining breadth well in advance of the price peak. The S&P 500 Advance-Decline Line is not showing the same weakness it did at those two points and continues to advance up to new highs at the same time the index is, which is what we want to see. Same Story with NYSE CSO A-D Line International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 9
The NYSE Common Stock Only Advance-Decline Line sent up a potential red flag in early November by not confirming the breakout to new highs in the S&P 500, but that red flag has now been negated with the most recent breakout in the indicator. With the NYSE CSO A-D Line back at new highs, both breadth and prices are looking good. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 10
S&P 500 Equal Weight Index Heating Up We have written before about how there is more to this market than just the FAANG stocks, contrary to what many people believe. The market cap weighted traditional version of the S&P 500 has certainly benefited from the performance of the big stocks, but the S&P 500 s Equal Weight version is also continuing to hit new highs and has actually outperformed the S&P 500 since early November. This is another good sign for the health of the average stock in the market. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 11
Value Line Geometric Index The Value Line Geometric Index is often overlooked but can provide a different view of the stock market compared to other averages. It is an equally weighted index of around 1600 stocks that uses a geometric average to provide a closer approximation of what the median stock in the market is doing. The index continues to trade near all-time highs after breaking out above resistance a couple of months ago, but it s actually not as extended above the 2007 peak as other stock indices are. Overall, its performance is a good reflection of a broad, strong market. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 12
The 10-2 Spread Much has been made recently about the flattening yield curve, but as Richard Greenwald, a Raymond James advisor in Pennsylvania, points out, the spread between the 10-Year U.S. Treasury rate and the 2-Year U.S. Treasury rate stayed in a narrow channel around current levels during a long period from 1994-2000. Since we have regularly compared the current market to the mid-1990s, this seems to be just one more potential similarity and hopefully can help assuage some of the worries that a flattening curve will go inverted and possibly signal a recession is on the way. The spread may even be hitting some support right now (green lines) that could help boost it back up. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 13
Semiconductors Back at Resistance but Not Falling The Semiconductor Index (SOX) has returned back up to the resistance level we have pointed out in the past, but, to this point, the resistance has just slowed the SOX s trajectory instead of causing it to really fall. Still, some caution is advised while the index is this extended, and you may get a better chance to buy lower in the Semis, which still appear to be a hot area of this market. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 14
Energy Opportunity We pointed out a few weeks ago that the Energy sector was hitting long-term resistance and could struggle in the near term, but the subsequent weakness has brought the sector back down to potentially attractive levels above support. Some resistance does remain a little above the current price, but if you are looking to take a shot at Energy, this appears to be the clearest nearby support level. It continues to underperform compared to the S&P 500 but is close to breaking above resistance on its relative strength chart against the index (lower panel). International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 15
Retail Finally a Good Bet? The Retail sub-sector has attracted bottom pickers for much of this year, but it was difficult to call it a good bet while it remained in its downtrend. Now, however, Retail has clearly broken the downtrend and broke up above the late September/early October highs yesterday. With most reports about Black Friday shopping and holiday expectations being positive, it could continue to produce some interest in the area over the next few weeks. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 16
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