behavior of leading stocks in a market correction

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FFTY is the fund that has the 50 leading stocks in the market. Since Feb 17th 2016 techs have been dominant leading index. the purple line is the 50 day simple Moving average (SMA) and the red line is 200 day SMA. If the leading stocks are testing their 200 SMA. Time to get to the sidelines and watch (as indicated in previous post) The volatility has been crazy!

on Monday The Nasdaq composite up 3.3%; the Dow Jones industrial average soared 2.8% and the S&P 500 jumped 2.7%. a pure dead cat bounce!! because on Tuesday The Nasdaq composite plunged 2.9% and undercut Friday’s low. The S&P 500 slid 1.7% !!

Both indexes’ price ranges Tuesday exceeded the prior day’s — a bearish behavior that’s known as an outside day!

semiconductor, software, internet have taken much more pounding as the stock market sees its second intermediate-level correction unfold so far this year.

The Nasdaq 100 slid 1.1% and pierced the 6500 level for the first time since Feb. 8.

The biggest winners fall 1-1/2 to 2-1/2 times as much as the major indexes do. What does this mean? With the Nasdaq at 6949, down 9% from its 7637 all-time peak, expect some of the leaders to fall anywhere from 14% to 23% from their own 52-week or all-time peaks.

look at the S&P index – a very robust broad and key index

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It is in hair’s breath of the most important indicator 200 day moving average. Why is this most important indicator ? mutual funds, hedge funds, pensions, sovereign wealth funds see this level at 200 day MA as the key level to buy or sell.

there is no buying now – look at the triple top in the second chart above. Stay in sidelines and watch

Source of some of this article : IBD

 

 

 

volatility is back

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The stock market does not like uncertainty.  Uncertainty is a component of how the stock market discounts future earnings back to a price today.  The discount rate is the denominator of the equation.  Just as 1/10 is a smaller number than 1/5, stock prices are lower as uncertainty rises.

Whether we look at the relative performance of stock market components based on exposure to foreign trade or the CBOE Volatility Index (VIX), it is evident stock investor anxiety is on the rise.  How concerned should we be?

We look to the credit market to see if lenders are also feeling anxious.  The debt market is substantially larger than the stock market and often provides a more reliable and leading indicator of broad investor sentiment.  Specifically, we monitor the high-yield spread.  If the differential between junk-debt interest rates and treasury rates is 5% or greater and rising, we get worried about the stock market

Currently, the high yield spread is about 3.6%.  3.6% is down from about 3.8% a month ago and 4.1% a year ago.  If the bond market were the British Government, it would be telling us to “keep calm and carry on.” (source : delta market sentiment )

Having said that – based on our trading philosophy – the price is the true north star

on Monday March 19th 2018  market fell very badly

S&P 500 solidly gave up the 50 Day MA under a clear gap down . Very close to 2700 support

The 2800 was a solid resistance. Time to get in sidelines

 

 

 

Raising interest rates and the market

 

The Federal Reserve is implementing a multi-year interest rate increase plan as a way to manage inflation.  Many bull markets have ended as a result of the Federal Reserve raising rates too much.

As long as the 10-year U.S. treasury rate is below 5%, rising interest rates have a positive correlation with a rising S&P 500.  Said simply, rates go up and stocks go up.  Above 5%, rising rates have a negative correlation with the direction of the S&P 500.  Today, the 10-year treasury is about 2.9% — shown with vertical blue dashed line on chart below.

The Federal Reserve attempts to manage inflation (Fed target rate of inflation is 2% year-over-year) through interest rates.  By raising interest rates, the Fed can slow economic activity.  Borrowing (e.g., for a home or any other purpose) becomes more expensive.  Saving and earning interest becomes more attractive.  Consumption moderates relieving upward pressure on prices (inflation).
The Fed Funds rate is currently about 1.4%.  The Fed says it plans to raise the Fed Funds rate to about 2.7% in 2019.  The current spread between the Fed Funds rate and the 10-year treasury rate is about 1.5%.  If we assume the spread remains constant going forward, the 2019 10-year treasury rate using the Federal Reserve’s projection of the Fed Funds rate is 4.2%.  Based on market relationships dating back 55 years to 1963, interest rates rising should not be a major threat to the bull trend this year.

The 17 consecutive month of positive Leading Economic Index (LEI) percent change month over month was reported this week at plus 1% for January.  The LEI continues to signal growth through the first half of 2018.

Source of the entire article is delta market sentiment news

 

Historic Drawdowns in market

The last two weeks steep downhill and loss of 10+ percent on S&P

RED DOTS – inter year DRAWDOWNS

The chart below shows calendar year S&P 500 returns without dividends (grey vertical bars).  Below the bars are red numbers which indicate the maximum intra-year drawdowns.  The chart makes clear that 10% drawdowns are fairly common.  What is not common is a drawdown of only 3% which was the case in 2017.

Another important observation from the above chart is that as long as the economy is not in a recession (areas shown with horizontal green bars), the calendar year returns are usually positive.  The U.S. is not currently in a recession.

From January 1950 through December 2017, the S&P 500 has declined by 5-10% 41 times.  The average length of the decline was one month.  The average recovery from the low was one month.  In the 11 cases that the S&P 500 declined by 10-20%, the sell-off lasted and average of 4 months and recovery took and average of 3 months.

Source : delta maker sentiment

Volatility and high frequency algorithms

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If it wasn’t obvious to investors,  fanned the market volatility. Treasury Secretary Steven Mnuchin said that algorithmic trading played a role in the sell-off as he sought to reassure jittery investors.

The S&P 500 fell as much as 9.7% from its peak. That’s practically the definition of a market correction, which is commonly understood to be a decline of at least 10%. The small-cap Russell 2000 did sink more than 10%. (IBD)

No, i am not talking about terminator 2 judgement day

yahoo has a small segment here

As posted in the previous post on this site we have had and we had exited the market on Jan 30th when we

5 days of stalling and no progress

2 days of high volume selling

100 points loss in 2 days in high volume

Top leaders down in high volume

( first photo source : trading view )

FFTY etf a proxy for top 50 beat stocks in the market down by 2%

On Jan 30th – the market gapped down 88 points …

Market could be in Correction ?

5 days of stalling and no progress

2 days of high volume selling

100 points loss in 2 days in high volume

Top leaders down in high volume

( first photo source : trading view )

FFTY etf a proxy for top 50 beat stocks in the market down by 2%

#ffty #etf

#market

#marketincorrection