RUT comes back

Today the RUT led higher. Interestingly, all the major indexes suffered an intra-day reversal, but only the RUT recuperated from it completely. The SPX nearly closed on the lows of the day. The NDX stayed postive.

According to McMillan's analysis the Put/Call ratio's 21 day moving average is rolling over to move higher off very low levels on the chart. This could mark the warning sign that a pullback is ahead. Volatility levels are extremely low - especially the VXST trading below 9! Low short term VIX levels don't last long. On a multi-year chart, low levels of the VXST have corresponded with at least short pullbacks in the market. 

Today, was a tricky day for the call spread on the SPX. I initially rolled it out to Jan 17 for a 40 cent credit early in the day. Then as the market pulled back, I closed it out for a total price of 75 cents. We captured 50 cents profit on the trade overall. 

Earnings season starts on Friday with several big banks reporting. January expiration week is next week, and historically, its usually a weaker one. If the market moves up these next few days, I will look to put on more bear call spreads. 

First five days of 2017 positive - NDX up all of them!

NDX is usually the most bullish of the indexes in January. So far this has been the case in 2017.

Unlike the RUT, the Market Sentiment on the NDX is sloping up and has not yet reached the overbought levels above 80. We can expect more gains after a slight pullback coming up in the NDX.

The market's trade in the first five days of the new year is often a barometer for the rest of January. The SPX gained about 1.3% in the first five days of trade, but fell slightly today. This bodes well for a positive January. For large caps, but the RUT could be in trouble. It barely broke even after a strong start last week.

GLD and TLT made strong moves in the first 5 days of the new year. This is in the face of rising equities, so it seems bullishness abounds in many markets. 

In fact, only the energy and utilities sectors were down in the first five days of trade this year. Strangely, healthcare led all other sectors.

In the face of this bullishness and because the first five days have ended I sold a 22295/2305 call spread on the SPX for expiration this Friday for 85 cents at the highs of the day. The market closed on its lows, so the spread is worth 50 cents now.

RUT down, TLT up most in 6 months

Today, the NDX was up, while the SPX was flat. However, there were two noticeable items today that warrant caution for the market.

First, the RUT was down over 1% today, giving back nearly all of yesterday's gain. This created a 'railroad tracks' pattern on the chart. Also, Tuesday I mentioned that the Market Sentiment on the SPX was approaching an overbought area (above 80). The RUT already has attained that level and is flattening. Besides this, the green line of the Market Forecast is sloping down and below the 80 mark. This is a slightly bearish reading for the market.



Second, intermarket analysis shows some headwinds for equities. Gold (GLD) and long term US treasuries (TLT) - both risk-off trades that run counter to equity markets - spiked today. TLT had its best day in 6 months! Without going to deep into the analysis of the charts, they both show nice rounding bottoms and the Market Sentiment is ready for a bullish run. In fact, the Market Forecast for both GLD and TLT have recently turned bullish. The USD fell sharply today, also, and broke distinctively below its 30-day MA. Its Market Sentiment line is now falling from very high levels, which signifies a trend change in the USD is happening.

Medium term volatility hits 52-week low

Markets moved up again today, especially the RUT as oil bounced back and the USD fell.

VXV, the measure of longer term volatility hit lows today that have not been seen in all of 2016. Just a cursory glance at these low levels of the long term volatility measures mark at least breaking points in the uptrend over the last few years, as seen by the SPX chart in green below.



Everything is bullish - and again extremely so. McMillan's Put/Call ratios are at extremely low levels, so when the sell off comes, it could be a big one.


The Santa Claus Rally period ended today with a positive gain. This is generally positive for the markets in the short term, but there are two other test coming up: 1) the first five trading days of January and 2) the month of January. If these are both positive periods, then the market will most likely trade positive for the year.

From the Stock Trader's Almanac "Including this year, Santa has paid Wall Street a visit 53 times since 1950. Of the previous 52 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 28 times. When all three indicators were positive, the full year was positive 26 times (92.9% of the time) with an average gain of 17.8% in all years."

A big test is ahead however as market downturns usually happen when Republican presidents are new to office. The promises made during elections often do not turn into immediate outcomes for the US economy. The table from the Stock Trader's Almanac (2017) highlights this, as 4 out of 5 new Republicans led market declines.


Furthermore, first year's under Republican's is usually a difficult time.

Bullish start to Jan 2017

Right on time and as expected, today was a bullish day, although the move occurred mostly overnight due to some good growth numbers out of Italy and China. Oil fell and that put pressure on the day's session until a rally in the last hour.



The Market Forecast chart (middle chart on the graph above marked MFC) shows that a bullish intermediate cluster was formed last week. This means that further downside is limited this week, and we will likely see the markets retest the highs.

I notice in the Market Sentiment chart on the bottom of the graphs above that the line is flattening and again nearing the 80 level. This is again a sign that real upside potential from here is limited.

I bought back the SPX 2245/2235 put spread expiring on Jan6 for $2.70 - a loss of $1.60 on the trade. As the market is moving higher I will sell put spreads this week to gain from the bullishness.

December Monthly Market Review

This December the US markets did exactly the opposite of a usual December. Usually the first day of December is bullish. It was negative this year. Then usually the next two weeks show only moderate gains. This year the first week was extremely strong. The third week is options expiration week, and that is usually one of the strongest weeks of the year. This year it was relatively flat. Finally, the last few days of trading are usually extremely bullish in a period known as the 'Santa Claus Rally'. This year the markets suffered the month's worst losses on those days. This is not a good sign for January!



The large capitalization stocks held up better than the medium and small cap stocks in December. The SPY was flat up until the last days of the month, whereas the MDY and IWM sold off and consolidated more heavily right after making their month highs in the first week.





Non-US stocks followed the US markets, with big gains in the first week. After that they sold off hard and tried to stay above their 50-day moving average, which is negatively sloping still. Non-US have to stay above this important level if they are going to start a new uptrend.



Emerging Markets cannot break above the 50-day moving average, which is now declining at a more significant rate. It could collide with the 200-day moving average as soon a late January. The 50-day moving average in acting as a level of resistance for emerging market ETF VWO.



Real Estate markets cleanly broke out above the 50-day moving average on decent home sales news from the US in the beginning of the month. Technically, RWO then retested the 50-day moving average twice now in a 'W' formation and looks to go higher. The short term moving average looks also to be rounding and could start trending up.



Natural Resources firms remain in a bullish trend (above both their 50 and 200 day upward sloping moving averages. Many analysts feel 2017 could be a great year for commodity companies. However, if this ETF creates a lower high and continues to fall, this could be a trend changing event.



Commodities themselves suffered heavy losses in December. Importantly, the 50-day moving average on USCI broke below the 200-day average last month, and is now firmly trending lower. Commodity prices could go much lower here.



For all the talk of increased rates and lower bond prices, the market did not follow through lower from their November move. Again, the 50-day moving average crossed below the 200-day moving average, showing the trend is lower for bonds, but a retest of the 50-day level seems imminent. That is another $1 to the upside.



Inflation indexed bonds suffered more than other bonds, but still recovered late in the month.



International bonds held up better than US bonds, as they remained flat as US stock markets rose in the first weeks of the Dec. As stocks weakened BNDX rallied above its downwardly sloping 50-day moving average. This may signal the end of that rally, unless equities continue to falter.



Dollar strength continued in early December, echoing the performance of US stocks. With the USD correlated so high to US equities, any de-correlation could mark an end to the stock rally.



In summary, US stocks, the US dollar and Real Estate look strong, while bonds and commodities look weak. Non-US stocks are at potential turning point here and need to move higher in January to stop there downtrend. The effect of the Trump presidency will also become clearer in January. With that, natural resource producers will be in focus for support from the new president needed to keep their rally going.

Markets again down on tech

The NDX led the market down on the last day of the year. The RUT held up best, making this sell off seemingly not so bad.

The SKEW inflated to 127, but that is nowhere near extreme levels. The Put/Call ratios are at very low levels, suggesting that a top is likely forming in the markets. Until the P/C ratio trends higher, the stock market can still rally.

The VIX has been increasing lately, as I highlighted in previous entries on Dec 27 and Dec 28. I mentioned that the increase was not a detriment to the market, but if the trend continues, it will be. With the VIX around 14, anymore increases could be the start of a spiking situation.

 
We are still in a bullish period of the year - you would not know it though - which gives this market a chance to rally back in the next two days. Therefore, I rolled the Dec30 SPX 2245/2235 put spread out to Jan6 for a 40 cent credit. This puts the total credit at $1.10 for that spread. I will try to close this on Tuesday or Wednesday on a strong up move.

As the SPX 2260/2255 puts expired on the money on Friday, I will also look to recover those losses by trading that same spread if things look to get more bullish.

In any case, on any strength we will sell call spreads as this market is looking to roll over soon.