Sunday, September 21, 2014

SP Hits New Highs But . . .

Yes, yes.  Major Markets surged to new highs this week before backing off on Friday.  SPY, the ETF proxy for the S&P 500 closed up to 200.70, still holding below its weekly closing high of 201.11, set two weeks ago.

As mentioned last week, I was anticipating a top to play out this coming Friday.  The concept I propose is nothing new if you look at closing prices and don't get caught up in all of the noise that happens throughout the day and week.  If you look at weekly close prices over the past two years, you can see a number of these "tests of the highs" play out prior to nearly all of the declines we experienced. 

The last three week test of the high, that occurred starting with July 3rd's closing price of 198.20 and completing on July 25 failing with a Friday close of 197.72.  What followed was the last decent down move we've experienced in a while.  Usually, the moves are much more obvious such as the first three tops circled in the chart above.  Last time, the scenario was much as it is now.  The market topped, then dropped down but regained most of its loss during the subsequent week.  The third week bounced a little but was otherwise a very boring week.  Yet it was SIGNIFICANT!

The same could be happening now as all of the market fireworks exploded last week with Scotland's vote for independence, Alibaba's IPO and so forth.  Those of us who lived this past week know it was quite volatile with a lot of emotion for both Bulls and Bears.  But if you only have the above chart to look at, who could guess how explosive the week was?

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Yes, I was excited as well but when I look at my daily and weekly statistical data, I have such a hard time buying into the Bull scenario.  This chart illustrates SIZE.  It is the statistical 20 day standard deviation of the price data.  Most people observe it as the width of the Bollinger Bands.  This chart shows the size of 1 unit of standard deviation.  My rule is that when Size is going up, you go with the trend.  When Size reverses, usually one of two things will happen.  Either the price will then drift to the trend line and at that point, explode again in the primary direction.  OR, price could go express from one extreme, such as the top band of the Bollinger band, to the other extreme.

So with Size declining, price should either drift to the moving average, currently at 195.64 or go to oversold levels.

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With this Size value declining on nearly every time frame I track, I can't take a bullish stance at this moment and believe that a bear stance is a better option.  This is only based on my projection of the potential three week test of the high.  I believe that from a time standpoint, the market should experience a cycle low at the end of October.

Out of respect to the powerful underlying currents that continually prop up the market, I did add some October calls to balance out my bear positions for October and January.  There have been a number of times when I saw this three week test of the high coming and price exploded through to make still more new highs.  While this could happen, decline Size measures tell me that the power just isn't there.

Thursday, September 18, 2014

Bulls Push S&P, DOW to New Highs

The Dow Jones Industrial and S&P 500 averages pushed ahead once again to new, all-time highs on light volume.

Today's move follows yesterdays surge higher on Fed Chairwoman Janet Yellen's testimony which basically confirmed that nothing has changed, but someday, it will.

In other news, the IMF expressed concern that the market and related derivatives are funded with borrowed money and fear another 2008 scenario, with nothing but debt backing up assets.

This is the problem that many have with the market move.  Central Banks, world-wide continue to add liquidity to their economies.  Somehow, much of this new liquidity is finding a home in US markets.  This is clearly evident by reviewing a chart of UUP, an ETF proxy for the US Dollar.

Such strength in the dollar has not been seen in ages.  Dollar strength results in corresponding weakness in commodities such as oil and precious metals. 

So for now, it appears like "party on."  The Bulls are rejoicing.  And while it appears to be prudent to add some calls to take advantage of what appears to be the start of a new wave up, I'm not so willing to give up the put positions I hold going out through October and January. 

Perhaps the continual Central Bank liquidity will not end and even if it does, interest rates will remain at extremely low levels, resulting in never ending up markets.  But in the end, we know that this market has been created through corporate financial engineering (issuing debt to raise cash to buy back shares, propping up stock prices) and cheap credit.  Someday it will end and rising interest rates will not result in pretty outcomes.

More analysis over the weekend.  Unless we get a big selloff at the end of the day tomorrow, it appears my three-week test of the high scenario is no longer in play.