This page has been archived and commenting is disabled.
Is The Market Consolidating Or Topping?
Submitted by Lance Roberts of STA Wealth Management,
This past week I was having a discussion with my good friend Doug Short over the struggle of the S&P 500 to gain ground over the past few months. Good economic news and "stronger than expected" earnings reports have buoyed the market against the drain of liquidity from the Federal Reserve. Today, the market ripped higher at the open as hopes of a "QE" program from the ECB rippled through the markets. Despite commentary from the mainstream media that the markets are doing great, the updated chart below shows the markets continuing its tug-o-war between support and resistance.
There are two ways to look at stagnation in the markets. It is either a consolidation process that works off an overbought condition which leads to further advances, OR it is a topping process that leads to a market decline. Discerning which process is currently "in play" is critical for investor decision making. Unfortunately, as is always the case with investing, we will never know with certainty in advance. It is only in hindsight that the always bullishly biased forecasts can either be vindicated or victimized.
However, we can do some analysis to compare the current market environment with similar past markets to try an garner a "best guess" as to what might happen.
The chart below is what a consolidation process looks like. I have shown the Dow, S&P 500, Nasdaq and Russell 2000 indexes from July of 2013 through the end of last year.
Notice that the all the markets get oversold but remained in consolidation together. As the market gained strength the more “aggressive” stocks, as represented by the Nasdaq and Russell 2000, break out first followed by the more defensive large capitalization S&P 500. In other words, the degree of correlation between stocks remained high which is bullish.
The next chart shows what a topping process looks like. The consolidation pattern looks very similar to the current period as shown above. All stocks remain highly correlated and the markets get oversold prior to the next move.
The difference is that in 2011 this pattern ended in a rather severe correction of almost 20%.
The obvious question is "What was the difference?" Were there any signs that suggested that the consolidation in 2011 was going to breakdown as opposed to 2013? For that answer, we must look at some of the internal measures of the market for any tell-tale clues.
The first chart shows the percentage change in the number of stocks on bullish “buy” signals for the S&P 500 in 2011, 2013 and currently.
In 2011, the change in the number of stocks on "bullish buy signals" was deteriorating sharply and by mid-May was down 15%. This was as opposed to the consolidation process in 2013 as the change in the number of stocks rose by 20%. Notice, that during the current correction process the number of stocks on bullish buy signals has fallen by 15% at the same point as we were in 2011.
The next chart is the percentage change in the CBOE Total Put/Call Ratio. Like the VIX, the put/call ratio is a gauge of investor's “fear” of a correction in the financial markets. When investors are complacent, or lack fear, markets tend to rise. However, when this index is on the rise it is generally a sign that underpinnings of the market are more fragile.
In 2013, the markets consolidated and there was virtually no “fear” of a correction. In fact, the longer the consolidation process continued, the less fearful investors became. This was not the case prior to the onset of the correction in 2011, nor is it today.
Lastly, the NYSE High-Low Index, which measures the number of stocks hitting new highs versus new lows, is an indicator of the participation of stocks in the market. Again, I am looking at the percentage change in the number of stocks hitting highs versus lows.
In both 2011, and currently, the percentage change in the number of stocks hitting highs versus lows was virtually unchanged. This is as opposed to 2013 when new highs were accelerating over new lows as the percentage change in the index rose to nearly 90%.
There is also another important similarity between the current market environment and that in 2011. In 2011, the Federal Reserve was in the process of winding down their second liquidity program (QE2) just as they are currently. Whether continued “forward guidance” will be enough to support asset prices going forward is yet to be seen.
Let me be clear. I am not stating that the current consolidation process will absolutely collapse into a sharp correction in the months ahead. However, I am stating that the current environment is more similar to past markets which did correct, than not.
As my good friend Richard Rosso, CFP, reminded me recently:
“The markets spend 5% of their time making new highs. The other 95% of the time is spent making up prior losses.”
This is an important point to remember. While it is certainly possible that the markets could ratchet higher from here due to the "psychological momentum" that currently exists, the likelihood of a runaway bull market from here is remote. What history tells us is that when markets are attaining new highs, the end of a particular bull market cycle is closer than the beginning. It is also worthwhile to remember that getting back to even is NOT an investment strategy.
It is easy to get lured into the casino as the flashing lights and cries of barkers send out the siren's call that "everyone's a winner." However, the difference between a successful gambler and everyone else is knowing that "hot hands" eventually run cold. Knowing when to walk away from the table is what separates success from failure. In both cases, by the time a winning streak gets you back to even, it has generally run the majority of its course. As Nick Dandalos once said:
“The house doesn't beat the player. It just gives him the opportunity to beat himself. “
- 11603 reads
- Printer-friendly version
- Send to friend
- advertisements -







Earnings aren't doing any better! Look at Capex, Top line revenue, and buybacks for your so called better earnings.
Agreed, Yen! But, Jim Rickards sez that as long as they keep printing, stocks will go up.
This may indeed work, until it no longer does.
I don't doubt that DoChen. But it sure as hell isn't from earnings. Apparently the person that junked me missed this chart.
http://i.imgur.com/Enfx8Ul.png
they will continue to print until the price of essentials break the back of the average peep....until then the market CAN and probably will continue its trend
kliguy38 - you're right on. And I do believe our backs are bending a bit already. As we know, backs will only bend so far and then, 'snap!' and it's done. Very hard to put 'em back together again - takes a long time and a lot of physical therapy.
Didn't you guys hear about the taper? That's why we've been topping here.....distribution. Old money going into old (Dow) stocks and out of tech. Tech is dead. QE is winding down come hell or high water so they can push back the inevitable collapse of the dollar as long as possible. It might take a few more months but this bull is losing it's legs.
Sorry to mention this but it'll rip till the fed doesn't want it to.
I can tell you this seems to be constructed so that the next crash or correction never gets below 1700 or so. Buy for the long term
Yeah,
Hate to be debbie downer but unless you are a biotech or gogo tech stock, the median sector cash flow multiple is around 5 to 7x vs. the S&P 12.7x. On average the SPX industrial sectors have a 8 to 9x mulitple, so for your generalist mutual fund, there is enough solid ROAC not priced in and since they still are at break even to 2009, those generalists will continue to push higher.
Heavily skewed bull run since 2010. Bear case for reduced capex and margin compression is very much in effect in retail, but in industrial sectors such as oil, transport and related facility industries the capex + ROEC story is still intact. Market priced in 5% growth in energy alone, 1Q14 showed on average 15% growth rates (ex-Exxon, which has Imperial Oil issues). Metal consolidation will likely lead to the kickoff in the metals run. Those CapEx ramps will be the life raft for the macro-generalists and federal policy makers who must hang their hat on anything green shoot. So the short term trend, in an election year, where they do NOT want the economy to be a republican speaking point signals to "bullish" breakout.
India's new election rally and the natural gas price restructuring could offset the slowdown in China.
Goldman is likely correct that the 2015 ECB lines will not be opened until they have due reason to push the French and Spanish/Italians for common tax structures (which will piss off some very rich dudes). Until then, notice on Friday the Fed made reverse-Repo's a perma fixture of the fed window. Tyler1 has done plenty of work on this and their critical importance on providing quality collateral to the overnight and 5-day liquidity facilities in the past 2 years.
If that word soup is too much for you: just look at the historical trend in post-May election years. In fact I suspect if "they" exist, everything matters in keeping the recovery story alive until October.
Overbot RSI tends to work in multiple expansion rallies, but discounts earnings or cash flow growth. So while the RSI would have made you cash as a forward signal in shorting the 2009 run, it breaks down in late market rallies where the generalist overlays do not evenly deflate all sector rallies when yields bear-curve.
Earnings cannot continue to improve without topline growth. What the establishment wants is irrelevent unless they have the power to make it happen. They have expanded the money supply to an extent never seen in human history and at some point they will hit a wall where they cannot do enough to keep the markets up and the market will reassert itself. Easing has not been able to keep interest rates down; signs that central banks are loosing control of interest rates and with them the market. History releats itself, until it doesnt.
I do not disagree GernB that the general "sustainable" rate of M3 is impossible, however we are talking near term trendology based on RSI and top down vs. understanding what the SPX and individual subsectors were and are performing at. If we are looking at consumer discretionary; auto, clothing, beverages, retail food then yes: you are correct.
You mention that "they" can not keep up market rates, ok fair enough. I have never argued against this, and speculative money is propping up momentum stocks and sectors (ie Biotech 40x P/CF, Social/Tech 89x P/CF) yet the general sectors which do not operate on speculative cash plugs and loans on average have seen multiples grow by 35 to 50% earning growth, with less than 3x multiplier expansion in 12 months. So where is the beef if this is a fully inflated bull ? Until those sectors which do not require inflationary money to prop up their capex programs falter, I'm reluctant to call the top.
I'd agree. This is not "the" top. Rotation out of momentum stocks is normal. Manager will find a new set of "favorite" momentum names. IMHO people are still too cautious, sentiment has not yet gotten to extremes, and I think we'd have to see a reversal of tapering along with rising interest rates before faith is lost in the idea that stocks can only go up if the fed has your back. That is not happening in the near term. That's not to say this couldn't be a short term top and we see a selloff before a rally to new highs.
Weimar stock market might be a good example of this.
Peak Credit has been breached!
RE
My guess is it's going the Zimbabwe and Venezuelan route. Up, up and away as the country becomes poorer and poorer.
Well, he said he wanted to "fundamentally change amerika!" Methinks he's too successful.
Good to hear a runaway bull market isn't in the cards, ha.
One word...... Rigged.
That is all.
You just BTFD and don't worry about it.
Markets don't top anymore. It must be consolidation.
consolidating for another mounth, until the fed start a taper taper
This isnt what CNBC wants us to know. That must mean my reading level is above 5th grade.
I have to agree that it is hard to have a runaway bull market within a runaway bull market.
"Stock prices have reached what looks like a permanently high plateau."
~Irving Fisher
Are people rioting over runaway inflation? Are there still printing presses (or Control-P)? No and yes? Then I'm voting for consolidation
Without easy money, it doesn't look good. The Taper Risk Is In Stocks Not Bonds
The "Market" will continue to suckle off the teat of the public treasury while choking the middle class to death.
The "Market" is a fucking LIE!
The "Market" is anything but.
The "Market" is a propaganda tool.
The "Market" will do whatever the FED and the Banks want it to do.
OT: Look how Reuters is framing the economy.
"Rising U.S. economy could help Democrats stave off election loss"
http://www.reuters.com/article/2014/05/12/us-usa-campaign-congress-analy...
This propaganda comes out weeks after Carville said not to use the term 'Recovery' at all while campaigning. Note that this article is not in the Opinion section
What a complete fucking total waste of time.
At these levels it takes ~$8B to raise the S&P 1 point. Printers are running @ ~$ 1B/day for the whole market. Where's the rest of the money coming from? Insiders? GLWT
Perhaps the markets are getting a little frothy, just blow the froth off, drink up and party on!
DJIA hits 20,000 before it hits 10,000, and the SnP 2500 before 700. Especially and as long as they keep talking inflation doesn't exist. As long as the $USD is the cleanest dirty shirt - market will continue to "consolidatingly" (new word) rise. Nothing else really matters. Especially fundamentals.
Hopefully there's a fakeout over SPX 1900 and a hard reversal. At this point it looks like 1900 is in the bag. Never would have believed it though.
at the rate that volume is declining as the market rises the banksters can't make money going up from here. They need the volume of a down panic. and they'll probably get it. Sad to see so many good people here still tying themselves to the train tracks. good time to get safe for a while until the taper mess resolves.
The FED better damn well hope it's not topping.....better make another sacraifice to the printing God's Yellin.....
Why? The banks make money on the way down. They need a scapegoat though, and I'm not seeing it yet.
pattern have been for sometime to dump on high-volume and pump on low volume ... hardly looks like a top ... i'm waiting for chinese stimulus announcement or eu announcement of qe for a final blow-off top.
This is not a market, it is a goddamn circus!
True that, but is the circus going higher, or coming down from where it is?
Using TA in a rigged market.
Futile.
yeah, funny. could just consolidate in the same range for the next ten years. it's called rigging.
Really cool tech analysis - compelling arguments.
We are heading higher for institutions to squeeze the shorts.
The institutions are squeezing the shorts because the have too much inventory and retailers aren't buying.
PS: Yes I saw that BOA chart that showed retailers are all in - I call bullshit. It's BOA and the like that are all in - that's why they have to short squeeze - and there is less to squeeze each time they do it.
How to counter?? Keep your positions small. You can also do small counter trades to short to lessen the squeeze - go long or write puts - but again do it small.
Are all the recent charts showing Instituationals as net sellers of equities not correct?
Ask me again in 30 days.
Or ask Yellen now and she'll tell ya, it can't go down so consider other options, "Watson, when you have eliminated the impossible, whatever remains, however unlikely, must be The Truth!"
magic 8 ball says ask again later
I think repeated trotting out of the ECB easing pony is good for 5%....
Gotta love it...
What's critical for decision making is unknowable? Really? If that's true then investing -- say, via some particular "wealth management" firm for instance -- would be an irrational act. Roflmao.
Hello, stock "markets"! Is anyone...there? Hello in here...anyone at all...?
Let's face it, with interest rates at zero for almost 6 years and counting as bonds and equities haved ripped through records and even the most recent bubble area (real estate) has caught a bid, the action of central banks shows every intention of having the S&P be at 3,000 - 4,000 or higher within a year or two. Remember, as Greenspan told us, they see no bubbles until long after they pop. Big moves end vertical.
markets bla oversold bla bla graph trading range bla percentage change graph bla correction .... index ... graph
sharp correction .... momentum graph graph graph... ratchet higher bla ... runaway bull market...
Hate to step on anyones toes here and I'm sure that a lot of work went into this article, but sorry: Does technical analysis really matter at this point? Did it ever matter? Did anybody predict the internet bubble bursting with technical analysis and trading bands? September 11th? Lehman? Fukushima? any major correction? ANYTHING?
Well said...how many "Hindenburg Omens", "oversolds", "buy signals", waves, violated moving averages, &c., &c., mean anything in markets that are completely and thoroughly ARTIFICIAL and MANIPULATED???
Those were the days when fundamentals mattered.....now just BTFATH!
Here is a story of interest:
Jury rules that Dallas billionaires Charles, Sam Wyly used offshore trusts to hide trades
Bloomberg News
Published: 12 May 2014 12:15 PM
http://www.dallasnews.com/business/business-headlines/20140512-jury-rule...
excerpt:
"Samuel and Charles Wyly used a web of offshore trusts to illegally hide their stock holdings and evade trading limits, a federal court jury found Monday, leaving Samuel and his brother’s estate potentially liable for as much as $550 million."
Keeping interest at zero will allow for the market to go higher. Banks will just keep purchasing hard assets. THERE IS NO MARKET, only yellen.
The majority of the nation is not participating nor benefitting from the Fed's market ramp up. The statement is correct, but the ultimate end result is far from understood at this point.
Keep the shorts coming in. Grabbing money from them is like taking candy from a baby. Sqeeze play.
Topping.
Its was clearly consolidating and is now breaking out for the next leg higher; there is no question about that. There is no conceivable reason for the market to decline in this post free market market and zero indication of a top or anything changing the manipulated state of things in the foreseeable future.
In fact, all signs point to this being near the bottom; last year we broke out from a triple top pattern, retested old highs and confirmed generational lows as we have done several times before in history to never again come even close to those levels. The market will more than double from here before you can even think about a top.
Its a foregone conclusion that we will close 2014 above 2000 in the SPX.
Foregone conclusion: An end or result regarded as inevitable.
What happened in 2011 then? Was there a 20% correction or not? If so, I guess the Fed wanted it to happen. Ergo, maybe they want another correction to happen? If there is a feeling that having the Fed drive the stock market forever higher is a forever win, win, win solution, and there are no costly negative incentives or side-effect that are being created from it, then the entire concept of a free market economy has been obliterated. Everyone should just stop working and the Fed can print every dollar everyone would ever need or want to fund permanent retirement for the entire nation. 0% unemployent as no one is looking for work, and no one counts in the stats. Full employment as the Fed has defined it. There are so many stats that are pushing the limits of historical peaks, it's hard to keep track any more. If we think we can redefine the entire spectrum of financial accounting and economic statistics to make our new reality appear viable, the I guess we will forever be stuck in the world of smoke a mirrors. Just hope that someday, somebody doesn't turn on the lights.
Is The Market Consolidating Or Topping?
yes
Silly Rabbit, Trix are for kidz! The market is clearly consoli-topping.
"It is also worthwhile to remember that getting back to even is NOT an investment strategy."
You mean like being short S&P ever since the founding of ZeroHedge? Eh, what's a multi-year drawdown if it's all going to zero...
I think looking about for a "top" is a waste of time. 'Tops' occur in a normally-functioning market, and this is NOT a normal market! It's not so much rigged as it is staged. We are watching a show that is being put on for us by TPTB.
They probably DID try to rig it at one time, but their thinking is so short-term oriented they failed to see the obvious outcome a few years down the line. Now the whole thing threatens to blow up in their faces, and they are desparately staging this happy, healthy market as a Potemkin Village of economic recovery. I DO believe they were really hoping for the return of the 'up' part of the business cycle to sweep them, and the problems, up in the general current. But it failed to arrive, and they have been propping the facades up and slapping new coats of paint on as fast as they can. Trying to make everything look normal. Even driving gold and silver down, because they know that people tend to view volatility and price jumps as a sign something is wrong. Tweaking data to alter the meaning, throwing all sorts of diversions at us to distract us and keep us arguing with each other over bullshit, the old war gambits using demonized foreign 'enemies', all of it.
None of the regular terms are applicable anymore. These folks are in survival mode, they are scared and overwhelmed. They know what a colossal cluster-fuck this whole thing is, and that there's no fixing it. They are waiting for a solution to come to them, and just trying to hold it together until it arrives.
The market won't 'top' in the traditional sense. It will reach a maximum price when the efforts to keep it up fail.