Another Sell Signal

This is for the intermediate term and it usually leads the actual top:

The above is a title from the home page of Le Monde, the main non business journal in France. They almost never focus on the stock market outside the economic section.

Another Sell Signal

Outlook for Early January

Here is another very insightful resource from Gallup: short term Economic Confidence Index.

source: Gallup Economic Indexes (clicking the link will take you to the original chart for the index and some explanations from Gallup)

The index has recently reached the horizontal red line. In the past this has been followed by a correction in the stock market. The index also times the important bottoms pretty well.

The put/call ratio also suggests we are about to witness at least a short term top today or tomorrow:

When the ratio barely moves and diverges from the market a top is very close.

Meanwhile, weakness in breadth has become more evident:

Since NYHL is a widely followed indicator, I think many traders are expecting a bigger correction to start soon. This makes me think that, after an initial sell off into next week's employment report, the market will rally again to new highs before any intermediate term correction begins. NYHL will probably spike higher on this rally confusing everybody (it often does that).

So here is, in short, the tactical plan ( as usual this is subject to change as the picture becomes clearer). I will choose some of the three actions in italics:

1. sell/take profits/watch rallies until Monday (one especially good shorting opportunity will emerge after the ISM number on Monday); 1262 SPX looks like a good level but the spike in volatility on Monday could offer a higher level to the patient ones;

2. cover/go long/continue watching next Thursday or Friday after about 20 points of downside (around the 20 DMA);

3. expect new highs around the 1270 SPX level.

Evidence of Consumer Strength

The chart below is an average of daily self reported spending by US consumers:

source: Gallup.com

Notice how the series stayed below the 80 level for the whole period since the recovery began.

The good news is that it has recently broken above that level, an event that suggests increasing consumer strength and confidence. Since the series is volatile it could easily drop below 80 again. A confirmation of strength would be reaching 85 or above a few more times in the future.

Merry Christmas to All

I may not post with the same frequency during next week.

For the period until the end of the year I am expecting a small correction followed by more strength. I will update if something significant comes up.

Meanwhile, I will let you ponder over this chart:

Will this bull leg end with a divergence in the New Highs - New Lows indicator, or, on the contrary, with it displaying strength as it did before the other two intermediate term corrections in January and April 2010?

Short Term Top For Today

I think the market has arrived at a short term top. The put/call ratio has climbed slowly back towards overbought levels, after being there last week. This pattern usually precedes tops:

I think the market will start to go down from the ES 1252-1254 zone. A 15 point correction seems to be the norm, but, given the low volatility, it might end after only 10 points to the downside.

The bullish sentiment is increasingly visible in the media. Today I even saw a projection of 1500 for the SPX until June 2011! This leads me to believe that, after a small correction, the market will make new highs and then start an intermediate term correction in January. The only caveat to this scenario is that something similar also happened in January 2010.

Just Another Bullish Outlook

Outlook for 2011: the economy will continue to expand, the stock market will reach 1400 SPX.

In short, I think 2011 will be a year marked by improvements in employment and a stabilization/improvement in the lagging housing and small business sectors. The stock market will benefit from these growth synergies and the available liquidity.

Here is in more detail how I expect things to unfold:

> in the first quarter the pace of change in real retail sales will slow down:

> this will accompany an intermediate term correction in the stock market:

My best guess is that this IT correction will begin around 1270 SPX. A 10% fall will take the market to 1140, close to the support level obtained using the fibonacci retracement.

> Then, as the retail sales series starts climbing again, the employment situation will improve and the stock market will rally:

The pace of change in private payrolls will probably reach the higher levels usually attained during previous expansions.

The SPX will start a new average bull run of about 20%.

> During the year the small business sector will start recovering after a long adjustment:

The index has recently spiked up. Notice that this index is correlated with the economic conditions. A recovery in this part of the economy will help employment improve.

> The housing sector does not get worse. A bottom is signaled by the related magazine covers during 2010 (especially Time).

What can be said for sure about outlooks one year ahead is that they will be off. However, this outlook represents a framework that is indispensable in trading. The outlook is subject to change as the picture becomes clearer. It is very important to be flexible and not to get married to it.

Here are some developments that may alter my expectations:

> the stock market shows very bad breadth during the intermediate term correction, suggesting the bull is over;

> the current bull leg does not stop until close to 1320 before it corrects. This would change the target for the correction to around 1180 but would not significantly alter the 1400 target on the upside;

> the economy shows signs of weakness, with the retail sales and employment series not acting as expected. The GDP reports show the consumer is not taking over any more;

> the problems in Europe become worse.

I will monitor the related indicators and adjust accordingly.

Market Outlook

The put/call ratio has not offered any edge lately:

All I can say for sure is that there is no indication of an overbought condition yet since the short term top on Tuesday. This, combined with the seasonality, means the path of least resistance is still up.

However, I think the market will be choppy and will not roar higher. A strong indication of weakness is a small range day with greater than average volume. This is what happened on Friday:

I also marked a previous similar case.

If today opens with a relatively large gap up, I think profit takers will seize the opportunity.

Near Future Bias

I presented the chart below yesterday:

This time I also drew a bigger red circle to highlight the three times in recent history that the series reached about the same level as it did lately. Here is what the stock market did in each of the cases:

The smallest correction that followed was the one in September 2009, of about 5.5%.

In other cases in the past the story is the same. There is sometimes a longer period of maximum 2 months before a bigger correction starts, but that also depends on the context the stock market finds itself in. Since until now the SPX has risen about 20% it is not hazardous to expect an intermediate term correction soon.

However, I think the market will drift upwards to around 1270 before this bigger correction. Weakness should become apparent on the way up. In fact, some breadth indicators are already diverging from the market.

As Good As It Gets

Sorry for the late post. Here is an updated chart of the pace of change in real retail sales:

It has reached the upper boundary of its range. This suggests the economy is strong enough to continue expanding but also that a bigger correction in the stock market is not far away. I will detail with some examples from the past in a future post.

Market Outlook

The put/call ratio will become oversold quite fast given yesterday's behavior:

Usually, in uptrends a good strategy to buy is on weakness after trend days down. If today is such a day, I think tomorrow there will be a good opportunity to go long until the end of the year. With most of the important monthly data behind and with no negative surprises, I do not think the market will find many reasons to go down.

Update

Although I think the correction will start around these levels, I decided to refrain from shorting. However, if I did short, I would do it between ES 1242-1245 (March contract) with a stop at 1253.5.

Market Outlook

I have not much more different to say today than I said yesterday. The spike in the put/call ratio confirms my assumption of a correction in the next few days:

I think the market will stop after it rallies on the Fed announcement. My guess is, if the retail sales report does not bring a negative surprise, that the March contract will first reach about 1245 before selling off.

The real retail sales number will give me a clue as to when to expect the next bigger correction. I will provide a chart after the CPI release tomorrow.

Correction Coming

One of the more accurate indications of a correction coming is the turn of the 5 day ema of the total put/call ratio after it has penetrated the overbought zone:

The turn happened at Friday's close so, judging by the past behavior, a top is just 1-2 days away. I think the best opportunity to take profits or sell will emerge tomorrow after the Fed announcement.

How big a correction is anybody's guess. I expect it to reach the 20 day MA quite fast, probably in the SPX 1215 area. I also expect the simple total put/call ratio to give another signal for going long. Becoming too bearish in an uptrend in the middle of December would be a mistake.

For today's trading, I think the gap up will be sold but the market will hold after the initial small sell off and probably close strong again.

Still Overbought

The market is very resilient. After each sell off it bounces back. This is a characteristic of fast trends. It is good to remember that they bounce back until they don't (my second tribute to Yogi Berra in two days!).

The 5 day ema of the put/call ratio has made a new high for this bull leg:

Since, usually, bigger corrections come after the 5 day ema diverges from the market it follows that the next correction will not be very big. This is an important observation for the near term bias.

"It's Deja Vu All Over Again"

The last time I titled my post "Correction Not Over" the market mocked me with a huge trend day up. It happened on the 5th of October. Will this time be the same since yesterday's post has the same title?

Back then the put/call ratio had refused to move while the market started to go down and led me to believe that there was still downside to come. The same has happened now:

Interestingly, in the previous case the ratio moved to oversold levels only as the market rallied to new highs.

If this time around is no different, than buying the big gap up would be the right thing to do. However, I will refrain from doing that since the 1250 level is very close. I also think that, even if the market closes strong today, tomorrow or Monday will offer a pull back to enter on with lower risk.

Correction Not Over

The weakness in the second part of yesterday's session suggests the market will go a little further down. My expectation of a 25 point correction implies a target of 1210 that looks attainable especially with the put/call ratio and the 5 day ema of the put/call ratio still close to or at overbought levels:

Here is how the market could look like at tomorrow's close:

Each candle above represents a day, with the first in each case being analogous to yesterday.

Covered at 1234.25

Ready to Take Profits

The 5 day EMA of the total put/call ratio is very close to the overbought level,

while the simple total put/call ratio is overbought and displaying a pattern often associated with short term tops:

The above in the context of a big gap up suggest that I should take most of my profits today. I will leave only about one third of my long position open just in case I am wrong and the market goes straight to 1250 (timing corrections in a fast uptrend is hard).

My favorite level to cover is the high of the overnight range up to now, 1234.25 ES, but anything above SPX 1230 will do. I expect a 25 point correction by the end of the week, after which I plan to reenter my longs for a move to new highs. The FOMC meeting next week will act as a magnet for the new rally.

AAPL - Trouble in Paradise?

The sentiment towards Apple is generally very bullish. Here are two covers suggesting that:

- Time Magazine:

- Le Monde Magazine: Jobs - The new Gutenberg?

I believe that sentiment at an extreme coupled with fundamental problems represents a dangerous mix. So I did a more detailed analysis of Apple.

The company looks great at the first glance. Its sales are growing healthy and profitability is high but I have stumbled upon a few signs of fatigue:

1. The year-over-year quarterly sales growth for the next two quarters is slowing (green; Yahoo Finance estimates used):

If the 3rd quarter in FY11 grows at about a 30% rate, it represents a slowdown of 50% from a year ago, which signals big problems with meeting earnings expectations by the end of FY11.

2. The latest quarterly operating margin is dropping significantly compared to the year ago figure:

> latest Q OM: 26.77%

> year-ago Q OM: 30.18%

This means the company is slashing prices to increase sales, a behavior that cannot last forever without bringing down earnings growth expectations.

3. The latest tax rate is dropping suddenly compared to previous numbers, suggesting the company might be struggling to meet the earnings forecast:

So an explosive mix might be starting to brew. The company is not overvalued yet with a P/E of about 20 so it may continue to go up along with the markets but I think that at the next intermediate-term correction in 2011 AAPL is going to be a great short.

Market Outlook

Two big trend days in a row is quite a rare occurrence. It looks like traders have great expectations from the employment report. This is why last week I said I wanted my longs before this Friday.

The put/call ratio has reached overbought, which means that the rally might take a break around these levels. A 10 point correction would not be unusual.

I am not expecting a significant correction, however, until the 5 day ema of the put/call ratio reaches the upper horizontal line:

This might happen just as SPX makes it to 1250.

Market Outlook for Thursday

Yesterday's action looks strong by the usual breadth measures. The total put/call ratio has not spiked too much, a healthy development for the move up:

The current level, around 0.8, does not mean overbought anymore like it did in September. The fact that the overbought level is moving higher is another indication that we are in a bull market.

Usually, after big trend days the market oscillates in the next session and confines itself to a much smaller daily range. I think this will be the case today also and this is why I expect the probable initial gap up to fail. A sell off to the overnight lows would not be a surprise. The bulls may also be prudent since tomorrow is an employment report day.

Market Outlook

The market is up a lot as I am writing this. Someone (I do not know who) once said the market resembles someone with manic-depressive disorder. It seems today it put on the manic face.

I explained previously why I was bullish from these levels. Here is a target for what I think will prove to be a rally in the coming weeks:

The target is obtained using the Fibonacci retracement levels. Notice how 1182 is support and 1256 the next target in case of a new high.

The first phase of my trade was establishing a core position at the base of the expected rally. If today's strength holds, the trade will enter the next phase: making small adds to my position on the way up.

These adds will be small enough not to ruin my whole trade in case something goes wrong but also big enough to matter for the bottom line. The total put/call ratio will be very useful in my adding process since it usually accurately indicates when a rally off the bottom is going to just continue higher or pause.