Baseline Analytics Market Tour

A technical review of the financial markets

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Posted by on in News

Equities appear to be biding their time as they settle back from an overbought condition.

The chart below draws several trendlines to "keep up" with the strong long-term uptrend. The S&P 500 initial support levels are in the 1900-1925 range, which suggests some further sideways action as the overbought RSI (top of chart) finds likely support near 50.

(click here to enlarge)

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"Known Sure Thing," reflecting a series of moving averages and their derivatives from Martin Pring, is approaching recent highs near 40, underscoring the age of this uptrend. Sentiment readings in VIX and Put/Call are neutral to slightly bearish for equities.

The 30-year Treasury bond continue to flirt with resistance at 137.50, as seen on the chart below:

(click here to enlarge)

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A significant break below resistance would suggest a more bullish expectation in rates and will likely support a continued uptrend in equities.  Until bonds decide which way they want to move in a more assertive demeanor, expect this tentativeness to manifest itself in an equally-tentative stock market.

Baseline Analytics TrendFlex signals assess the risk of a shift in market trend.  Visit our website for more information and subscription details.

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Baseline Analytics is launching a new service focused on dividend-paying stocks.  Over the long-term, dividends have accounted for a significant portion of total equity returns (to see an excellent paper on this subject by Guinness Atkinson Funds, click here).

On a weekly basis, Baseline Analytics will feature a list of equities that turn ex-dividend in the upcoming week (investors owning the stock at the ex-dividend date will receive the next dividend, which is typically paid within the upcoming 30 days). A minimum 1.0% yield is required to make the initial cut.

To further refine the list of ex-dividend stocks, Baseline Analytics runs its screening technology to identify those stocks that are technically-attractive.  Such indicators include whether the stock is trading above its 50-day moving average, and whether the stock is showing signs of a short-term breakout (i.e. price increasing on higher volume, or an upside crossing of short-term moving averages over longer-term moving averages).  In addition, we filtered the list to represent stocks with average daily trading volume of 50,000 shares or more (to avoid thinly-traded stocks with typically-wide bid/ask spreads). These technical indicator filters will help to identify those ex-dividend stocks best poised for further gains.

Click on the link below to enlarge this week's list.  For subscribers, an updated StockStash Ex-Dividend list will present the most technically-attractive candidates from this week's list.  This list is being offered at no cost to our Blog readers for this week and next week's picks, after which time it will be offered to subscribers only.  To subscribe to our TrendFlex, StockStash and ETF-Zone content, click here.

 

(Click here to enlarge list)

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The S&P 500 was barely changed on the week, despite Friday's swoon.  Revisiting the more significant technical indicators reviewed by Baseline Analytics, the market's general demeanor remains positive despite weakness in momentum, small cap and Nasdaq stocks in general.

A few highlights (also noted on the chart below):

  1. The major uptrend remains intact; RSI held above the mid-30's (top of chart below), reinforcing the bull market.
  2. KST is neutral to slightly negative; not a significant concern at this time.
  3. VIX is neutral however Put/Call ratio is near a point that would suggest a reversal in this short downtrend.

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Our sentiment chart (below) highlights a few interesting developments:

  1. Advances vs. declines remain near their highs.
  2. New Highs vs. New Lows remain positive
  3. The Summation Index (a momentum indicator) remains in bullish territory.

(click here to enlarge)

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So while the markets have shown increased volatility and headline reaction, it appears that sector rotation is shifting funds from momentum and small-cap high-fliers and seeking the alternative sectors (larger-cap, dividend-paying, lower beta, more reasonable value equities) in this aging bull market.

Visit Baseline Analytics TrendFlex for more information about our TrendFlex indicators.

 

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Several Market Technicians have been rather vociferous of late in characterizing the chart action as a gradual topping pattern in the equity indices.  Clearly, the NASDAQ index is in worse technical shape than that depicted in the S&P 500 chart below. It feels like tough going for the S&P 500 until it can break out of the 1890-1895 range to a new high.  A pickup in volume on the upside would be further encouraging.

(click here to enlarge)

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A positive sign after reviewing all of the setbacks during the last year, has been the ability of the Relative Strength Line (RSI, at the top portion of the chart) to maintain support at the low end near 30.  This has historically been a signal of a strong uptrend in that the RSI has repeatedly failed to sink to lower levels that would denote a more serious setback.

The middle of the chart shows Martin Pring's KST (which stands for "Known Sure Thing"), another technical tool in Baseline Analytics' arsenal.  During uptrends, when KST crosses below zero, that point typically coincides with a short-term low. Note the several instances when KST crossed below the zero line over the last eleven months depicted in the chart. Those points represented buying opportunities.  A trader would have generally profited by going short when the blue (faster) KST line crossed below the slower red KST line.

As for measures of market sentiment, Baseline Analytics favors VIX and the Put/Call Ratio, tracking those indicators relative to historic extreme points as well as their moving averages. VIX has entered a neutral stage (neither suggesting complacency nor worry), and the Put/Call Ratio also has settled back from a near-extreme reading approaching 1.2 at the height of the early-April swoon in the market.

So what's our take?  Clearly the market is resilient.  It wants to maintain its uptrend but it faces occasional headwinds that encourage dumping of momentum plays and calls for a deeper correction.  Add to that the mid-term election year fear and exasperation that the bull market is five years old (old age for such a trend) and you have a solid dose of fear and caution, just what we need to push the market higher.

This is the time for sensible portfolio allocation.  A mix of large cap, dividend-paying stocks, a prudent partial allocation to bonds, some emerging market ETF's and perhaps a little small-cap spice, as well as a cash reserve for future buying opportunities, would be a reasonable approach to this fickle market.

Baseline Analytics TrendFlex market signal use several indicators (including those in the chart above) to help investors stay on the right side of the market.  Visit our website for more information.

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I am not one to predict targets for the equity indices.  But reviewing the monthly chart of the S&P 500 below, one can't help but wonder if the index is setting up for an aggressive bull run not unlike that of the early 1990's.  I want to draw your attention to the Relative Strength Index (RSI) at the top of the chart below:

(click to enlarge)

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Note how "overbought" the index got in 1995, preceding a tripling of the index to its high near 1500 at the height of the Internet bubble in 2000. Since then, despite RSI highs prior to the financial crisis in 2008-2009, the S&P 500's Relative Strength Index has barely touched upon an overbought level in the monthly charts. Given the severity of the 2008-2009 downturn, one would expect new highs to make up lost ground, and then some, as it meanders in "overbought" territory. The daily chart view of the S&P 500, as well as key market indicators that comprise the Baseline Analytics TrendFlex market trend indicators, show a robust bull market but with early signs short-term topping action.

The chart below depicts the daily view of the S&P 500, along with some of our key TrendFlex indicators, such as RSI, Martin Pring's "Known Sure Thing (KST)," and sentiment gauges as measured by VIX (the CBOE volatility index) and the CBOE Put-to-Call ratio.  As for the S&P 500, its emphatic uptrend is denoted by no less than five touches of its uptrend line from May, 2013.

(click to enlarge)

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Near term support of the S&P 500 is at 1850, with the next level of support at the 50-day moving average near 1825.  Some noteworthy indicators include KST (bullish since the 1825 level) and neutral-to-slightly negative reading in VIX and Put/Call (low level as such indicate modest complacency, which has been, in the past, a forewarning of a potential setback in the stock market). Other key indicators of our TrendFlex Score include several measure of market breadth, namely the extent to which there is broad participation of stocks in the market uptrend, including more new highs and higher prices coupled with higher volume.

The chart below shows some of these indicators:

(click to enlarge)

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It is worth noting that the surge in the Advance-Decline ratio of the New York Stock Exchange (NYSE) since early February, is very similar to the surge experienced in April-May 2013 (see circle). The 2013 surge was quickly followed by a correction in the S&P 500 of about 8% (a similar correction this month would take the S&P 500 to about 1727). The Summation Index, show at the bottom of the chart above, similarly appears to have reached a near-crescendo at its 1050 close on Friday March 7th. Likewise, the NYSI reached 1200 in May 2013, prior to its 8% correction.

As our subscribers are aware, the Baseline Analytics TrendFlex Score measures the RISK of a change to the current trend.  Complacency and a "this time is different" attitude can hypnotize traders and investors to join the trend at the very point of an impending reversal. A balanced portfolio, protected with adequate capital preservation, will prepare traders and investors to weather corrections as well as provide the capital necessary to continue to participate in the longer-term uptrend.

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Each week, Baseline Analytics follows key charts and technical indicators to obtain a read on the direction of the markets, especially the various intermarket sectors (bonds, commodities, stocks) as well as macro-economic developments.

Several charts are affirming signs of a pickup in economic growth as well as potential signs of inflation.  The first chart is the CRB index basket of commodities.  It has been no secret that commodities have strengthened this year, with Natural Gas, Coffee, precious metals and others (have your checked out DBA lately?).

click to enlarge

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Our next chart depicts the relative performance of the Financial ETF (XLF) compared to the S&P 500. Financials have been underperforming the S&P 500 since mid-January. Anticipation of rising interest rates (consistent with the pickup in commodities and potential inflation) could be driving this underperformance.  Financials and Technology have been viewed as necessary sectors to support a bull market.  Although financials are not showing leadership, technology is showing decent relative strength.

click to enlarge

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The chart below depicts the Nasdaq market, which broke its 2014 high this week. Nasdaq leadership is a bullish indicator, and we would look for other indices to likewise reach new highs.  See the chart below:

click to enlarge

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Finally, one of our favorite charts is the relationship between Staples and Discretionary stocks, as shown by a comparison of SPCC (discretionaries) and SPST (staples).  Outperformance in discretionary stocks is a harbinger of economic growth and consumer confidence.  Sure enough, discretionaries (purple line on chart below) recently printed a higher low relative to the S&P 500, and have outperformed staples, since early February.

click to enlarge

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These sector indices suggest that investors would be rewarded to favor growth and inflation-driven opportunities, and lighten up on interest-sensitive sectors (financials, bonds) as well as defensives (staples).

Baseline Analytics market tour follows intermarket activity each week, and utilizes several indicators as part of its TrendFlex Score system.  ETF Zone (for subscribers) selects timely sector ETF's consistent with economic signals and intermarket relationships. Subscribe to our TrendFlex market trend signals, ETF Zone and StockStash, for timely trading and investment selections.

 

 

 

 

 

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Today's 0.76% bounce in the S&P 500 occurred at another critical support level.  As seen in the chart below, the 1750 area (the index closed at 1755 today) represents trendline support going back to June, 2013. RSI has held above 30, avoiding a dip into a more bearish, trend-reversal situation.

click to enlarge

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Reviewing a weekly chart of the S&P 500, the uptrend is comfortably intact.  On the chart below, 1690 represents trendline support at the 50-period moving average.  Also note that RSI has hugged the 50-level repeatedly during past setbacks.

(click to enlarge)

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The exception was the more serious correction in July and August 2012, when RSI slipped to the 30-level and the S&P 500 fell 250 points from peak to trough.  A similar scenario today would take the index to 1600, representing a 13.5% correction.

In the near-term, holding 1750 support will be key to a resumption in the uptrend.  Should support fail, the 1700 level is a likely stopping ground before we should once again review the technical state of the S&P 500.

The TrendFlex Score from Baseline Analytics assesses the risk of a change in the market trend. Our subscribers receive timely notices of a trend change based on the TrendFlex Score.  Learn more by visiting Baseline Analytics.

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Each week, Baseline Analytics screens over 6,000 equities to identify compelling price and volume patterns.  Depending on what these patterns say, traders and investors can benefit by establishing long or short positions in the stocks.

The SURGE Report identifies equities in our 6,000+ database that have exhibited volume surges over the past 1,5,10 and 20-day period, compared to several moving averages.  In this list, you may find stocks that have broken out and based, representing an attractive entry point.  Alternatively, stocks that have sold-off and are bouncing may represent attractive short opportunities.

Baseline Analytics StockStash equity selections is a subscription-only service that hones stock screens such as the SURGE Report to identify those particularly-attractive long or short opportunities. Subscribers also receive the TrendFlex Market Trend risk-assessment signals as well as our ETF Zone ETF screener service.  

Click on the link below to see the results of today's SURGE report. The report is an Excel list and will open as a separate download.  Online charting services such as StockCharts.com and finance sites such as Zack's and Yahoo Finance can then be used to review the list for further due diligence. The SURGE report is published every two weeks, so check back again.

Baseline Analytics SURGE Report.

 

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We are back to our familiar chart of the S&P 500.  As previously noted, a bounce was likely when the index touched the 1775 level on Monday. A bounce on Tuesday, which took the S&P 500 to a close of 1792.50, reversed to test the lows of Monday and has once again settled near 1775 support.  See the chart below:

click to enlarge

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This appears to be a critical juncture for the index.  A close below 1775 would suggest next level of support at the trendline, near 1750.  RSI has held at about 35, a level which has marked the low point for RSI in this uptrend.  Also, a close at the 1750 level would classify this setback as a technical downtrend, by forming a low that is lower than the previous low that can be seen near 1775, in December.

A tentative bounce on light-to-modest volume from current levels would suggest continued technical weakness.

For our subscribers, an update to the TrendFlex Score will be published this evening.

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Just a quick update on the S&P 500.  The chart below shows today's low touching a support line drawn at 1775, which marked the low in December as well as broken resistance in November.  A pattern such as this tends to generate a little short-term support, if not a bounce in the index. Failure at this support level suggests the next support point at the trendline, around 1750.

We try not to read too much into short-term chart patterns, but just in case you were wondering what we are thinking, there you have it!

click to enlarge

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Every so often, the high-beta, growth-oriented momentum portfolio needs a little peace and quiet via a prudent diversification into lower-beta equities.  A mix of varying beta stocks can provide diversification within a 100% stock allocation, whether it consists of consumer staples, healthcare, energy, telecom, etc.

Baseline Analytics ran a stock screener selecting equities with the following characteristics:

  • Below market beta of 0.8 or lower
  • Return on equity of 10% or higher
  • Price Earnings Ratio under 15
  • Dividend yield of 1.5% or higher
The attached stock screen has not been combed for timely trades or other fundamental or technical indicators that might suggest a high reward-to-risk ratio.  We leave that work up to our StockStash service.  Click on the link below and it will open an Excel file with our low beta selections.

 

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By observing the chart below, you can tell when Cisco Systems reports its earnings. Euphoria and fear following earnings reports and the company conference call has driven gaps up and down in Cisco's stock price. Cisco Systems is due to report earnings again on February 12th.  See the chart below:

click to enlarge

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The compelling fact regarding Cisco is its cheap valuation.  Cisco Systems holds over $9 in cash per share.  Reducinng Friday's closing price of $22.74 by the cash per share, results in a price of $13.74. At its trailing full year earnings of $1.84, Cisco's PE ratio is 7.5, or less than half of the S&P 500's PE multiple.  At next year's 2.08 EPS estimate, that is a PE of 6.6.

Now there is reason why value stocks can remain value stocks for a long time.  Shifting industry dynamics (think Sun Microsystems, Microsoft) can catch a large company off-guard, unable to or unaware of the need to make a change. Cisco Systems traditionally focused on network hardware, while startups shifted the network solution to software (not dependent on legacy hardware as Cisco was dependent upon).  However, as Barron's recently noted, Cisco's "Application Centric Infrastructure consists of a software-based controller that works with a new line of Cisco switches. Cisco says it will offer the agility and programmability that software-defined networks promise, with reduced complexity."

Being the first (or the early technology leader) is not necessarily the best for a technology company.  With Cisco's successful track record, excellent management, depth of talent, and cash, the odds are in favor of Cisco Systems ratcheting up its revenue growth in the coming years as it introduces its software-based solution.

click to enlarge

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Cisco Systems also sports a 3.0% dividend yield (the next ex-dividend date will be early April). A breakout above the $23.75-$24.0 area would suggest a potential trend reversal for Cisco (26 and higher would break its 2010 peak, and 32 would take Cisco above its 2008 peak).

As the chart below shows, Cisco is a long way from returning to its 2000 peak, and has quite a way to catch-up with the Nasdaq (the blue line), which is closing in on historic high.

click to enlarge

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Learn about StockStash, our stock picks based on a blend of technical and fundamental criteria, at Baseline Analytics.

Baseline Analytics is expanding!  Please take this survey to share your ideas as we enhance our services.

 

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Each week, Baseline Analytics screens over 6,000 equities to identify compelling price and volume patterns.  Depending on what these patterns say, traders and investors can benefit by establishing long or short positions in the stocks.

The SURGE Report identifies equities in our 6,000+ database that have exhibited volume surges over the past 1,5,10 and 20-day period, compared to several moving averages.  In this list, you may find stocks that have broken out and based, representing an attractive entry point.  Alternatively, stocks that have sold-off and are bouncing may represent attractive short opportunities.

Baseline Analytics StockStash equity selections is a subscription-only service that hones stock screens such as the SURGE Report to identify those particularly-attractive long or short opportunities. Subscribers also receive the TrendFlex Market Trend risk-assessment signals as well as our ETF Zone ETF screener service.  Click here for our subscription offerings.

Click on the link below to see the results of today's SURGE report. The report is an Excel list and will open as a separate download.  Online charting services such as StockCharts.com and finance sites such as Zack's and Yahoo Finance can then be used to review the list for further due diligence. The SURGE report is published every two weeks, so check back again.

Baseline Analytics SURGE Report.

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With the S&P 500 having gained 29.6% in 2013, portfolio rebalancing out of strong equity gainers and into other intermarket sectors (such as bond-like stocks) may be a prudent approach to protecting capital.

On Friday, a weaker-than-expected employment report showed us how oversold bonds had become. Bonds and many high-yield (bond-like) equities surged.  Although we do not embrace chasing bounces (and many bounces are just that - short-term blips that end up resuming the overall trend downtrend), Friday's action causes us to re-evaluate our 2013 successes and adjust (i.e. diversify) a portion of our portfolios.

Below is a chart of MUB, a municipal bond ETF.  Municipality finances are trending more positively with the pickup in economic activity and stronger housing.  MUB has not felt the pinch of higher rates as much as other bond ETF's such as TLT.

click to enlarge

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REITS (Real Estate Investment Trusts) also represent a diversification opportunity. Below is a chart of the Vanguard REIT (VNQ), which bounced off daily support on Friday.

click to enlarge

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Various bond and higher-yielding equity ETF's performed well on Friday and should not be ignored as potential rebalancing opportunities.  Here are a few more interesting ETF's to consider:

click to enlarge

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Finally, AT&T (T) took a hit last week on potential price wars.  Sporting a 5.5% yield, this may represent a buying opportunity.

click to enlarge

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With talk about single-digit equity index gains in 2014, and a reduction in stock correlations (which favors bottom's up, old-fashioned stock picking rather than index investing), investors are advised to remain flexible with their holdings. A diversified mix of equity holdings and a modest blend of bond-like stocks (and income ETF's) may smooth the potential bumps in 2014.

Visit Baseline Analytics and its StockStash and ETF Zone selections for timely stock and ETF selections.

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Previously we have noted that extreme readings in VIX and the Put/Call Ratio have coincided with shifts in the market trend.  These trend shifts can launch modest, short-term pullbacks or much-needed corrective action.

The chart below is an update from a past posting that highlighted highs and lows in VIX and the CBOE Put/Call Ratio, comparing those extreme readings with the stair-step advance of the S&P 500 and its short-term peaks and troughs.

click here to expand

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You will notice that when both VIX and Put/Call were at extremes, and the S&P 500 was at a peak or trough, there is a dotted line connecting the encircled peaks and troughs. This simple, visual depiction of market sentiment has been a useful tool to assess the risk of a change in the current trend, and a component of our TrendFlex scoring system.

Today, we have denoted a "question mark" on the chart above, highlighting that these readings appear to have reached an extreme. Both Put/Call ratio (at the bottom of the chart) and VIX are at complacent levels (a contrary indicator to the market trend: low complacency at high market price levels have in the past preceded a change in the market trend).

Whether a trend change occurs now or in the near future, our assessment is  that there is increased risk of a trend change, and prudent money management to protect capital is in order.

- Baseline Analytics

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As the stock market rally reaches to new highs, it may be time to re-allocate a portion of capital to a few top defensive equities to help manage risk should this uptrend  grow weary.

First, let’s take a long-term look at staples vs. discretionary stocks. Below is a weekly chart of staples vs. discretionaries and their relative performance vs. the S&P 500.  The indices are the S&P 500 Consumer Staples Sector Index (SPST) vs. the S&P 500 Consumer Discretionary Index (SPCC).  As is obvious and expected following the "Great Recession," Consumer Discretionary stocks (purple line) have outpaced defensive Staples (orange line) since the market bottom in 2009. Staples have graced a trading range since 2010, with a rather marked setback in relative performance this year, since April 2013.

click to enlarge

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As discretionary stocks have outperformed staples, so too has growth trounced value, generally spanning the period from the 2009 market bottom to today.  An interesting to note, however, is that the relative strength of growth vs. value has not participated recently in the new highs of the S&P 500.  In the chart below, we depict the Russell 2000 Growth index (RUO), vs. The Russell 2000 Value index (RUJ).  You can see the peak in the Growth/Value ratio achieved this October, corresponding with a peak in its Relative Strength Index (RSI) from an overbought condition.

click to enlarge

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How do we tactically respond to these signals in our portfolio allocation strategies? Considering the gains on the equity markets during 2013, taking profits or shifting out of high-beta growth equities into more defensive long positions may be in order, especially considering the age in this market uptrend, which will be five years old this March.

We ran a screen of equities that sported the following “defensive” characteristics but that represented companies with solid fundamentals.  Here is the screening  criteria:

- Beta 0.8 or under

- Return on Equity of 10% or higher

- Record of positive earnings surprises

- Price to cashflow of 10 or lower

- Dividend yield of 1.5% or higher (we omitted utilities due to interest rate risk).

We then pared the list to a mix of equities of companies representing a diversity of industries as well as stocks that were technical-attractive.  Here is what we found:

(click to enlarge)

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While there is no guarantee that discretionary stocks won’t continue their steadfast ascent, diversifying one’s portfolio with a handful of defensives such as those above, is a prudent approach to equity allocations.

Click here to learn more about our portfolio allocation strategies and market trend signals.

 

- Baseline Analytics

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Happy Thanksgiving!  It is snowing here in Ann Arbor MI, a fitting backdrop for today’s review of Natural Gas prices.

Natural Gas prices recently broke out through resistance, closing above $3.80 on the daily charts (see the chart below).  No doubt colder weather is part of the reason.  But a longer-term review of natural gas pricing correlated with housing (and its recovery) suggests further potential upside despite the whims of the weather forecast.

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In the chart below, we portray Natural Gas prices (candlestick line), the Dow Jones US Home Construction Index (ITB, the purple line) and Chesapeake Energy, a major natural gas supplier (pink line).  This chart is a monthly view to provide a long-term (20-years) perspective on the relationship of these three indicators (the ITB stretches back only 11 years).

b2ap3_thumbnail_NAtGas-and-Housing.png

Our observations of these relationships are as follows:

Natural Gas prices and housing are fairly well-correlated.  As NG prices increased, so did the housing index (although housing peaked about 3 years before natural gas prices, they appear to be bottoming at about the same time).  This suggests some degree of cause-and effect relationship in that growth in housing construction increases demand (and prices) for natural gas (as most new homes are heated by the commodity).  You will note that the higher low in housing corresponds with a potential floor under NG prices (which may also be forming a higher low as noted in the chart below).

Other factors affecting Natural Gas include production (the major reason for prices to have fallen so low has been significant increase in inventories), and the relative cost of oil.  Cold weather should drive stockpiles lower, and exports as well as production curbs are also expected to help support NG prices.  A sustainable housing turnaround should also be supportive of a bottoming in NG prices.

There is a fairly strong correlation between NG prices and Chesapeake Energy, as one would expect. Should investors want to explore the natural gas industry further, below is a table of relative performance data of Chesapeake Energy and its major competitors.

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Natural Gas prices have been known for their "head fakes" in the past, with various failed breakouts over the course of the 20-year horizon.  Nonetheless, we want to be vigilant of a potential sustained move in prices and aware of opportunities to diversify our portfolios with this commodity or the energy sector in general.

Click here to for additional opportunities and updates to our TrendFlex stock market trend signals.

- Baseline analytics

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The S&P 500 hit a new high this week, gaining 1.6%.  Reviewing the Baseline Analytics Trend and Sentiment chart published in our public charts on Stockcharts.com, most technical indicators for this major index (and the market in general) are lined up to support the uptrend.

Note that in the chart below, the S& P 500 broke above an upper channel trendline in October (green arrow) and appears to have set the 1750 level as intermediate-term support.  The ascent since mid-November was accompanied by improving RSI (which does not yet appear overbought), even though the chart pattern looks tired and nimble at its new high (a 1% decline in the S&P 500 would be welcome at this juncture)!

click for larger image

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KST (Martin Pring’s “Known Sure Thing” remains bullish, however a little momentum shift is seen  with the blue line cross below the red line.  A more material concern for bulls is the shift toward complacency with VIX and the Put/Call ratio (seen at the bottom of the chart).  You will note the red and green horizontal lines on the Put/Call chart, denoting extreme readings where short-term trend changes have historically occurred.

When markets move to new highs, it behooves us to extend the timeframe in technical analysis, and the chart below shows the S&P 500 on a monthly basis.  The monthly chart of the S&P 500 expresses the bullish secular (long-term) trend that has transpired since the bottom in 2009, with volume activity lagging the strength of the price uptrend.

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The final chart below is a depiction of market breadth and internal strength.  After a bout of weakness in October and early November, Advances vs. Declines and New Highs vs. New Lows have once again moved toward new highs.   The one concerning development expressed in this chart is the behavior of the Summation Index (NYSI).  As noted in past blogs, the Summation Index is a useful momentum tool that tends to define the “400” level as the Bull vs. Bear dividing line.  Although the index closed at 393 on Friday, it appears to want to resume its uptrend and may simply be working out the remnants of the weak momentum experienced in the late October-early November market.

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So what does this all mean?  Although the trend remains supportive of long positions, selective longs (i.e. value and dividend plays) and cost-averaging into equity mutual funds (partial positions rather than all-out bullish bets) feels like a prudent strategy at this juncture.

 

Learn more about Baseline Analytics TrendFlex and our TrendFlex signals.

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At any time, the health of the market trend can be characterized by changing relationships between various sectors of the market (i.e. small caps versus large caps) as well as inter-market behavior (i.e. gold versus equities).  One of the sector relationships followed by Baseline Analytics is the relative performance of small cap vs. large cap equities, as well as growth vs. value equities.  The current state of these relationships suggests that the market uptrend may be feeling a bit tired.

The chart below depicts a ratio between small cap stock performance and large caps.  The darker (red/black) line is the ratio, while the pink like is the S&P 500.

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Note that the strongest performance in the S&P 500 tends to be accompanied by a rising small cap vs. large cap ratio.  A rising ratio suggests increased tolerance toward risk and, at extremes, tends to represent excessive bullishness.  A peaking of this ratio, although not necessarily negative for stocks in general, tends to introduce a more defensive market posture as larger, dividend-paying stocks are favored.  The small cap/large cap ratio appears to be topping (note the resistance as denoted by the blue line) while its relative strength index (RSI at the top of the chart) has been on a slight downtrend.  This would suggest an increased preference for more defensive, large cap issues.

We can see a similar peaking activity in growth vs. value stocks.  On the chart below, the RSI of growth vs. value became quite overbought as RSI has recently fallen below 70. Note the red-boxed areas where value outperformed growth. This is also depicted where the ratio has fallen below its 50-week moving average (the smooth blue line). This condition tended to correspond with a sideways or correcting S&P 500 (see the lower portion of the chart below).

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You will note that the relationships depicted in both charts are not perfect, and there are timeframes whereby the expected results do not pan out.  However, Baseline Analytics relies on signals and warning signs to assess the risk of the current market trend changing.  The small cap/large cap ratio and the growth/value ratio are only a small part of the arsenal of technical tools that can be used to assess market risk and manage investment portfolios wisely.

- Baseline Analytics

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The S&P 500 climbed 0.9% this week to an all-time high.  In retrospect, when indices hit a new high, Murphy’s Law seems to kick in and toss in a market correction when we least expect it.  There is no doubt this rally has legs and looks like a “storybook” uptrend (a steady climb with occasional, orderly pullbacks).  See the chart below:

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Although we are not big fans of wave theory, we can’t help but to notice the gaps at recent market peaks vs. trendline support as seen by the green lines in the chart above.  Other metrics we follow (KST, RSI) are firmly bullish.   Sentiment is a bit complacent (more complacency tends to suggest an overbought market) as noted by VIX and the CBOE Put/Call ratio, but is not at a complacency extreme.

We have written here in the past about the Summation Index, a momentum indicator and part of the TrendFlex Score, which recently marched into bullish territory.  The chart below includes the summation index as well as market breadth (advances vs. declines, new highs vs. new lows), all with positive readings.

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When the daily charts depict a trend as strong as this one, it behooves us to look at weekly and even monthly charts.  Below is the monthly chart of the S&P 500.  Note the breakout above long-term resistance to a new high.  One could argue that a new secular bull trend has begun, and we suspect there are market technicians drawing monthly price targets based on Fibonacci projections.

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Considering this breakout, we may indeed be in store for a long-term rise (with its normal pullbacks). Volume has clearly been in a downtrend.  Part of this is due to fewer shares (buybacks, companies going private).  But it could also suggest lack of widespread participation of retail investors (especially those burned in the 2008-2009 market rout).  If so, as retail investors join in, look for more gains and a reinforcement of the bullish trend.

Best to your trading and investing!

Baseline Analytics

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