S&P 500 volatility

The S&P 500 again respected primary support at 2550. Twiggs Volatility Index is retreating but a trough that forms above 1.0% would warn that market risk remains elevated.

S&P 500 and Volatility

After a brief flicker of fear, when volatility spiked above 30, the VIX is hovering around 20 suggesting uncertainty. The market is undecided whether to take this Twitter War seriously.

The S&P 500 is again testing primary support around 2550 but Twiggs Money Flow remains comfortably above zero, indicating long-term buying support.

Twiggs Volatility (21-day) is still in the amber zone, between 1% and 2%. A rise above 2% remains unlikely but another trough above 1% is my primary concern and would convince me to reduce equity exposure to 50% (of portfolio value).

J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to your sleeping point.” ~ Burton Malkiel

East to West: Trade tariff fears

Plenty of red ink as Trump’s threat of trade tariffs spooked global markets, with fears of a global trade war.

China’s Shanghai Composite Index is headed for a test of primary support between 3000 and 3060 with a falling Trend Index warning of strong selling pressure.

South Korean investors are more spooked by Trump’s trade tariffs than Kim Jong-un’s nukes. The Seoul Composite Index retreated below support at 2450, while bearish divergence on the Trend Index warns of strong selling pressure. Breach of 2350 would signal a primary down-trend. Breach of 2300 would confirm.

Japan’s Nikkei 225 Index is falling hard. Breach of support at 21000 offers a target of the September 2017 low at 19250.

India’s NSE Nifty Index is testing primary support at 10000.

Europe is in the same basket, with Dow Jones Euro Stoxx 600 testing primary support at 365.

The Footsie broke primary support at 7100 to signal a primary down-trend.

In the US, the Nasdaq 100 is likely to test primary support at 6200 but this looks like a secondary correction, with the Trend Index still positive.

The S&P 500 is similarly headed for a test of primary support between 2500 and 2550. Breach would signal a primary down-trend but Twiggs Volatility Index is currently in the amber zone, between 1% and 2%, suggesting that the correction is secondary in nature. For more on the Volatility Index, see Market Volatility and the S&P 500.

Canada’s TSX 60 also signals strong selling pressure. Breach of 880 would signal a primary down-trend.

As the market flees from risk, two of the traditional safe havens — the Dollar and the Japanese Yen — are under threat from a trade war. Which leaves Gold as the last man standing.

East to West: S&P 500 strengthens

Japan’s Nikkei 225 Index continues to test its rising trendline and support at 21000, with resistance forming at 22000. A Trend Index peak below zero warns of medium-term selling pressure.

India’s NSE Nifty Index has had a strong bull run, with Trend Index troughs above zero. But now the Index is heading for a test of primary support at 10000, warning of slowing momentum.

South Korea’s Seoul Composite Index remains bearish after breaking support at 2450.

Likewise China’s Shanghai Composite Index found resistance at 3300.

Hong Kong’s Hang Seng Index is the pick of the East, with a long run of Trend Index troughs above zero. Breakout above 32000 would signal a fresh advance.

In Europe, DJ Euro Stoxx 600 is struggling with resistance at 380/385 while bearish divergence on the Trend Index warns of selling pressure.

The Footsie is similarly headed for another test of resistance at 7300 but bearish divergence on the Trend Index warns of selling pressure.

In the US, the S&P 500 is testing medium-term resistance at 2800. The difference is that a Twiggs Money Flow trough at zero warns of buying pressure. Breakout above 2800 is likely, bringing the long-term target of 3000* within reach.

* Target calculation: log scale 750 x 2 = 1500; 1500 x 2 = 3000

Canada’s TSX 60 is recovering. Breakout above 940 would suggest another advance.

Patience is required to weather the volatility of the next few weeks without making short-term decisions.

Next major target for the Dow and S&P 500

The next major target for the Dow Jones Industrial Average is 28000*.

Target 14000 x 2 = 28000

And 3000* for the S&P 500.

Target 1500 x 2 = 3000

Reasoning: The Dow top of 14000 in 2007 was double its 2002 low of 7000 and roughly double its 2009 low of 6500, allowing for some GFC overshoot. The S&P high was similarly close to 1500 in 2007, compared to its 2002 low of 768 and a 2009 low of 666. Double the 2007 high of 14000 would give a target of 28000 and double 1500 for the S&P 500 gives a target of 3000.

East to West: Global correction

There are clear signs that global stock markets are headed for a correction.

South Korea’s Seoul Composite Index followed a false break above its November high of 2560 with a sharp reversal. Bearish divergence on the Trend Index warns of selling pressure.

Japan’s Nikkei 225 Index remains bullish but shows strong resistance at 24000.

A large engulfing candle on China’s Shanghai Composite Index warns of a correction. Breach of support at 3400 would test the primary level at 3250.

India’s NSE Nifty Index also displays an engulfing candle at resistance of 11000*, warning of a correction. Trend Index troughs above zero, however, continue to signal long-term buying pressure.

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the DJ Euro Stoxx 600 penetrated its rising trendline at 390, warning of a loss of momentum. Strong bearish divergence on the Trend Index warns of a primary down-trend. Reversal below 380 would strengthen the signal.

The Footsie retreated below its new support level at 7600. Reversal below 7300 would signal a primary down-trend.

In the US, the daily chart for the S&P 500 reveals market skittishness about higher inflation and interest rates.

While Canada’s TSX 60 ended its 4-month rally with an emphatic red candle breaking support at 940. Expect a test of the primary level at 880.

This looks like a global correction but it would be premature to call this a market top.

Black Monday, October 1987

What caused the Black Monday crash of 1987? Analysts are often unable to identify a single trigger or smoking gun that caused the crash.

Sniper points to a sharp run-up in short-term interest rates in the 3 months prior to the crash.

Valuations were also at extreme readings, with PEmax (price-earnings based on the highest earnings to-date) near 20, close to its Black Friday high from the crash of 1929.

Often overlooked is the fact that the S&P 500 was testing resistance at its previous highs between 700 and 750 from the 1960s and 70s (chart from macrotrends).

A combination of these three factors may have been sufficient to tip the market into a dramatic reversal.

Are we facing a similar threat today?

Short-term rates are rising but at 40 basis points over the last 4 months, compared to 170 bp in 1987, there is not much cause for concern.

PEmax, however, is now at a precipitous 26.8, second only to the Dotcom bubble of 1999/2000.

While the index is in blue sky territory, with no resistance in sight, there is an important psychological barrier ahead at 3000.

Conclusion: This does not look like a repetition of 1987. But investors who ignore the extreme valuation warning may be surprised at how fast the market can reverse (as in 1987) from such extremes.

East to West: Global stocks rally

In Asia, South Korea’s Seoul Composite Index found support at 2450 but be careful of a bearish divergence forming on Twiggs Trend Index. Reversal below zero would warn of a test of primary support at 2300.

Japan’s Nikkei 225 Index remains bullish. Trend Index troughs high above zero indicate strong buying pressure.

China’s Shanghai Composite Index found support at 3250. Breakout above 3450 would signal a primary advance.

India’s NSE Nifty Index broke resistance at 10500, signaling a fresh advance. Trend Index troughs above zero signal buying pressure. The immediate target is 11000*.

Target 10500 + ( 10500 – 10000 ) = 11000

In Europe, the Footsie is advancing strongly after breaking through resistance at its June high of 7600. Trend Index is still declining but recovery above the declining trendline indicates buyers are taking control.

Europe, represented by the DJ Euro Stoxx 600, remains weak. A declining Trend Index warns of selling pressure despite breakout above resistance at 396.

Moving to the US, the S&P 500 chart says it all. Investors continue to shrug off concerns about high valuations. The rising Trend Index, high above zero, indicates strong buying pressure. We need a correction fairly soon to prevent an accelerating up-trend leading to a blow-off.

Commodities are also advancing, led by stronger crude oil prices.

It’s about time that the Fed and other central banks took the punch bowl away, before the party really gets out of hand.

East to West: Footsie surprise

The Footsie is testing resistance at its June high of 7600. Trend Index is still declining but recovery above 0.2% would indicate buyers are taking control.

Europe is weaker, with tall shadows on weekly Dow Jones Euro Stoxx 600 candles and a declining Trend Index warning of selling pressure.

In Asia, South Korea’s Seoul Composite Index broke support at 2450, confirming the bearish divergence on Twiggs Trend Index. Expect a correction to test primary support at 2300.

Japan’s Nikkei 225 Index remains bullish, consolidating in a narrow band below resistance at 23000. Trend Index troughs high above zero indicate strong buying pressure.

China’s Shanghai Composite Index found short-term support at 3250. Bearish divergence on the Trend Index warns of selling pressure.

India’s NSE Nifty Index is testing resistance at 10500 after a mild correction to 10,000. Twiggs Trend Index respecting zero signals strong buying pressure. Breakout above 10500 is likely and would indicate another primary advance with an immediate target of 11000*.

Target 10500 + ( 10500 – 10000 ) = 11000

Moving to the US, the S&P 500 continues to shrug off concerns over high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

Bellwether transport stock Fedex has advanced to 250, signaling strong economic activity, a bullish sign for the entire economy.

East to West: Asia, Europe weaken but US powers on

Starting with Asia, South Korea’s Seoul Composite Index continues to test support at 2450. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary in nature. Breach of the rising trendline would warn that the primary up-trend is losing momentum.

Japan’s Nikkei 225 Index is consolidating between 22000 and 23000. A Trend Index trough high above zero indicates strong buying pressure.

China’s Shanghai Composite Index is undergoing a correction that should find support at 3200. Bearish divergence on the Trend Index, and a cross below zero for the first time since May 2016, warn of continued selling pressure.

India’s NSE Nifty Index continues to test support at 10000 after a weak correction. Twiggs Trend Index respecting zero signals strong buying pressure. Recovery above 10500 is likely and would indicate another primary advance.

Target 10500 + ( 10500 – 10000 ) = 11000

Europe is weaker despite strong manufacturing signals. Dow Jones Euro Stoxx 50 found support at 3520 but the Trend Index is declining, warning of selling pressure. Breach of 3520 is likely and would warn of a test of primary support at 3400.

The Footsie remains volatile, with the index headed for another test of stubborn resistance at 7600. But Trend Index is declining and continues to warn of selling pressure.

Moving to the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

The Nasdaq 100 also continues a strong bull market, with the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook) all recording solid gains.

East to West: Europe steadies, S&P powers on

Dow Jones Euro Stoxx 600 found support at 380 and is now headed for a test of recent highs at 395. Bearish divergence on the Trend Index continues to warn of selling pressure but recovery above the declining trendline (on the Trend Index) would indicate that pressure has eased. Breakout above 395 would signal another primary advance, with a target of 425*.

Target 395 + ( 395 – 365 ) = 425

Conclusion of phase I of Brexit negotiations helped the Footsie find support at 7300. Trend Index continues to warn of selling pressure. Breach of 7200 is unlikely at present but would signal a primary down-trend. Breakout above 7600 would signal a primary advance, but is also unlikely. Expect further consolidation.

In Asia, South Korea’s Seoul Composite Index is undergoing a correction but seems to have found support at 2450. Respect of the rising trendline would confirm the primary up-trend.

Japan’s Nikkei 225 Index found solid support at 22000, with long tails signaling buyer enthusiasm. The trend index trough high above zero indicates strong buying pressure.

China’s Shanghai Composite Index is undergoing a correction. A long tail suggests support at 3250. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature.

India’s NSE Nifty Index found support at 10000 after a weak correction. Recovery above 10500 is likely and would warn of another primary advance.

Target 10500 + ( 10500 – 10000 ) = 11000

In the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index indicates buying pressure.

The Nasdaq 100 continues its strong bull market, powered by the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook). Corrections are mild and of short duration, typical of the latter stages of a bull market.

East to West: European tremors

Complacency in Europe has been shaken, with Dow Jones Euro Stoxx 600 testing medium-term support at 380. Bearish divergence on the Trend Index, with intervening troughs below zero, warns of strong selling pressure. Breach of 380 is likely and would indicate a test of primary support at 366.

The UK’s Footsie broke medium-term support at 7350 and is headed for a test of primary support at 7200. Bearish divergence on the Trend Index again warns of strong selling pressure. Breach of 7200 would signal reversal to a primary down-trend.

Asia was also affected, with Japan’s Nikkei 225 Index the only major index to end the week on a positive note, after finding solid support at 22000.

South Korea’s Seoul Composite Index below 2500 warns of a correction, though nothing more.

China’s Shanghai Composite Index broke support at 3340 to warn of a correction. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature.

India’s NSE Nifty Index is still bullish but reversal below 10000 would warn of a strong correction.

Target 10000 + ( 10000 – 9000 ) = 11000

The S&P 500 is as bear-proof as you can get in the current climate, with the trend index reflecting strong buying pressure.

A bear market in Europe may not be sufficient to dent the animal spirits driving US markets but would certainly influence more cautious investors to change to a risk-off stance and shorten the time left for more adventurous souls.

S&P 500 reaches 2600

The S&P 500 reached its medium-term target of 2600. This is stage 3 of a bull market; a short correction or consolidation followed by further gains is likely.

A sharp correction during stage 3 often warns of an impending top but is unlikely at this stage.

Bellwether transport stock Fedex found short-term support after a 3-week correction. Bearish divergence on Twiggs Money Flow so far suggests secondary selling pressure and not an alteration in the primary trend. Recovery above 220 would respect the rising trendline, indicating a healthy up-trend — a bullish sign for the broader economy.

Elliot Clarke at Westpac raises concerns over low investment growth:

…the FOMC clearly sought to cement market expectations of a rate hike in December in their October/November meeting minutes. The economy was seen as continuing to enjoy above-trend growth thanks to robust gains for household consumption. Built on income gains as well as strong confidence, this trend is expected to persist. Inevitably though, an economy cannot be built on consumption alone. Investment is necessary, and this is an area of the growth outlook where we harbor doubts. Should, as we expect, investment growth remain tepid, then productivity and income growth will be held back. This is a key reason why we believe that this rate hike cycle is likely to top out around 1.875%, after the December decision and two further hikes in 2018.

I think he is right that the Fed will remain cautious about raising interest rates until investment growth strengthens. Low inflation is partly caused by low investment, but this is likely to fade as new job creation strengthens.

East to West: Still mostly bullish apart from EU & China

South Korea’s Seoul Composite Index continues in a strong up-trend despite the nuclear threat from its northern neighbor. The latest retracement appears mild and likely to test the rising trendline around 2450.

Japan’s Nikkei 225 Index also retraced but the long tail on this week’s candle indicates solid support at 22000.

Hong Kong’s Hang Seng continues in a strong bull trend, with the Trend Index respecting the zero line.

China’s Shanghai Composite Index is consolidating above support at 3340. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature, warning of no more than a correction.

India’s NSE Nifty Index is also in a bull trend, with the Trend Index respecting zero. Respect of the rising trendline is likely and would signal a fresh advance.

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 shows a stronger correction, with bearish divergence on the Trend Index warning of selling pressure.

The UK’s Footsie displays a stronger bearish divergence and the index is likely to test primary support at 7200.

The S&P 500 displays a strong bull trend but penetration of the rising trendline is likely to lead to a correction to 2500.

East to West: S&P 500 leads the bulls

Let us start in the East, with the canary in the coal mine. The Seoul Composite Index completely ignored the nuclear threat from its northern neighbor, surging in a strong primary up-trend.

Japan’s Nikkei 225 Index likewise ignored the threat of a nuclear DPRK, advancing strongly since breaking resistance at 21000.

China’s Shanghai Composite Index is also advancing, albeit at a more modest pace.

India’s NSE Nifty Index displays strong buying pressure, with Twiggs Trend Index oscillating above the zero line.

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 broke resistance at 395 and is likely to test its 2015 high.

Despite BREXIT fears, the UK’s Footsie has recovered to test resistance at 7600. Breakout would offer a target of 8000*.

* Target calculation: 7600 + ( 7600 – 7200 ) = 8000

The S&P 500 leads the pack. With Trend Index troughs above zero and barely a correction in sight, the index displays exceptional buying pressure. At some point the Fed will take the punch bowl away but the party is likely to continue in full swing until then.

GDP slow growth as stocks power on

GDP growth for the third quarter is out and I can see little to indicate that growth is improving despite tweets to the contrary from the White House.

Nominal GDP is growing at just over 4 percent per year, continuing the narrow band established since late 2010. Growth closely follows our monthly estimate: total weekly hours worked multiplied by the average wage rate.

Real GDP, beset by problems in accurately measuring inflation, grew by 2.3 percent over the last 4 quarters. But growth remains relatively soft and our latest monthly estimate (growth in total weekly hours worked) slowed to 1.2 percent in September.

The S&P 500 powers on, climbing to a new high of 2581, while rising Twiggs Money Flow signals buying pressure.

Retracement of the Nasdaq 100 successfully tested its new support level at 6000, confirming a fresh advance.

Bellwether transport stock Fedex is advancing strongly while a Twiggs Money Flow trough above zero suggests strong buying pressure. A bullish sign for broad economic activity.

Stage 3 of the bull market continues.

It was never my thinking that made big money for me. It was my sitting…Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

~ Jesse Livermore

S&P 500 makes new high

The S&P 500 made a new high on Friday, while Twiggs Money Flow rose above its descending trendline, signaling that selling pressure has eased. Expect retracement to test the new support level but respect is likely and would confirm a target of 2600* for the advance.

* Target calculation: 2500 + ( 2500 – 2400 ) = 2600

The Nasdaq 100 has been dragging its feet a bit, still testing resistance at 6000. But Technology stocks are likely to follow the main index, with breakout above 6000 signaling a fresh advance.

Tech giants Amazon and Apple are partly responsible for Nasdaq tardiness, with Amazon retreating from its watershed breakout above $1000. Further decline would be cause for concern — when leading stocks no longer lead — but recovery above $1000 is more likely and would be a bullish sign for the broader market.

Fedex bullish but Nasdaq displays selling pressure

Bellwether transport stock Fedex is testing resistance at 220. A higher trough on Twiggs Money Flow indicates buying pressure. Breakout above 220 is likely and would signal a primary advance. This is a bullish sign for broad economic activity.

The S&P 500 is retracing to test its new support level at 2480/2500. Declining Twiggs Money Flow warns of medium-term selling pressure. Respect of support would confirm a fresh advance, offering an immediate target of 2600. But breach of support is as likely and would warn of a correction to test the rising trendline around 2420.

The Nasdaq 100 also displays medium-term selling pressure, but with a steeper fall on Twiggs Money Flow. Having failed to break resistance at 6000, a correction is likely, with a target of 5750.