Canada: TSX 60 resistance holds

Canada’s TSX 60 continues to test resistance at 820. After two false breakouts, follow-through above 830 would confirm, signaling an advance to 850*. Divergence on 13-week Twiggs Money Flow, however, warns of continued selling pressure. Reversal below 810 remains less likely, but would warn of a (bull trap) correction to 770.

TSX 60

* Target calculation: 810 + ( 810 – 770 ) = 850

TSX 60 VIX remains low, at 10. Typical of a strong bull market.

TSX 60 VIX

Market sell-off despite improved job numbers

The market experienced a strong sell-off Friday, despite signs that the Winter slowdown in job creation is over. Nelson Schwartz at the New York Times writes:

The latest numbers are likely to be revised significantly as more information flows into the Bureau of Labor Statistics. Even so, they suggest that the economy is not achieving what economists call escape velocity, something that policy makers have long sought. Neither is it falling into the rut some pessimists feared was developing early in 2014.

The S&P 500 retreated below its latest support level of 1880. Follow-through below 1840 would signal a correction, while respect of support would suggest an advance to 1950*. Bearish divergence on 21-day Twiggs Money Flow continues to warn of medium-term selling pressure and reversal below zero would strengthen the signal. An early correction (without a decent advance above the January high) would be a bearish sign, indicating that long-term sellers outnumber buyers.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) at 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 indicates long-term selling pressure, with a sharp fall following bearish divergence on 13-week Twiggs Money Flow. Breach of the (secondary) rising trendline and support at 3550 warns of a correction to primary support at 3400. Recovery above 3650 is unlikely, but would suggest a bear trap.

Nasdaq 100

* Target calculation: 3750 + ( 3750 – 3550 ) = 3950

The primary trend remains upward and none of our market filters indicate signs of stress.

ASX more tentative

The ASX 200 rally appears more tentative than North American markets. Expect strong resistance at 5450/5460. 21-Day Twiggs Money Flow holding above zero, however, indicates a healthy long-term trend. Breakout above 5450/5460 would signal an advance to 5800*. Breach of the rising trendline, however, seems as likely, and would warn of another test of support at 5300 and possibly a stronger correction.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

ASX 200 VIX below 12 indicates low risk typical of a bull market.

ASX 200

Canada: TSX 60 advances

Canada’s TSX 60 broke through resistance at 820, signaling an advance to 850*. Sharp divergence on 13-week Twiggs Money Flow is testimony to the level of selling encountered at the resistance level. Completion of a trough high above zero would signal a strong up-trend. Reversal below 810 is unlikely, but would warn of a bull trap.

TSX 60

* Target calculation: 810 + ( 810 – 770 ) = 850

TSX 60 VIX is exceptionally low at 9, typical of a strong bull market.

TSX 60 VIX

S&P 500 breakout

Narrow consolidation on the S&P 500 weekly chart and completion of a shallow correction on the Nasdaq 100 would suggest a strong up-trend.

The S&P 500 broke through resistance at 1875/1880, signaling an advance to 1950*. Layering above 1850 throughout March reflected strong selling, with bearish divergence on 21-day Twiggs Money Flow warning of medium-term selling pressure, but upward breakout indicates that buyers have prevailed. Reversal below 1875 is unlikely, but would warn of a bull trap — as would a peak below the descending trendline on Twiggs Money Flow.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) at 13 indicates low risk typical of a bull market.

VIX Index

The Nasdaq 100 found support at 3550 and the (secondary) ascending trendline. Recovery above 3700 would confirm another advance, but continued bearish divergence on 13-week Twiggs Money Flow would warn of persistent selling pressure.

Nasdaq 100

* Target calculation: 3750 + ( 3750 – 3550 ) = 3950

S&P 500 continues to rally

The S&P 500 rally is testing resistance at 1875/1880. Volumes are light, but an attempted breakout above 1880 should reveal any patient sellers lying in wait. Successful breakout would signal an advance to 1950*, but bearish divergence on 21-day Twiggs Money Flow continues to warn of medium-term selling pressure.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

ASX rally but weak close

The ASX 200 continues to rally, but today’s weak close indicates resistance. 21-Day Twiggs Money Flow holding above zero, however, indicates longer term buying pressure. Breakout above 5450/5460 would signal an advance to 5800*. Weakness from China or the US, however, could drive the ASX lower. Failure of support at 5290/5300 would signal a stronger correction and possible test of primary support at 5050.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

ASX 200 VIX near 12, however, indicates low risk typical of a bull market.

ASX 200

China: Shanghai falters

China’s Shanghai Composite Index encountered resistance at 2100 last week. Reversal below long-term support at 1950 would signal a decline to the 2009 low of 1650*. 13-week Twiggs Money Flow below zero indicates selling pressure. Recovery above 2180 is unlikely, but would complete a double-bottom reversal.

Shanghai Composite Index

* Target calculation: 1950 – ( 2250 – 1950 ) = 1650

DAX bounces back

The DAX rallied strongly off primary support at 9000. Recovery of 13-week Twiggs Money Flow above the descending trendline would suggest that medium-term selling pressure is easing. Breakout above 9800 would signal an advance to 10600. Breach of primary support is unlikely at present.

DAX

DAX Volatility retreated below 20, indicating low risk typical of a bull market.

DAX

S&P 500 not yet out of the woods

The S&P 500 rallied off support at 1840/1850 but a weak close warns of further resistance. Bearish divergence on 21-day Twiggs Money Flow (not shown) indicates medium-term selling pressure. I have highlighted daily Volume that is more than 1 standard deviation outside the 50-day moving average on the graph below. The latest red bar showed strong resistance at triple-witching hour, but the last two rallies on low volume also suggest a lack of commitment from buyers. Reversal below 1840 would signal a correction. Breakout above 1880 is less likely, but would signal an advance to 1950*.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

CBOE Volatility Index (VIX) below 15, however, continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 below 3600 indicates a correction. Penetration of the (secondary) rising trendline would strengthen the signal. Sharply falling 21-day Twiggs Money Flow, following bearish divergence, warns of strong selling pressure and a test of primary support at 3400/3420. Recovery above 3650 is unlikely, but would indicate another advance.

Nasdaq 100

* Target calculation: 3600 + ( 3600 – 3400 ) = 3800

Bellwether Transport stock Fedex is headed for another test of primary support at $128/$130. Reversal of 13-week Twiggs Money Flow below zero warns of strong selling pressure and a primary down-trend. Failure of primary support would confirm, suggesting a broad economic slow-down.

Fedex

Is the S&P 500 overvalued?

The daily press appears convinced the S&P 500 is overvalued and due for a crash. Yet the macro-economic and volatility filters that we use at Porter Capital and Research & Investment — to identify market risk so that we can move to cash when risks are elevated — show no signs of stress. So I have been delving into some of the aggregate index data, kindly provided by Standard and Poors, to see whether some of their arguments hold water.

The Price-Earnings ratio for the S&P 500 itself is not excessive when compared to the last decade.

S&P 500 Price-Earnings ratio

The bears argue, however, that earnings are unsustainable. One reason advanced for this is that earnings growth has outstripped sales, with corporations focusing on the bottom line rather than business growth.

Faced with weak domestic demand, large US corporates have actively sought to manage their expenses so as to meet and exceed the market’s expectations. Combined with the unwinding of provisions taken in the GFC, cost management has allowed US corporates to achieve a 124% increase in 12-month trailing earnings off the back of a 25% increase in 12-month trailing sales since October 2009.
~ Elliott Clarke, Westpac

That may be so, but any profit increase would look massive if compared to earnings in 2009. When we plot earnings against sales (per share), it tells a different story. Earnings as a percentage of sales is in the same band (7% – 9%) as 2003 to 2006. A rise above 9% would suggest that earnings may not be sustainable, but not if they continue in their current range.

S&P 500 Earnings/Sales

The second reason advanced is that business investment is falling. Westpac put up a chart that shows US equipment investment growth is close to zero. But we also need to consider that accelerated tax write-offs led to a surge in investment in 2009/2010. The accelerated write-offs expired, but the level of investment merely stopped growing and has not fallen as I had expected.

Westpac: US Equipment Investment Poor

Private (non-residential) fixed investment as a whole is rising as a percentage of GDP, not falling.

S&P 500 Price to Book Value

Lastly, when we compare the S&P 500 to underlying net asset value per share, it shows how frothy the market was before the Dotcom crash, with the index trading at 5 times book value. That kind of premium is clearly unsustainable without double-digit GDP growth, which was never going to happen. But the current ratio of below 2.50 is modest compared to the past decade and quite sustainable.

S&P 500 Price to Book Value

I am not saying that everything is rosy — it never is — but if sales and earnings continue to grow apace, and with private fixed investment rising, the current price-earnings ratio does not look excessive.