Dow and S&P 500 remain bullish

Dow Jones Industrial Average found support at 16950, with long tails indicating short-term buying pressure. Recovery above 17075 would indicate a fresh advance; above 17150 would confirm. A close below 16950 is less likely, but would warn of a correction to 16500. The decline of 21-day Twiggs Money Flow indicates mild selling pressure typical of a consolidation.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 also displays a long tail indicative of buying pressure. Recovery above 1985 would indicate another attempt at 2000. Further consolidation below the 2000 resistance level is likely. Reversal below 1950, however, would warn of a correction to 1900.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

The CBOE Volatility Index (VIX), trading at low levels last seen in 2005/2006, is typical of a bull market.

VIX Index

Consolidation expected

  • S&P 500 retreats below 1985.
  • VIX continues to indicate a bull market.
  • ASX 200 breaks resistance.

The S&P 500 retreated below its new support level at 1985, indicating a false break. Consolidation between 1950 and 1985 is likely — below the psychological barrier at 2000. Respect of support at 1950 would confirm. Declining 21-Day Twiggs Money Flow continues to signal mild, medium-term selling pressure. Further resistance is likely at the 2000 level — and at 4000 on the Nasdaq 100. Breakout would offer a long-term target of 2250*.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

CBOE Volatility Index (VIX) recovered to above 12. Low levels continue to indicate a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 is consolidating above medium-term support at 3150. Breach would signal a test of the primary level at 3000. Descent of 13-week Twiggs Money Flow warns of modest long-term selling pressure. Recovery above 3250 is less likely at present, but would suggest a target of 3450*.

Dow Jones Euro Stoxx 50

* Target calculation: 3300 + ( 3300 – 3150 ) = 3450

China’s Shanghai Composite Index broke resistance at 2100 and is headed for a test of 2150. Breakout would suggest a primary up-trend, but I would wait for confirmation at 2250. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 2050 is unlikely at present but would warn of another test of primary support at 1990/2000.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 broke clear of resistance at 5540/5560 on strong results from BHP. Expect retracement to test the new support level, but Friday’s long tail and rising 21-day Twiggs Money Flow indicate short-term buying pressure. Respect of support would indicate a long-term advance to 5800*. Reversal below 5540 is unlikely, but would warn of a correction.

ASX 200

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

S&P 500 pregnant pause

  • S&P 500 advance to 2000 likely.
  • VIX continues to indicate a bull market.
  • ASX 200 finds support.

A Harami candlestick formation on the S&P 500 suggests continuation of the up-trend. Harami means ‘pregnant’ in Japanese. Expect a test of the psychological barrier at 2000. 21-Day Twiggs Money Flow recovery above the descending trendline would confirm that short-term selling pressure has ended. Further resistance is likely at the 2000 level — and at 4000 on the Nasdaq 100. Short retracement or narrow consolidation would suggest another advance. Reversal below 1950 is unlikely, but would warn of a correction to 1900 and the rising trendline.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

CBOE Volatility Index (VIX) spiked to 15 on news of the Israeli incursion into Gaza and the downing of Malaysian airlines flight MH17 over Eastern Ukraine, but soon retreated to 12 and remains indicative of a bull market.

S&P 500 VIX

The ASX 200 retreated below support at 5525/5530 on the hourly chart, but long tails at 5500 indicate buying pressure and another attempt at 5550 is likely. An open above 5530 would confirm. Breakout above 5550 would suggest a long-term advance to 5800*. Reversal below 5450 is unlikely, but would signal another test of 5350.

ASX 200

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

Market bullish despite Europe bank worries

  • S&P 500 advance to 2000 likely.
  • Europe warns of correction.
  • China further consolidation expected.
  • ASX 200 hesitant.

US market sentiment remains bullish, while Europe hesitates on Portuguese banking worries. As Shane Oliver observed: “Could there be a correction? Yes. Is it start of new bear mkt? Unlikely. Bull mkts end with euphoria, not lots of caution like there is now…”

The S&P 500 found support between 1950 and 1960, as evidenced by long tails on the last two candles, and is likely to advance to the psychological barrier of 2000. 21-Day Twiggs Money Flow recovery above the descending trendline would confirm that short-term selling pressure has ended. Expect retracement at the 2000 level, but short duration or narrow consolidation would suggest another advance. Reversal below 1950 is unlikely, but would warn of a correction to 1900 and the rising trendline.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

CBOE Volatility Index (VIX) remains at low levels indicative of a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 broke support at 3200/3230, warning of a correction to the primary trendline at 3000. Solvency doubts over struggling Portuguese Banco Espirito Santo have roiled European markets. Descent of 21-Day Twiggs Money Flow below zero indicates medium-term selling pressure. Recovery above 3230 is unlikely at present.

Dow Jones Euro Stoxx 50

* Target calculation: 3150 + ( 3150 – 3000 ) = 3300

China’s Shanghai Composite Index displays strong medium-term buying pressure, with 21-day Twiggs Money Flow troughs above zero. Follow-through above 2060 would indicate another test of 2090. Breach of primary support is unlikely at present, but would signal a decline to 1850*. Further ranging between 2000 and 2150 is expected — in line with a managed “soft landing”.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 found support at 5450 and appears headed for another test of resistance at 5550. 21-Day Twiggs Money Flow oscillating around zero, however, continues to indicate hesitancy. Reversal below 5450 would signal another test of 5350, while breakout above 5550 would suggest a long-term advance to 5800*.

ASX 200

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

What a difference a week makes

Summary:

  • S&P 500 advances toward 2000.
  • China respects primary support.
  • ASX 200 rallies.

Market sentiment shifted significantly to the bull side after some solid employment numbers. There are still concerns about low interest rates across the US and other major economies, but these policies are likely to continue — with corporate earnings remaining buoyant — for the foreseeable future. And as Eddy Elfenbein observed: “…market corrections solely due to valuation are fairly rare. If the market’s dropping, earnings usually are too.”

The S&P 500 is advancing towards the psychological barrier of 2000. Weekly (13-week) Twiggs Money Flow recovered above its descending trendline and Daily (21-day) is trending higher, signaling medium-term buying pressure. Expect retracement at the 2000 level, but short duration or narrow consolidation would indicate continued buying pressure and another advance. Reversal below 1950 is unlikely, but would warn of a correction to the rising trendline.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

Buoyed by Fed monetary policy, the CBOE Volatility Index (VIX) is at extremely low levels, indicative of a bull market.

S&P 500 VIX

The Shanghai Composite Index respected primary support at 1990/2000 and rising Twiggs Money Flow indicates medium-term buying pressure. Follow-through above 2080 would indicate another test of 2150. Further ranging between 2000 and 2150 is expected — in line with a managed “soft landing”. Breach of primary support is unlikely at present, but would signal a decline to 1850*.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 is headed for another test of resistance at 5550 while an up-turn on 13-week Twiggs Money Flow suggests medium-term buying pressure. Twiggs Money Flow has been descending for some time, indicating long-term selling pressure, but failure to breach the zero line suggests buying support and completion of another trough above zero — with a rise above 20% — would confirm the resumption of long-term buying pressure. Breakout above 5550 would offer a long-term target of 5850*. Reversal below support at 5350 is unlikely, but would warn of a down-trend.

ASX 200

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

S&P 500 unfazed

Summary:

  • S&P 500 continues a primary advance.
  • China respects primary support.
  • ASX 200 continues to signal weakness.
  • Momentum investors need to hold positions.

The S&P 500 retraced to test its latest support level at 1950 after a downward GDP revision for the first quarter. Respect indicates medium-term buying pressure — also evidenced by rising 21-day Twiggs Money Flow. Follow-through above 1970 would confirm a test of 2000*. Reversal below 1950 is unlikely, but penetration of the secondary trendline would warn of a correction.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

The CBOE Volatility Index (VIX) remains low, indicative of a bull market.

S&P 500 VIX

The Shanghai Composite Index respected primary support at 1990/2000. 21-Day Twiggs Money Flow oscillating above zero indicates buying support, but this may be due to the managed “soft landing”. What we do know is that a fall below zero would definitely signal selling pressure. Breach of support would signal a decline to 1850*. The primary trend is expected to continue its downward path, but further ranging between 2000 and 2150 is likely. An abrupt fall is a fairly remote possibility.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 made a false break above 5470, but 21-day Twiggs Money Flow below zero warns of medium-term selling pressure. Breach of support remains likely and would indicate a correction to 5300. The long-term trend, however, remains upward. Support at 5300/5400 would offer a great entry point for long-term investors. Recovery above 5470 is unlikely at present, but would signal a test of resistance at 5550.

ASX 200

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

I repeat my warning from last week: Momentum investors should not attempt to time secondary corrections and need to endure the present volatility in order to reach their intended investment goals.

A good week for the S&P 500 but not the ASX

Summary:

  • Good week for US markets.
  • China continues to threaten further down-side.
  • The ASX 200, pulled in opposite directions, is range bound for the present.
  • Momentum strategies require persistence.

The S&P 500 broke through 1950 and is expected to test the next resistance level at 2000*. Rising 21-day Twiggs Money Flow signals medium-term buying pressure. Reversal below 1925 is unlikely at present but would warn of a correction.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

The CBOE Volatility Index (VIX) continues its downward path, indicating low risk typical of a bull market.

S&P 500 VIX

The Shanghai Composite Index rebounded Friday after a tough week and continues to test primary support at 1990/2000. Breach of support would signal a decline to 1850*. 21-Day Twiggs Money Flow oscillating above zero indicates buying support; a fall below zero would suggest selling pressure. The primary trend is expected to continue its downward path, but this is a managed descent and an abrupt fall seems unlikely.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

After a strong surge on Thursday the ASX 200 retreated below 5450 on Friday, suggesting another test of support at 5400. Reversal of 21-day Twiggs Money Flow below zero indicates medium-term selling pressure. Breach of support is likely and would indicate a correction to 5300. Recovery above 5500 is unlikely at present, but the long-term trend remains upward.

ASX 200

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

Resist the urge to avoid discomfort

Momentum stocks have suffered a fair degree of turbulence since April, after a strong first quarter. Investors unfortunately have to endure periods like this, when the market appears hesitant or lacks direction, in much the same the same way as travelers can expect turbulence during an air flight. It is important is to resist the urge to avoid discomfort by exiting positions. Enduring uncomfortable parts of the journey are necessary if you want to reach your intended destination. Our research on both the ASX and S&P 500 has shown that attempting to time secondary movements in the markets does not enhance but erodes performance: the average (re-)entry price is higher than the average exit price after accounting for brokerage.

A basic rule of thumb in investing is that investors need to endure higher volatility in order to achieve higher returns. If your investment time frame is long-term, it is important to focus on the end result and not be overly concerned by weekly fluctuations.

S&P 500: Strong Ichimoku trend

Today we take a look at long-term trend strength in North American markets using a great trend tool, Ichimoku Cloud, with weekly charts. Ichimoku is only available on the latest beta version of Incredible Charts (Help >> Upgrade To Latest Beta Version), but will soon be released with Incredible Charts 7.0.

Ichimoku offers a number of trend signals:

  • The trend is upward when price is above the Cloud (and downward when price is below).
  • A green cloud indicates an up-trend, while a red cloud indicates a down-trend.
  • Long trades are taken when the blue line crosses above the red. In strong trends, blue may hold above red for extended periods.

The S&P 500 encountered resistance and is consolidating below its target of 1950*. The trend above a green cloud is further strengthened by the blue (Tenkan) holding above the red (Kijun) for an extended period. Continuation of the up-trend is likely and breakout above 1950 would signal an advance to 2000.

S&P 500

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

Dow Jones Industrial Average displays a similar strong trend with few blue (Tenkan) dips below the red (Kijun) line. Breakout above resistance at 17000 would signal an advance to 17500*. Reversal below 16500 is unlikely, but would warn of another correction.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The Nasdaq 100 recovery of blue (Tenkan) above the red (Kijun) line offers a fresh entry signal. Resistance at 3800 is unlikely to hold and follow-through would confirm the target of 4000* for the advance. Reversal below 3700 is unlikely, but would warn of another correction.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

Another indication of trend strength is the CBOE Volatility Index (VIX), currently trading at levels last seen in 2005/2006, which indicates low risk typical of a bull market.

VIX Index

S&P 500 advancing towards 2000

The S&P 500 has reached its initial target of 1950*. Steeply rising 21-day Twiggs Money Flow indicates strong medium-term buying pressure. Retracement to test support at 1925 is expected. Respect of 1920 would suggest a strong up-trend and an advance to 2000.

S&P 500

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

CBOE Volatility Index (VIX) below 12 indicates low risk typical of a bull market.

VIX Index

The Nasdaq 100 broke resistance at 3700/3750, signaling an advance to 4000*. Rising 21-day Twiggs Money Flow again indicates strong medium-term buying pressure. Reversal below 3700 is unlikely, but would warn of another correction.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

S&P 500 bullish, Nasdaq tests resistance

After early skittishness over some dud Institute for Supply Management (ISM) data, the S&P 500 recovered lost ground by the close. Expect an advance to 1950*. Rising 21-day Twiggs Money Flow troughs above zero indicate strong medium-term buying pressure. Reversal below 1900 is unlikely, but would warn of a correction.

S&P 500

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

CBOE Volatility Index (VIX) below 12 indicates low risk typical of a bull market.

VIX Index

The Nasdaq 100 is testing resistance at 3740/3750. Breakout would signal an advance to 4000*. Rising 21-day Twiggs Money Flow troughs above zero again indicate strong medium-term buying pressure. Reversal below 3700, however, would warn of another correction.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

S&P 500: A beautiful breakout

Heart-warming to see S&P 500 breakout above 1900, with the candle gapping through the resistance level. Expect an advance to 1950*. Completion of a 21-day Twiggs Money Flow trough above zero indicates strong buying pressure. Reversal below 1870 is most unlikely, but would warn of a bull trap (and correction to test primary support at 1750).

S&P 500

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

CBOE Volatility Index (VIX) below 12 signals low risk typical of a bull market.

VIX Index

Dow and S&P 500 bullish, but Nasdaq cautious

Dow Jones Industrial Average broke resistance at its previous high of 16600, signaling a primary advance to 17500*. Recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure. Reversal below 16500 is unlikely, but would warn of a bull trap.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 is testing resistance at its previous high of 1900. Breakout would confirm an advance to 1950*. The 21-day Twiggs Money Flow trough above zero indicates long-term buying pressure. Reversal below 1850 is unlikely, but would warn of a bull trap (and correction to test primary support at 1750).

S&P 500

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

CBOE Volatility Index (VIX) at 12 indicates low risk typical of a bull market.

VIX Index

The Nasdaq 100 broke 3600, suggesting another advance, but only breakout above 3750 would confirm. Bearish divergence on 13-week Twiggs Money Flow and a cross below zero warns of selling pressure. Reversal below 3400 is unlikely, but would warn of a down-swing to the primary trendline.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

Is the market overpriced? Episode III

US markets look pricey when we compare market capitalization to GDP. Why is the market ignoring this?

The S&P 500 is trading on a reasonable forward Price-Earnings Ratio (PE) of 15.17, but this forecasts a 23% jump in earnings over the next 12 months. Current as reported PE of 18.64 also assumes strong earnings growth.

S&P 500

Margins are growing:
S&P 500

But sales growth close to zero warns that earnings may falter:
S&P 500

Book value is surprisingly growing faster than sales, suggesting that corporations are hoarding assets rather than distributing profits to shareholders:
S&P 500

Causing asset turnover (sales/book value) to fall:
S&P 500

Which is why the valuation metric of Price to Book Value remains within reasonable bounds:
S&P 500

If management are unable to improve asset turnover — through improved sales or new investment — stockholders will start clamoring for higher distributions. Which may be one reason for high stock prices.

The second reason is that, with interest rates, tax rates and real wages at historic lows, corporations are likely to make fat profits over the next few years and stocks remain reasonably buoyant. But at least one of these factors can be expected to change in the next decade: recovery of the housing market would cause the Fed to lift interest rates; a revision of the tax code by a President who can work with both sides of the House; or a dramatic fall in exchange rates placing upward pressure on (real) wages as manufacturers regain export markets. The impact of any change will depend on how well the economy has recovered.

I will be watching sales growth, profit margins and asset turnover with interest over the next few quarters to see how this plays out.

Selling pressure rises

S&P 500 displays little direction while bearish divergence on 13-week Twiggs Money Flow continues to signal selling pressure. Reversal below 1850 would warn of a correction to test primary support at 1750. Breakout above 1900, however would signal an advance to 1950.

S&P 500

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

The primary trend remains upward and CBOE Volatility Index (VIX) below 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 is struggling to break 3600 and reversal below 3400 would warn of a down-swing to the primary trendline. 13-Week Twiggs Money Flow below zero warns of selling pressure, but breakthrough above 3600 would suggest another advance.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The Russell 2000 is testing primary support at 11.00. Follow-through below 10.80 would confirm. Small caps outstripped large caps over the last 18 months, but now appear to be faltering. A 13-week Twiggs Momentum cross below zero would also warn of small cap reversal to a down-trend. A small cap down-trend would not necessarily mean large caps will follow: large caps significantly outperformed small caps for more than 3 years leading up to the 2000 Dotcom crash.

Russell 2000

Canada’s TSX 60 is retracing, but unlikely to break support at 820 and the rising trendline. Rising 13-week Twiggs Money Flow, with troughs above zero, indicates long-term buying pressure. Respect of support would suggest an advance to the 2008 high of 900.

TSX 60

S&P 500 follows through

S&P 500 follow-through above short-term resistance at 1880 strengthens the case for an advance to 1950. Breakout above 1900 would confirm. A 13-week Twiggs Money Flow above zero would signal long-term buying pressure. Reversal below 1850 is unlikely, but would warn of a test of primary support at 1750.

S&P 500

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

CBOE Volatility Index (VIX) below 14 indicates low risk typical of a bull market.

VIX Index

Nasdaq 100 breakout above 3600 would suggest a fresh advance. Follow-through above 3750 would confirm, offering a target of 4000*. Recovery of 13-week Twiggs Money Flow above zero would also be a bullish sign, while respect of resistance at 3600 would be bearish.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The primary trend is upward and none of our market filters indicate elevated risk.

Medium-term selling pressure but long term bullish

Summary:

  • Medium-term selling pressure is strong, warning of a secondary correction
  • But the primary trend is up and VIX remains low
  • Long-term prospects remain bullish

The S&P 500 continues to encounter resistance at 1880 and bearish divergence on 13-week Twiggs Money warns of medium-term selling pressure. Breakout above 1900 would signal a primary advance, but a secondary correction is more likely. The primary trend, however, remains upward.

S&P 500

VIX below 15 continues to indicate low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 displays stronger selling pressure on 13-week Twiggs Money Flow. Respect of resistance at 3600/3650 would be cause for concern, breach of support at 3400 completing a head and shoulders reversal with a target of 3100* at the primary trendline. Recovery above 3750 is unlikely at present, but would offer a target of 4000.

ASX 200

* Target calculation: 3400 + ( 3700 – 3400 ) = 3100

S&P 500 and Nasdaq selling pressure

The S&P 500 is testing resistance at 1880 and follow-through above 1900 would signal another primary advance. Bearish divergence on 13-week Twiggs Money, however, continues to warn of selling pressure and another secondary correction remains likely. But the primary trend is up.

S&P 500

VIX below 14 suggests low risk typical of a bull market.

S&P 500 VIX

The Nasdaq 100 is testing resistance at 3600/3650. Breakout would suggest another advance, while respect would be cause for concern. Reversal below 3400 would complete a head and shoulders reversal with a target of 3100* at the primary trendline. 13-Week Twiggs Money Flow below zero indicates strong selling pressure.

ASX 200

* Target calculation: 3400 + ( 3700 – 3400 ) = 3100

I would suggest that even a Nasdaq fall to 3100 would not disrupt the bull market. Penetration of the primary trendline at 3100, however, would be cause for concern.

S&P 500 recovery

The S&P 500 recovered above 1850, suggesting an advance to 1950. Breakout above 1900 would confirm. Recovery of 21-day Twiggs Money Flow above its descending trendline indicates that selling pressure is easing. Reversal below 1840 is less likely, but would warn of a test of primary support at 1750.

S&P 500

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

CBOE Volatility Index (VIX) retreated to 14, indicating low risk typical of a bull market.

VIX Index

The Nasdaq 100 found strong support at 3400 on the weekly chart. Recovery above 3600 would suggest an advance. Breakout above 3700 would confirm, offering a target of 4000*. Recovery of 13-week Twiggs Money Flow above zero would be a bullish sign. Respect of resistance at 3600 would be bearish.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The primary trend continues upward and none of our market filters indicate elevated risk.