Folks, we are at a major turning point in the markets and are not buying until we get further illumination. Here‘s why:
The S&P 500 is at the top of its range. The dollar has bounced off major support but could end up rolling over (see: chart patterns- rollovers). We keep saying the market and the U.S. dollar have a closely correlated, inverse relationship so this dichotomy is very important. But lets dive a little deeper and see if the odds really are in our favor.
S&P 500 Chart. Yes we are above all moving averages: Bullish. But we are now at 3 -year highs: Bearish. Overall Outlook: Neutral.
The vix (measure of put buying…people betting the market will go down) is at significant lows. The expression with the vix goes as stated: when the vix is high it’s time to buy; when it’s low it’s time to go. So this observation with the vix at 3- year lows while the market is at 3-year highs would put the odds out of our favor if we are betting on stocks to go higher in the short-term. Food for thought: Buy the market and hedge with the vix; or vice versa. Just food for thought.
VIX at 3- year lows: Bearish
Let’s see… any other indicators worth mentioning? The dollar, vix and S&P 500 are the main indicators we use at wsss.com because they comprise most of what goes into long-term investing models. Ok the transports: The transports are widely considered a barometer of economic activity. If they are doing well, so are we. If not, red flags arise. As you can see from the chart below of Union Pacific (UNP), the transports look great actually. I mean, we would have owned them for our portfolio if they did not put us to sleep years ago. (UNP’s chart can be a bit messy day-to-day. But, the long-term trend is a beauty with a current pullback to the 20 day moving average (orange line in August). We might actually buy this name for the portfolio at the 20 day and put a stop loss below- great risk/reward. We will do our research and notify you first.
Nice Uptrend. At support of the 20 day (orange line). No resistance ahead: Bullish.
So the transports look good. How about the semi-conductors, another gauge of economic activity? While the number of trains doing the shipping is important, how much internal production going on is vital. So yes, the semiconductors have been struggling but bounced off of their 3- year lows as well. (See our piece on NVIDIA). And big bellwether names like Intel have been doing great. So Transports, Semi’s- Check.
To the secondary indicators now- the oscillators, moving averages, and volume: Whether the market is overbought or oversold at this point is a matter of opinion. Sure oscillators are showing overbought signals short-term as some stocks are up 20-30 percent in the last month. But long-term, stocks have a ways to go before reaching their 3- year highs. And forget about the 5-year highs; if you want to go there stocks are really cheap!
The indicators for the % of stocks above the 50 day moving average is also positive. However, while most stocks have found support on a major price level or moving average trend, the next price level or moving average is right above acting as resistance. This puts stocks on the fence of making a move. We are right on the cusp of something major happening folks.
With respect to volume. Volume has been anemically low. It has been this way for every uptrend in the last three years. It suggests people aren’t buying this market because they still have no trust. However, there is ton of money waiting on the sidelines. So if the market does catch fire there are plenty of investors that can step in and move it higher.
Lastly, the global picture is not great. China is slowing as is the rest of the world. However, it is important to note that while global economies may be slowing, they are still growing at healthy rates- an important constellation to mention considering the attractive long-term view and landscape we will be investing in for the future.
Who knows what is going on with the elections. The outcome will undoubtedly shape the market in some ways for the next four years. But historically, markets have gone higher during election years. That is all you need to know. We stay objective about investing not subjective. Unless Obama becomes highly favored to win, and he could be who knows, the markets should churn higher on that note.
So: The S&P 500 is at resistance, but could always break through. Neutral.
The Dollar is at support- but could break down and rollover. Neutral.
VIX Volatility: Bearish
The transports and semi’s: positive. (Dow Theory: Check.)
Secondary indicators: neutral.
Macroeconomic picture: neutral.
Political landscape: positive until November.
Action: None until we get definitve confirmation. See markets having a small correction.
