Markets, Algos, Washington - Stuck in the Middle
By Joe Duarte on November 20, 2017
There is an old song by a one hit wonder band
from the 1970’s titled “Stuck in the Middle with You,” whose lyrics sum
up this market as well as anything anyone with a market column can come
up with these days. Indeed the lines “clowns to the left of me, jokers
to the right, here I am, stuck in the middle with you” pretty much sum
up what may be in the minds of many an investor trading these markets.
Although the news cycle sinks to new levels of “WTF” on a daily basis,
the real issue for the markets is the tax debate, which is why despite
last week’s option expiration related volatility most asset classes
remained stuck in the middle of recent trading ranges. This, of course
suggests that neither the algos nor the human traders know what’s about
to happen, especially on a holiday shortened trading week where volumes
are likely to be nearly non-existent.
But a closer look at relevant price charts suggests that the initial
impression of a confused market isn’t necessarily accurate. Moreover,
a case can be made for an early transition of capital away from stocks
and bonds into crude oil and perhaps a spilling over into commodities
at some point in the future.
NYAD Runs into Resistance
First on the hit parade is the New York Stock Exchange Advance Decline
line (NYAD) whose uncanny accuracy over the past twelve months has
turned it into a bellwether. Over the last few weeks, I’ve noted NYAD
has been weakening and as it turned out last week the indicator was
correct in predicting at least a short bout of market weakness. To
review, NYAD should make higher highs along with the S & P 500
in order for the market to be considered as working properly. Two weeks
ago, as the S & P 500 (SPX) continued to make new highs, NYAD failed
to confirm. As a result, the market has started to stumble since fewer
stocks are participating in the rally.
Last week’s action in NYAD left the story unfinished. You can see
the line fought its way back to its 20-day moving average but remains
in a bearish lower high, lower low pattern. If there is no reversal
of this pattern, meaning a new high in NYAD over the next couple of
weeks, I expect stock prices to work lower.
S & P 500 Remains Undecided
Just as the NYAD is in a short term bearish technical phase, the
S & P 500 (SPX) is starting to show signs of distribution, which
is a bearish indication for the future of stock prices. Consider that
even as the index has remained above the key support of its 20,50,
and 200 day moving average, the On Balance Volume (OBV) and Accumulation
Distribution (ADI) indicators have rolled over.
That means there are now more sellers than buyers and that the odds
favor lower stock prices as the bulls become discouraged when their
stocks fail to make higher highs. Furthermore, the RSI indicator is,
as it were, also stuck in the middle adding to the indecisiveness of
Two More for the Road
The case for some sort of pause in the uptrend for stocks is gaining
some credibility as stock investors become more indecisive. So here
are two places where investors are starting to make bolder decisions.
First, the U.S. Ten Year Bond yield (TNX) has remained
above support near the 2.35% yield area. Also note that the 50-day
moving average (blue line) has crossed above the 200-day moving average
(red line), which may be signaling higher yields are coming. This technical
event seems to be confirmed by two others.
First, the Coppock line (COPP), which measures the effort required
for a trend to develop or continue has flattened out. Note similar
moves occurred in January, March, April, June, and September of 2017.
Each time COPP flattened after a down move in yields, bonds turned
in the other direction, toward higher yields. The second important
development is in the ROC indicator, which measures momentum. Note
the similar pattern over the past twelve months in ROC, and how it
has confirmed COPP.
Finally, note the chart of West Texas Intermediate Crude (WTIC),
where investors bought the dip to $55 aggressively. Note the turning
up of the OBV and ADI indicators. Furthermore this indication of positive
money flow into crude oil was confirmed by a rise in ROC. These three
indicators are telling us that money came into oil and that momentum
Higher Interest Rates and Oil prices Combined with Weaker
Investors may be stuck in the middle of a difficult transition period
where the direction of money flow changes direction from highly valued
assets, such as stocks and bonds which have been in long term bull
markets, to undervalued assets, such as crude oil. Furthermore, if
nothing changes externally, meaning the tone of the current political
situation and the direction of interest rates, the odds favor a changing
of the guard in leading markets. Considering being short treasuries,
being long oil, and hedging stock portfolios seems to be increasingly
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