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Markets, Algos, Washington - Stuck in the Middle with You

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 the moment.

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 is building.

Higher Interest Rates and Oil prices Combined with Weaker Stocks

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 sensible.



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