Morris the Cat, Robot Algos, and the Nine Lives Market
By Joe Duarte on November 27, 2017
It’s difficult to make long term assessments of
markets during low volume holiday weeks, but if it wasn’t for that
asterisk, as applicable to last week, stocks had a good few days. Furthermore,
if there are no further disruptions, such as yet another GOP failure
to deliver on campaign promises – this time on taxes – and if there
is no government shutdown, well, we may just get that Santa Claus rally.
That said, consider the following. Anyone alive in the 1970s with
any remnant of memory will remember Morris the Cat, the curmudgeonly
yellow tabby who pitched the stinky cans of Nine Lives cat food. Morris
would always slither around the TV screen and cutely avoid little dangerous
situations around the house and yard in order to come in for lunch
just in time for yet another stinky meal. Well, this stock market,
like Morris, not only has nine lives, but seems to have a bit of that
Morris food aroma. More specifically, just when you think the bull
market is over, the dip buying robots come in and yet again save the
day. It’s so uncanny that you can almost set your watch to when it
will happen. Sure, this type of action is great if you never sell stocks,
or invest based on the newly concocted mantra that stock prices can
never fall for any extended length of time. But for traders, especially
old guys like me who have seen bear markets deliver the goods more
than once, this type of market is messy, if not altogether stinky.
I’m not being unthankful during this, the Thanksgiving season. But
gimme a break, just last week stocks looked ready to embark on a bear
market. Yet, here we are, another new high, and yet another rebuttal
of traditional technical analysis. As a result, I did some serious
research via voodoo (figuratively), market lore, and supercalifragilisticexpialidocious.
You know, I did what the robot algos do, I stuck my hand in a hat and
looking at what I was holding in my hand, I said to myself: it’s on
the piece of paper that came out of the hat so it must be true.
Moreover, this highly scientific exercise led me to the only plausible
conclusion of who’s in charge. What I discovered, through my high caliber
research is that robot spelled sideways is Morris. And with Morris
you get the slithering orange tabby action that leads to the stinky
food. Translated into stock language, this means that this market will
go up, stink and slither included, until the robots decide that it
will go down. And you can take that to the safe deposit box where Morris’
owner put the millions the little tabby made eating stinky cat food
on TV in the 1970s.
NYAD Makes Yet another New High
Regardless of the above commentary, it’s difficult to ignore the fact
that the most accurate indicator of the past eighteen months, the New
York Stock Exchange Advance Decline line (NYAD) made a new high to end
the holiday shortened week. As the chart clearly shows, and as I pointed
out recently, we’ve had the same pattern of NYAD using the lower Bollinger
Band (Green line above and below NYAD) as support before launching to
a new high, repeat over the past year on four separate occasions: December
2016, then in March, May, August of 2017 prior to the November occurrence.
And given the general tendency of stock prices to move higher in
November and December, it’s hard to argue with yet another leg to the
rally, at least based on technical findings and recent market behavior
along with prevailing trends.
NDX Bolts Ahead of SPX
If you’re looking for index confirmation of the NYAD new high, you
got it last week with both the Nasdaq 100 (NDX) and the S & P 500
(SPX) closing the week at new highs. There is some nuance involved,
but overall, it’s hard to argue with the plausibility of the bullish
case, even though it may be based on sci-fi, at the moment.
The Nasdaq 100 fared better than SPX. As the charts show, the On
Balance Volume (OBV) and Accumulation Distribution (ADI) indicators
were both very robust with NDX, while the same indicators moved sideways
This softness in SPX is partly due to relatively
weak performance in the banking stocks which are not present in NDX.
And weakness in banking is due to two separate fundamental factors:
uncertainty about taxes and the direction of interest rates. If the
GOP can deliver something on taxes, banks may act better than they
have been of late. And if the Fed raises interest rates, bank stocks
may also get a boost.
The Real Story: Bonds and Oil
Stocks get the publicity but the bond market rules the world, and
oil is still the backing for the U.S. dollar, which is why I’m spending
time on the U.S. Ten Year Note yield and the price of crude in this
I’m currently bearish on bonds and bullish on crude oil which means
I expect the yield on the U.S. Ten Year Note (TNX) and the price of
crude (WTIC) to move higher simultaneously. There is good reason for
this investment posture. Indeed inflation is negative for bonds and
higher oil prices are often the centerpiece of inflationary periods.
And last month’s CPI showed inflation is starting to worm its way back
in. And if you don’t believe it, just go to the grocery store where
the ever shrinking packages of everything seem to cost more each time
you buy one.
So far crude oil is playing its part, as the WTIC chart
shows, the price of West Texas Intermediate Crude broke out to a new
high last week. Yet, bond yields remain range bound, with TNX trading
between 2.3 and 2.45 percent over the last few months. Most interesting,
even though there are plenty of stories describing foreign sales of
U.S. treasuries, yields remain stubbornly low.
Watch Bonds and Oil for Stock Clues
There is an old adage on the trading floors which says when stock
traders are talking about bonds, something dramatic may be on the way.
As far as I can see, stocks remain on a momentum run, so I own stocks,
albeit nervously. But I’m hedging my stock bets, and I’m keeping my
eye on the price of crude oil and the U.S. Ten Year Note yield. The
bottom line is this: if oil prices cross the $60 price area, the reaction
in the bond market will be the key to what happens next. If bond yields
rise and TNX moves above the 2.45 percent yield, I would expect the
stock market to reconsider its bullish stand.
On the other hand, if crude and TNX both rise simultaneously and
stocks move higher, then the only reasonable answer to the problem
at hand is that everyone is eating out of Morris’ dish. And that would
be a pretty stinky situation.
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