S&P 500 Short-Term Forecasts

The Pig is in short-term trading mode, keeping an eye on the Russell 2000 on behalf of my 3X-Bear R2K ETF, TZA, as well as looking for enticing opportunities to trade the FAS/FAZ combo. Aside from those, I'm interested in keeping abreast of the S&P 500 and its action over the coming weeks.

Carl Swenlin at Stockcharts.com's ChartWatchers blog posted several nice charts showing a likely short-term pullback in the S&P 500. Click on the link for all of the graphical goodness. If you don't need the visual evidence, here's Swenlin's conclusion:

Bottom Line: Based upon my perception of market behavior versus indicator status, I am expecting some kind of correction, possibly a short consolidation -- a week or so -- or a quick, scary couple of down days. Regardless of how the overbought conditions are cleared, I am assuming that the rally is not over and will persist for at least a few more weeks.

Today qualified as a "quick, scary" down day:



We'll see if the gravitational pull on the market continues tomorrow. A quick look at the $SPXA50 chart below shows that the number of stocks trading above their 50-day moving average dropped from an ionospheric 448 to a mere stratospheric 413:



Zero Hedge offers up some more technical analysis suggesting 816 as a potential downward target for the S&P, which is only a 2% drop from today's close. Again, this is a short-term target (Zero Hedge's linked report calls for ~April 30 as the target date, what with Chrysler's presumed Chapter 7 filing coming around that date). That seems like a conservative target to me, considering today's thorough sell-off.

Trader Mike took note of today's sell-off, pointing out the steep upward trendline has now been broken, meaning the short-term trend for the market is now negative. But it's not yet time for the bears (or a certain Pig) to celebrate and run rampant:

I think we all knew this selloff was coming, the only question was when. This was the biggest drop in several weeks and has broken all the March trendlines on the major indices. The bulls didn’t even put up a fight at those trendlines, which is a big change from the past few weeks. Financials led the way down, thanks to Bank of America (BAC). Despite BAC’s 24% drop today the chart doesn’t look terrible. It’s just back to where it was about a week ago. Let’s see if it can find support around the late March highs.

Portfolio Changes

I wrote yesterday that I would be "ready to sell if some quick-and-dirty profit opportunities come my way."

As Snagglepuss says, "Exit, stage left."



A few moments ago. I unloaded my FAZ position at $10.87, from a cost basis of $8.85, for a gain of 22.8%.

Yes, FAZ has continued its run, crossing $11/share as I write this, but again, the FAZ purchase was for a quick trade, unlike my improving TZA position.

Thoughts on the S&P 500 for the Coming Week

89.6% of the S&P 500 is trading above its 50-day moving average. That's 448 out of 500 for the mathematically disinclined.

I seem to be posting updated versions of this chart every few days now, as this market continues to defy gravity and rationality.



Again, I ask the question, will this market rally end soon?

Looking at the S&P 500 chart below, you'll see that some significant overhead resistance, as well as some short-term overbought indicators, could put the brakes on this rally:



Corey Rosenbloom at Afraid to Trade sees a potential bearish rising wedge forming in the S&P 500. Click on the link and check out the post on Afraid to Trade for his annotated chart, but here's the suggested strategy:

The expected play at a minimum is for a retest of the rising trendline around 850, but aggressive traders might want to hold on for a larger target should price weasel its way out of the wedge formation, which would be quite bearish. Should price continue to rally and break outside the wedge, the stop-loss point would be clearly defined.

Portfolio Changes

Since I still believe that this irrational rally is overdue for some subsiding, I picked up shares of FAZ at $8.85.

Fozzie has fallen ~70% over the last month. The chart below shows the underlying index for FAZ, and its red-hot performance during March and April. Yes, I'm bucking the trend here, so I'm ready to sell if some quick-and-dirty profit opportunities come my way.

When Will This Bear-Market Rally End?

When will this bear-market rally end?

I recently discovered a hyper-prolific blog that's asking the same question from a variety of angles.

First, an excerpt from the Barclays note care of Zero Hedge:

It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.
...
Normally, when we call for a trend to stop, we need to see three things. First, the trend has to have been strong and dramatic. Second, the trend has to have recently increased its trajectory in a hyperbolic way, to have accelerated its performance. And third, we need to have seen the trend reverse the clear majority of the prior trend.

On all three dimensions, we believe the current market conditions are clear and unambiguous. The current trend is strong and dramatic. We have clearly seen the trend accelerate, with the performance now coming from the tails of the distribution. And, we have reversed far more than the build-up of the prior trend. Think of a rubber band. What we are trying to identify is when the rubber band has been stretched far past its normal state. We believe unambiguously that we are at that point today.

All of this was true a week-and-a-half ago so we felt comfortable then calling for an end to the underperformance in Sentiment and the outperformance in Valuation. Today, we feel even more comfortable. And while on average, it takes 10 to 15 trading days after this condition has been met for the reversal to take hold, so we still have time, we certainly haven’t been proven right yet. As a prior boss repeatedly reminded me, and I humbly note here, there is no difference, though, between being early and being wrong.

Today, Zero Hedge pointed to the one month T-bill offering a fear-reflecting 0.01% yield:

Last levels seen during the fiasco after the November crash. Was at 0.08% two days ago. All money is running for near term safety, despite CNBC's urges for tresury investors to jump into equities - well, the opposite is happening...Maybe the real money is seeing something, and is accelerating purchasing of T-bills into this melt up.

Equities: have fun buying stuff.

How about we look at some charts that should make us feel better about questioning the post-nuclear-cockroach-like survival of this rally.

Here is the three-year chart of the $SPXA50 showing 88% of the S&P 500 is currently trading above its 50-day moving average. Breaching 80% is infrequent. 88% is downright rare, and at the very least, hasn't happened in the past three years:

Here is an annotated chart of the put/call ratio. The low 10-day moving average of the put/call ratio suggests the market is far too optimistic. Except the recent low reading from mid-March only slowed down the pace of the current rally--it didn't signify a market turnaround. Harumph.

And here's my current focus, the Russell 2000. I went short far too early, it seems, as the R2K is indeed jamming right up against both the overhead resistance levels established in January and February, and is near the top of its current bull trend channel.

This market looks so ripe that it's overdue for a bit of rot to form. Maybe I'll keep all of this negative evidence in mind tomorrow, and day-trade some under-$10 FAZ. I mean, what could happen? The market rises another 2% on more bad news?

Bob Mould is Back

Bob Mould is back with out with another record, "Life and Times." Newsweek, of all media venues, has a Q&A and video with Bob.

Here's the YouTube version of the aforementioned video:



And for old times' sake, here's the video for Sugar's heavy and catchily cacophonous "Tilted":

Balloon Man

I recently heard this classic while leaving my ipod on shuffle.

Why do I like the song so?

The chiming guitars. The walking bass. The Midtown locales mentioned. And the line, "and it rained, like a slow divorce." Those are plenty of reasons, I think.

Here's a live video of recent 2007 vintage. I think I saw him in Hoboken on this tour, not that you care one whit.



Unfortunately, the original video is nowhere to be found on YouTube, so you'll have to settle for the original song:

Russell 2000 is Flashing Warning Signs

Russell 2000 is flashing warning signs, reports Lynn Thomasson at Bloomberg:

The Russell 2000 Index’s record one-month gain is sending danger signals to investors who remember how similar rallies in U.S. stocks came to an end.

The gauge of companies with a median value of $301 million is beating the Standard & Poor’s 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points. Gains in the Russell 2000 are being led by an 11-fold jump in Spansion Inc., a bankrupt chipmaker, and a sevenfold rise for Hayes Lemmerz International Inc., a wheel manufacturer that hasn’t had a profit since 2006.

While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates Inc. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500’s 27 percent advance since March 9 will end the same way as the 24 percent rally that fizzled in January.

“This move is too explosive to be sustainable,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. “None of the structural underpinnings of the market have really changed. It’s going to be a multiyear healing process.”

...

Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall, said Cleve Rueckert, a Birinyi analyst. The Russell 2000’s 36 percent climb since March 9 is its steepest since the index began in 1979, according to Bloomberg data.

...

“It’s unusual for a new cycle to start with such an abrupt gain,” Rueckert said. “Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.”

None of the bull markets tracked by Birinyi included small- caps outperforming after a month by the rate they are now. On average, smaller stocks are tied with the S&P 500 at this stage of a lasting recovery, the data show.

New York Times Debate on the Bear Market Rally

The Gray Lady features a debate on the bear market rally this morning, featuring Barry Ritholtz, whose blog the Pig visits several times each trading day.

M.I.T. professor Simon Johnson leads off the debate with this worrying thesis:

Some stock market rallies are reassuring. Others provide at least temporary respite. And a third kind, more commonly seen in emerging markets, actually expose deeper underlying problems and contribute to a further downturn.

We seem to be experiencing this third kind of rally in the U.S. right now. Equity prices are up sharply, but the debt market continues to indicate a high probability of default. In particular, the level and recent trajectory of credit default swap spreads suggest that, as the financial system as a whole stabilizes, market participants expect increasing odds of failure (and failed bailout attempts) for the very largest banks.

Stanford professor Nicholas Bloom follows up, arguing that while the global economy is still uncertain about future growth, it is far less uncertain than it was in the Autumn:

Fortunately, the G-20 leaders have agreed to maintain free markets as well as sensible increases in financial regulation — which is radical, unprecedented stuff. As a result stock market uncertainty – measured by implied volatility, commonly known as the “financial fear factor” - has fallen. A measure of uncertainty (tracking implied volatility of the S & P 500) shows a more than three fold jump after the collapse of Lehman in September 2008. But that measure has fallen back by 50 percent as political uncertainty has receded.

Of course, there is still tremendous uncertainty about the extent of the damage to economy. We still don’t know the value of the toxic assets central to the banking crisis. Fear remains a factor, leading firms to postpone investment and hiring decisions. But we are moving past the big spike in uncertainty of last fall. And if uncertainty continues to decline, growth should start to rebound.

Barry Ritholtz looks at the bigger investing picture, and warns against both buy-and-hold, and more importantly, hunting for bottoms:

[I]f you managed to catch the exact low in December 1974, well, then, you would have had to accept an enormous level of volatility. That low was followed by a 75 percent rally, a 27 percent sell off, a 38 percent rally and a 24 percent sell off. But those are nominal numbers. Adjust the returns for inflation, and you actually lost about 75 percent of your money in real terms.

AAII Bull/Bear Index Signals Sell

Continuing on the overbought market theme, I found this piece from Bloomberg this morning, Return of Stock Bulls Signals Time to Sell: Technical Analysis.

Key excerpt:

Investors turned optimistic for the third time since the credit crisis started last year, gauges of sentiment among individual investors in the U.S. show, a pattern that Helmsman Global Trading says is a signal to sell.

The difference between the American Association of Individual Investors Bull Index and Bear Index surged to 5.6 as of April 2. When the reading rose to 11.5 in November and 13.6 in January it coincided with the end of “bear-market rallies” of at least 21 percent by the MSCI World Index.

“What that’s going to show is that people always want to look at the glass as if it is half full,” said Martin Marnick, head of trading at Helmsman Global Trading Ltd. in Hong Kong. “Using common sense you know what that general trend is. We’re in a recession and this is not the start of a bull market.”

The spread, which has fluctuated between 63 and minus 54 in the past two decades, has climbed above 5 in only three periods since the collapse of Lehman Brothers Holdings Inc. in September. It retreated to minus 8.6 according to data released yesterday.

Trading by Analyzing the S&P 500 Stocks above the 50 Day Moving Average

I have annotated three charts analyzing what the number of S&P 500 stocks trading above their 50-day moving average can predict about what's to come in the stock market.

Please click on the images to make them large and more legible.

And if you want to keep check on this chart, the symbol is $SPXA50 at stockcharts.com.





These charts tell me that odds are, the recent bear market rally is just that, a violent spike off of the lows. And we're going to see the market pull back in the near term.

The only data point calling that prediction into question is the $SPXA50 data from last October and November, when the number of S&P 500 stocks trading above their 50DMA remained at extremely LOW levels for ~six weeks without much of rebound.

Fibonacci Retracements on the Dow and R2K

Found this video presentation of Fibonacci tools via Afraid to Trade. The presentation is basic, but it did alert me to the fact that today's market rally came to a screeching halt at the 61.8% retracement level described in the video. Here's my annotated chart to make the point:



Will the Dow sell off next week? The Fibonacci retracement suggests that the Dow should pull back from today's close, but I have no idea, and I'm more interested in what the Russell 2000 is doing, since that's where my money is.

I worked up a chart of the Russell 2000, for comparison's sake, since I'm currently holding shares of TZA that took quite a shellacking today.



Click on the above chart to make it, and my comments, larger. The ~472 level on the R2K is where I'll be paying attention when trading resumes on Monday. Why? Because it's still the overhead resistance level from earlier this year, and to a lesser extent, 472 represents the 61.8% retracement from the early-November high.

Portfolio Changes

Sold off the remaining shares of FAS at $6.26, from a cost basis of $5.79, for a gain of 8.1%

Bought additional shares of TZA at $43.11, bringing up the cost basis of that position to $41.39.

Update at 4:03 pm:

And just before the closing bell sounded, I picked up some more shares of TZA at $42.88. That moves up the cost basis to $41.83.

Yo La Tengo's Ode to Connecticut

Portfolio Changes

Sold off some more shares of FAS today at $6.75, off of my cost basis of $5.79, for a gain of 16.6%.

I attempted to add to my TZA position toward the close, but my order remained unfilled as four o'clock rolled around.

Charts to Ponder for the Start of the Trading Week

Before I get to the charts I'm pondering for the start of the trading week, Trader Mike suggested reading this market outlook piece by Dr. Duru. Here's the choice excerpt:

Investing gets much dicier as we nudge ever so closer to the well-watched resistance level of 875 on the S&P 500 - maybe the market pushes to 900 just to salt the wounds of bears. T2108, the percentage of stocks trading above their 40-day moving average hit 83% on Thursday. The last two times this happened, we got a top the first week of January, 2009, and the all-time top in October, 2007. Recall that since 1986, selling the S&P 500 when T2108 crossed the 70% threshold, above or back below, has provided a practical capital preservation strategy. This means that we are in over-bought territory. The risk/reward is now very poor for playing chicken with the S&P 500's next resistance level. This next push represents just another 5% of performance. Not a good spot for initiating new longs, and a great spot for selling shorter-term holdings into the rally.

With this quote in mind, onto the annotated charts:

Portfolio Changes

Added to my 3X-short Russell 2000 position at the close, picking up additional shares of TZA at $39.875, bringing down the cost basis of my position to $40.53.

I prematurely sold off 40% of my FAS holdings at $6.61, from a cost basis of $5.79, for a gain of 14.2%. Considering FAS closed today at $7.20, I left cash on the table, but I'm still pleased that my remaining FAS position did so well on such a relatively quiet market Friday.

Portfolio Changes

At the close, I picked up some shares of TZA, the Russell 2000 3X-levered Bear ETF. Cost basis: $41.60. I'm using this short position as a hedge against my larger long position in the financials.

Proper Use of Leveraged ETFs

Trader Mike alerted me to this interesting article by David Penn of Trading Markets regarding the proper, i.e. short-term, use of leveraged ETFs:

However, a closer look at leveraged ETFs warns that in the longer run, leveraged ETFs may not provide long-term investors with the kind of returns their 2-to-1 or 3-to-1 banners suggest. Between fees and the unique way that leveraged ETFs are structured, investors who rely on leveraged ETFs may end up getting significantly less than 2-to-1 or 3-to-1 on their leveraged ETF investments. And although this does not mean that investors and position traders cannot use leveraged ETFs to good effect, it does mean that investors looking to leveraged ETFs should in some ways temper their expectations and, if not “do the math” first, at least be sure they read the fine print.

For short-term traders of ETFs, though, many of the problems that leveraged ETFs bring to investors are not problems at all. Because of the relatively short holding period of five to eight days, short-term ETF traders have a far better opportunity to reap the benefits of 2-to-1 or 3-to-1 leverage without many of the drawbacks that longer-term ETF investors must face.
...
What does this mean for traders? Not as much as the financial press will lead you to believe. Traders are in positions only a few days and when they trade these ETFs, they are not hurt much (if at all) by the rebalancing costs. Hold these ETFs for many weeks and months, and returns will potentially underperform. But trade them for a few days as TradingMarkets does, and a trader will be fine. A look at a classic, short-term trading strategy using ETFs shows how it applies to the world of leveraged ETFs.

Penn continues by advocating the two-period RSI swing trading strategy that I often use and describe on this blog.

Go me.

Otherwise, the moral of the story is, if you want long-term long or short exposure to indices or sectors, stick to buying and holding straight-up unleveraged ETFs. But if you are looking to juice your returns in the short-term, the leveraged ETFs are the preferred vehicle.

Portfolio Changes - Swinging from FAZ to FAS

The financials were bid up over the last two trading days, much to the chagrin of my FAZ position. I unloaded the remaining shares of FAZ at $20.075, from a cost basis of $29.52, for a loss of 32%. That's what I get for getting cute and trying to swing trade flat-footed against the trend.

With the sale of my FAZ shares, I swung over some of the proceeds into FAS, buying shares at $5.745 and $5.85, for a cost basis of $5.79.

In support of my swing trade from short financials to long...Barney Frank, Chairman of the House Financial Services Committee, wants to retroactively change mark-to-market accounting rules:

A key lawmaker on Tuesday said he would support allowing banks in some circumstances to recoup losses they have already taken due to controversial mark-to-market accounting rules. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support a procedure for firms to make the case that they have been forced to take losses on assets that they are holding to maturity. Mark-to-market rules are an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset. Frank said he would talk to the Securities and Exchange Commission about a rule change.

Casting doubt on my swing trade idea, Joe Weisenthal at Clusterstock thinks the financials will sell off after the mark-to-market announcement:

After trading down in the morning, the major financials are all solidly in the black today. Supposedly, there's enthusiasm over tomorrow's likely relaxation of mark-to-market rules.

Citigroup (C) is up over 5% and Bank of America (BAC) is up over 3%.

One trader we talked to thinks this is a classic buy-the-rumor-sell-the-news kind of deal. You've got retail investors who think a major change is coming, but after it's over, investors will realize there's no there there.

And this evening, Marketwatch joined the chorus singing the sell-on-the-news tune:

For weeks, investors have been expecting regulators to change accounting rules that would allow banks to recoup some losses already taken on illiquid mortgage assets, making Thursday's official decision by the Financial Accounting Standards Board almost a nonevent, analysts said.

But those high expectations are setting the market up for a big disappointment if rule makers actually balk at making changes.

"There might be a little bit of a positive reaction, but the move in stocks has already taken place as regulators already said they were considering changing the rule back in early March," said Fred Dickson, chief market strategist at D.A. Davidson & Co.
But "in the event they recommend no changes, we could see a sell-off," Dickson said.

Guess I'm bucking the analysts' conventional wisdom, this time. Maybe I am just a mere retail investor.

For some technical pros, and one con, click on the annotated chart below: