S&P 500 – Page 3

All-Time-High S&P 500 Provides Well Defined Opportunity

February 13, 2015April 13, 2022

[Note: this article was edited at 13:23 CST on 02/15/15 to correct our if/then line. Our if/then line is the daily close on 02/12/15, not the daily close on 02/13/15. This is an important distinction that we find imperative to clarify. We will swiftly change to a short position with a daily close below 2088.48.]

Over the past three months, the S&P 500 has gone sideways. That is until today, when this major U.S. equity index closed at a new all-time-high. With new highs, comes new opportunity. Those readers familiar with our approach understand that we preach price. Price is the manifestation of opinion and final arbiter of value. You can have the all the strong opinions and indicators you want, but the only thing that matters is price. And since 2011, the S&P 500 has moved upward in a well-defined channel (see green trendlines in chart below). Moving in a series of higher highs and higher lows, price has guided our investment approach. As long as price behaves this way, we remain long this market. The exception being back in mid-October 2014 when we backed away from the market until price proved we could be long again on October 21st.

If price is the most important piece of evidence in identifying opportunities, then risk management is the most important part of taking advantage of those opportunities. From a risk management perspective, technical analysis is ideal for identifying when any trade thesis is wrong. Knowing when you’re wrong or knowing when to exit is crucial to successful trading. Every trade we enter has to have an entry and exit plan. In the chart below, we’ve identified some important levels. If we are going to establish a long position in the S&P 500 using the ETF, SPY, we need to know where to enter, when we’re wrong, and when to exit. The same is true for taking a short position (using ETF, SH). Today’s new all-time-high provides a well defined opportunity. We remain long this market, but will swiftly change to a short position with a close below yesterday’s ~~today’s~~ close of 2088.48 ~~2096.99~~. That is our if/then line. Long above 2088.48 ~~2096.99~~. Short below it. As time moves forward, we’ll reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying being long or going short is right for you.

We like this breakout in the S&P 500, but we will be watching price action closely as none of the concerns we’ve identified over the past 3 months (see our seven part series) have been alleviated. More coming on that soon.

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Currency

Proof That Cash Is A Position Too

January 29, 2015April 13, 2022

Those who check out our work often, know that we are advocates of patience, risk management, and high probability asymmetric risk/reward scenarios. This is a fancy way of saying we like to minimize loss while maximizing gain. Isn’t that what every investor wants? Related to our approach, we have been known to tell our readers that “cash is a position too.” In this article, we’ll show you just how valuable cash is as a position. At this point, it needs to be made clear that there are many opinions about the functionality and validity of fiat currency. That is not what this article is about. We are not here to debate whether the U.S. dollar is worth the paper it’s printed on. We are writing to show you that holding U.S. dollars is a valid investment position and one that can protect your capital.

To show you this, we’re going to use ratio analysis, a valuable instrument in our tool box. This approach of comparing the price of two securities against each other as a ratio is valuable in identifying opportunities. Today, we’re using a ratio of the U.S. Dollar Index (USDX) versus the S&P 500 (SPX). The U.S. Dollar Index is our proxy for the value of (you guessed it) the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness.

In the weekly chart below, we’ve divided the USDX by SPX (the S&P 500). Our ratio (dollar/S&P 500) is in the upper panel and the S&P 500 is by itself in the lower panel.

When this ratio moves upward, the dollar is outperforming the S&P 500. When the ratio moves downward, the S&P 500 is outperforming the dollar. For the majority of the time, as you would expect, the ratio travels downward because the S&P 500 is outperforming the dollar. But when the ratio turns upward, investors should take notice. Based on this simple ratio, we know when holding the dollar is more valuable than owning U.S. stocks. Take a look at the chart (click it to enlarge). What do we see? We see that this ratio moves in relatively predictable trends. Notice the price trends identified within green channels (1995-2000) and descending triangles (see 2002-2005, 2002-2007, 2009-2011, and again during 2012-2014). These downward patterns are highlighted in green and when the downward trend has been broken, and the ratio moves up, we’ve annotated the chart with vertical black and orange dashed lines. The orange dashed lines indicate times when this ratio broke upward and the S&P saw a major correction or bear market. The black dashed line indicates a minor correction within the market when the ratio broke upwards. As you can see, starting back in October 2014, the ratio broke its upper trendline. From that point forward, investors have been better off holding U.S. dollars than owning the S&P 500. This is significant. With the dollar outperforming the S&P 500, it tells us that major money managers are seeking safety. Now is a time to pay close attention to U.S. stock markets. Will the dollar continue to outperform the S&P 500? Could this be the start of a minor correction or a major trend change for the S&P 500? No one knows for sure, but the warning signs are abundant [1]. In the end, we’ll let price guide us.

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[1] You can read more about the warning signs we’ve identified via our seven part series:

[the following chart was added on 02-04-2015 to show USDX next to the S&P 500, no ratio, dashed lines in same exact locations as the chart above]

Equity

Important Levels On S&P 500 (SPY) Identified

January 17, 2015April 13, 2022

Over the past two months, we’ve provided evidence that the probability of a correction in the US stock market was increasing. We have not made a full blown correction call because the most important piece of evidence still pointed to higher prices in the overall US stock market. However, that most important piece of evidence, price, has begun to capitulate. What does that mean? If you remember our article about price, you’ll remember that it is the only thing that matters. You can have every indicator, piece of inside information, or strong opinion you want. In the end, price is always right [anyone envision Bob Barker when you read that?]. Price trumps all other pieces of information you deem to be important. And since releasing our research, price has begun to deteriorate. The price of the S&P 500 is lower than it was when we began to identify problems back in November. It is time to pay close attention to price action in the near term. The U.S. stock market (represented in this article by the S&P 500) must re-establish new highs quickly or risk a trip to the 1800s (which increases risk of lower lows if that take place).

Using the chart below, we’re going to identify some important levels. Every trade we enter has to have an entry and exit plan. If we are going to establish a long position in the S&P 500 using the ETF, SPY, we need to know where to enter, when we’re wrong, and when to exit. The same is true for taking a short position. For us, we’ll us ETF, SH, to establish a short position on the S&P 500. As annotated on the chart, our game plan is to change from long to short with a daily close below 200.00. This is our if/then line. We are long above it, short below it. If price moves below 200.00, we would add to our short position with a close below 197.00. Keep in mind, that we will need to nimble with our short trade as we would be going against the upward price trend (as identified by the “360 green” channel). Each of the shaded areas and the lower green trend line would be logical places to reassess what price is doing and either add to our short position or change back to long. At each of those levels, we’ll analyze price and make adjustments as needed. With risk management, no game plan is static. We continually reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying going long or short is right for you. Cash is a position too. Some of the best trades are those that aren’t made.

Trade safe.

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Dow Jones Industrials

Attention Slow Money (IRAs / 401ks) – Risk Ahead!

October 19, 2014April 13, 2022

Investing is all about risk management. Preventing loss is just as important as realizing gain. There are periods in the market where Return of Capital is the more appropriate approach than Return on Capital. Now is one of those times. Those retirement vehicles (401ks, IRAs, etc.) that have exposure to the US equity markets would be prudent to reduce that exposure at this time. You are an adult. You make your own decisions. You do not make investment decisions based on what you read here. You know the drill.

The last couple weeks have done some structural damage to the market. We identified the need to watch the S&P 500 closely back on October 8th. Those levels broke down and were a sign to look for lower prices. We got lower prices and even broke significant support at 1900 on the S&P (by the way, breaking significant support levels are a hallmark of a directionally shifting market – in this instance, from an up trending market to a down trending market). What did this breakdown mean? Something has changed. Specifically, the likelihood of lower prices ahead has increased. That means risk has increased. We don’t like to lose money if we don’t have to… So when the market tells us something has changed, we listen. You should too.

After a good deal of studying many markets and charts, I’ve identified some levels on three US major markets (Dow, S&P 500, and Russell 2000) that would need to be recaptured in order for any equity exposure to be increased or reestablished. Right now, the risk of loss is too high to consider hanging around to see what happens. If these levels are not recaptured soon, then lower prices are likely. If these levels are not recaptured, the best case scenario is sideways price action for a few weeks. One thing is for sure, the next few weeks have a high likelihood of volatility (large price swings), which is also a hallmark of trend change.

In summary, the current potential for reward it too low compared to the current exposure to downside risk. The body of evidence (including Intermarket behavior, cycles, internal breadth, seasonality) point to a dangerous week ahead. We even noticed that today marks the 27th anniversary of the 1987 stock market crash. Does that mean it will again this week? Absolutely not. But volatility and risk are upon us. Buyers beware. Risk ahead!

Here are our levels as annotated on the charts. Hopefully, we can recapture these levels and evaluate the next move. Be careful, curious investor.

10-19-2014 Important level on SPX — Need to recapture 1905

Candle Sticks

Next Week is a Big Week for the Market

October 17, 2014April 13, 2022

The major US markets have been structurally damaged, increasing the likelihood of a large correction beyond what we’ve already seen. That being said, we are keeping an open mind and searching for evidence that we could see a short term bounce in the US market (S&P 500, Dow, Russell 2K). Here are some signs that we’re getting ready for a relief rally:

Russell 2K (See chart below) | Positve candle formation and a daily close above previously broken support (1082). The Russell 2K tends to give early signs compared to the rest of the majors. The basing by this small cap index is a positive development. It is very close to reaching 1100 and closing our Russell 2K short trade. *NOTE: at publication time (close of trading, Friday), the positive candle development turned neutral if not bearish.
50 day Rate of Change (ROC) on the McClellen Summation Index (not shown) | This indicator looks at the 50-day rate of change (ROC) in the Summation Index. It simply compares today’s value to that of 50 trading days ago. Mathematically, it is another way of quantifying the total of the last 50 trading days’ McClellan Oscillator values. When it gets to a deeply negative value, it indicates a longer term oversold condition for the market, one which is difficult to sustain past a certain point. When this indicator turns back up again, the message is that the big oversold condition is waning, and a rebound period is getting started. That is the condition in which we find ourselves now.
The CBOE VIX Index (See chart below) needs a breather | The VIX gets its share of criticism, but in rapidly moving markets it has its place in the toolbox. Research by Nick Colas of Convergex shows that the long term VIX average – back to 1990 – is 20 and the standard deviation around that mean is 6. That means at 26 and 32 you have 2 reasonable levels where the VIX should top out. Now, if you think we are entering a period of real crisis, the numbers shift higher. Typically the VIX averages 28 when things are really bad (think back to the Financial Crisis) and the standard deviation rises to 8. That puts the target at 36 and 44. Bottom line: don’t try to pick a bottom until the VIX gets to at least 26. We reached 26.00 yesterday. *NOTE: at publication time (close of trading, Friday), the VIX closed at 21.99.

The evidence above points to a short term bounce. But as of this writing (close of trading), it appears the bounce may have already taken place intra-day on Friday. To say the least, the market is at a major inflection point. We’ll provide more research, analysis, and if/then game-planning over the weekend. Next week is a big week for the market. Time to do some homework…

RUT trying to recapture previous support now turned into resistance

Cycles

Important Cycle Marking Major Market Top?

October 14, 2014April 13, 2022

One of the many tools at our disposal at 360 Investment Research is the use of cycles. What are cycles? Cycles are recurring events that happen at such a frequency as to be reliable in identifying the same event in the future. Think of the seasons of the year: Spring, Summer, Fall, Winter. These are cycles. They happen over and over again with reliability. We know with certainty approximately when these events will take place. Believe it or not, and I don’t have an explanation for it (other than ebb and flow of liquidity)… but markets also have cycles. One such cycle, the 360 trading day cycle, was introduced to me by Raj Ian Thijm on his site, http://timeandcycles.blogspot.com/. This cycle marks, with approximate reliability, turns in the S&P 500 every 360 trading days (which is also the equivalent of 525 calendar days or 75 weeks). See the chart below (you can click it to embiggen). The gray lines mark a distance of 360 trading days. Note how consistently this cycle marks significant turns in the market. What I also found interesting about this cycle is the possible significance of a cycle within a cycle. Look at the chart. See the green lines? This is the 360 trading day cycle on its 5th instance. Five 360 trading day cycles equal 1,800 trading days. Nice round number. But, that’s not the point. The point is that this 1,800 trading day cycle (a parent of the 360 trading day cycle) marked the relative tops of the S&P 500 back in 2000 and 2007. This same cycle has come due recently. Will it mark the top of the S&P 500 again? I don’t know, but I will be watching this carefully. The significance of the 360 trading day cycle is evident. Stay curious, investor.

360 trading days mark important turns in the market. Could 1,800 trading days be marking this as a top?