For the week of 11/12/2001
We have some important charts for you this week, so let's get to them first before the concluding commentary at the end.
First a look at the monetary stimulus being provided by broad monetary growth M-3. This is the best and most timely proxy we have for total debt growth in the economy, and present economic growth is totally dependent on rapid debt growth.
The chart below shows the weekly Nasdaq 100 (NDX) in the bottom panel, the weekly M-3 in the middle panel and then the year-over-year growth rate (red) and 13 week growth rate (green) of M-3 annualized in the top panel.
Blasts upward in the 13 week growth rate preceeded the monster Fall 1998 NDX ramp and the Fall 1999 ramp. However, the current blast does not seem to be helping stock prices. Something is different this time.
As you can see, the 13 week rate of growth is bouncing around below the year over year rate in response to data revisions this week. We remain on watch once again for debt balloon implosion.
For another view, we turn to a chart of the St. Louis Adjusted Monetary Base, a narrow aggregate including only cash plus bank reserves, an aggregate that the Federal Reserve directly controls. The lower panel graphs the adjusted base, while the upper panel graphs the 13 week (green) and year over year (red) growth rates.
Hooda thunkit!! Both the year over year and the 13 week rates of growth in Base are headed south, although from stratospheric levels. More confirmation of debt bubble implosion watch as the Fed must be hearing gold's footsteps.
Below is a chart of the open interest ratio for the Mini NDX option contract. You will see the NDX in the lower panel, and the ratio of puts divided by calls for the MNX options in the upper panel. The MNX option open interest tends to be a smart money indicator, as this ratio tends to fall (increasing calls relative to puts) as the market moves down and to rise (decreasing calls relative to puts) as the market rises. A number above one means there are more puts outstanding than calls, and a number below one means more calls than puts.
The MNX ratio continues moving steadily in a less bullish direction as the rally ages. This is a confirming indicator rather than a specific timing indicator. It is telling us that we can begin selling rallies.
Next we have a chart with the Market Vane survey of investment professionals in the top panel and the SPX in the bottom. This serves as a contrary indicator.
This is by far the most important chart this week as we have another sell signal on the weekly S&P 500 chart in a series that has been remarkably reliable. I just ran the same chart using the NDX and it called the weekly tops in that index with even greater precision.
Below is a chart which plots the weekly SPX in the lower panel, and in the upper panel, the ratio for small traders of long SPX futures positions divided by short positions. A ratio of one means that small traders hold as many long positions as short, a ratio above one means they are net long, while a ratio below one means they are net short.
We see the barest beginnings of rational behavior this week as the small traders appear to be using this rally to reduce their net long position in the SPX. We have quite a ways to go yet.
The chart of the Commercial SPX hedgers is getting rather boring so I replace it this week with the e-mini NDX ratio, and here the habitually wrong footed go massively long this week after having been massively short for the past 4 weeks. You never want to be on the same side of the trade as these guys. Conclusion? It is once again safe to start shorting rallies in the NDX.
Below is a chart of the weekly nearby Comex gold future in the bottom panel, with the ratio of longs divided by shorts of the gold commercial hedgers in the top panel. Below one is net short while above one is net long.
In the process of recalibrating, I stepped back this week and asked the larger question of what should happen to the commercials (who have basically taken the opposite side of the trade from large traders who have been mostly short for the past 20 years) should a 20 year trend change occur. And of course, the answer is that they should form a mirror image, taking large short postions opposite the large traders. We have a new 20 year trend, and that trend is up.
Below you will see a chart of AMG inflows with a 13 week moving average and a 5 week moving average of the data in the top panel. Because the software cannot accept negative numbers, 10 billion is actually the zero line for inflows. In the bottom panel, you will see a weekly chart of the NDX.
Those who view inflows as a contrary indicator will recognize the bearish implications of this week's 5 billion of inflows. By the time the public jumps on the rally, it is essentially over.
We switch to the most important chart, which is the weekly trading signal and then several charts which tend to confirm the message of that signal.
The chart below shows the DAILY NDX in the lower panel, the 8 day stochastic oscillator in the middle panel, and the accumulation/ distribution index in the top panel. We get our weekly signals by following the 8 day stochastic oscillator in the middle panel. A sell signal is given when the fast line of the stochastic oscillator heads down while above the 80 line, and a buy when it heads up while below the 20 line. A buy signal is in green, a sell in blue, and a counter trend signal which should be ignored by longer term traders will be in purple. A trend signal occurs when the accumulation/ distribution indicator is lower than at the previous STO high, in the case of a sell, and higher than at the previous STO low, in the case of a buy. In any case, they apply to the following day, and will not be moved once placed.
Last Wednesday's sell signal is working so far. Note that the volume patterns are much more powerful in this rally than in the April rally. Thus the sell is a counter trend sell.
An additional volume measure called the negative volume index is used to distinguish between a trend and counter-trend signal. This index adds the percentage move in price to an accumulator for any day in which the volume is lower than the prior day. If volume is the same or higher, nothing is done. The index tends to show whether there is smart money distribution or accumulation underneath the surface that shows up in price whenever volume falls.
The chart below displays the NDX in the lower panel and the negative volume index in the upper panel, based on volume for the entire NASDAQ. If the market were accumulating, then price should rise as volume falls. The index below looks beneath the surface and is a predictor of the direction once the short term volume trend changes.
This chart confirms the sell signal on the weekly chart, above.
Next, we have a chart of the weekly MACD, or moving average convergence- divergence index, a measure of weekly momentum in the NDX.
This chart remains powerfully bullish for the longer term. However, the signal line will keep trending upwards toward zero even if the NDX moves sideways for a few months.
We begin with a fairly reliable short term sentiment chart which shows the NDX daily in the bottom panel and the CBOE "equity only" put/call ratio in the top panel. Most recently, short term tops tend to be signaled by daily data readings at or below .5, while readings above .8 tend to indicate short term bottoms.
On Friday 10/26 the 5 dma crossed below 50. For the past year and a half, this has been a very reliable sell signal. This chart is bearish and seldom wrong. I should note that you can check this data intra day by visiting CBOE half hour update to help you with your end-of-day decisions.
The second chart has the NDX in the bottom panel and the NASDAQ new highs minus new lows in the top panel.
OK class! What is wrong with this rally? To show you, I have reproduced a chart plotting just NASDAQ new highs against the NDX. Notice the contrast between the April rally and this rally. In this rally, the fund managers are all bottom fishing. No one is willing to bid stocks to new highs. This rally is all bottom fishing and has a very limited life expectancy. You can check this chart daily by looking at NASDAQ New Highs, New Lows From StockCharts.com which updates in the evening.
The next chart shows the new 52 week highs, minus the new 52 week lows for the 100 stocks within the NDX.
The new highs and new lows within the NDX are stuck around zero, so I am showing instead, the NASDAQ advancing volume with 13 and 34 day moving averages. To get a decline, we need the 13 dma to be trending down and for the 13 to be below the 34. Notice that the 13 dma has been playing footsie with the 34 for the past week. Once the 13 falls below the 34, you have a declining trend in advancing volume, and you really must sell the stochastic oscillator peaks.
The next chart has the NDX in the bottom panel and the chart of the NASDAQ advancing issues minus declining issues in the top panel, with a 5 day moving average of the data in yellow and a 34 dma in red. Stochastic oscillator turns up when this 34 dma is moving up produce the best upside price gains, while Stochastic downturns while the 34 dma is trending down produce the best downside price moves.
This chart shows that breadth is surprisingly narrow for a rally with the kind of volume power we have seen. It is consistent with the chart of new highs, above. However, it has nothing to say right now about the short term direction of the market. The same data is used to calculate the MacClellan Oscillator. See NASDAQ MacClellan oscillator.
The next chart has the NDX in the bottom panel and the chart of the NASDAQ advancing volume minus declining volume in the top panel, with a 5 day moving average of the data in yellow.
Another substitution. This week I show the chart of declining volume, and while it would be nice to see the 13 dma of declining volume in an uptrend, all that is needed is a drop in total volume for us to have a significant downswing. However, the really nice price drops always occur when the 13 dma is above the 34 dma, and this friday we have a touch of the 34 by the 13 from below, indicating that this is a pregnant moment for market timers.
I would be a raging bear but for the recent updraft in the CRB, which implies improving economic statistics should begin showing up very soon. The question, then, is whether the markets have already discounted this turn in the economy. What we need here is a drop in total volume, which would be quite bearish. As long as total volume trends lower, I would agressively short the stochastic oscillator highs and wait for short term oversold conditions to step aside or reverse long.
For mid week signal chart changes check below.
The Ole Ygg is not a registered investment advisor. You are responsible for your own investment decisions. Do your own research, and if relying upon advice of others, seek counsel of a registered broker or investment advisor first. The above comments are intended as conceptual discussion of market direction and technical indicators only and are not a recommendation to purchase or sell any particular security.
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