Market Direction and Stock Trends

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Has The Curse of Year 7 Finally Caught up with the Market?
By Tushar Chande | August 18, 2017

Bad things have happened in the stock market during years ending in 7. However, 2017 has been remarkably calm, and our year-to-date draw-down is the smallest since at least 1947 (see Chart 1). Will the market now play catch-up (or is catch-down?) to its Year 7 history over the next few months? Inevitably, the sample size is small, but you can read about the quirks in Year 7 returns from LPLresearch , Dana Lyons, and Safehaven.



Chart 1: The worst yearly draw-down for years ending in 7 since 1947 shows that the 2017 year-to-date month-end draw-down is much smaller than its other counterparts. Will the market catch-down to its historical returns over the next few months?

Selling Changes Short Term Trend Picture

The selling that started two weeks ago (see my mini-correction has started post) has turned the short-term trend lower across the board (see top row of Chart 2). The Russell 2000 is weakest at the medium-term time frame. It is important to note that the intermediate- and long-term trend is still up across the board.



Chart 2: The short-term trend has turned flat -to-down across the entire market width, ranging from 30-stocks to over 2000 stocks in the NYSE composite. It is important to note that the intermediate-term and long-term (100-day and 200-day) trends are still bullish. (Details of the trend-following models are here.)



Chart 3: The path of least resistance, i.e., the trend direction across different time frames across the stocks in the Russell 1000 universe has turned lower in the short- to medium-term, as is clear from the direction of the index itself from Chart 3. So not only is the index weak, but a majority of stock components of the index are themselves weak.

High Grade Bonds Turn Lower as Expected

I commented on HYG breakout-after-retest to pinpoint the start of this move up, and I wrote earlier about how the HYG had reached the top of its channel and its next move was lower (see Chart 4 here). HYG confirmed my analysis, and now has broken below its up-trend channel. HYG is a quick check on the short-term direction in the market.



Chart 3: HYG, which led the breakout, is now signalling a period of consolidation as it came off its highs as suggested in a previous post. (A live chart is here.)

Equal Weight S&P 500 Universe Pulls Into Support

The Guggenheim S&P 500 Equal Weight index has given up its breakout and now closed below its breakout point, and is in nearby support. Thus, the broader SPX stock universe has begun to trend lower as a group. I can confirm this by showing the Path of Least Resistance calculations for the SPX universe (see chart 5). The majority of SPX component stocks are trending lower in the short- and intermediate-term, even though the SPX prices are trending lower only in the short-term for now (see Chart 2). In other words, market internals are pointing toward further weakness.



Chart 4: The Equal Weight SPX ETF (RSP) has given up the breakout and returned to initial support. Any further weakness will likely mean a retest of the March-April lows. (A live chart is here.)



Chart 5: The SPX internals suggest a majority of its components are trending lower in the short and medium term, though SPX prices are trending lower only in the short-term. Longer-term investors can focus only on the intermediate to long term, and those trends are still bullish.

S&P 500 Breaks Below Uptrend Channel

The S&P 500 broke below its uptrend of the year on the 2-hour chart, breaking below the 2440 area. The uptrend line has not been broken decisively yet, but the initial close could just be a sign that the trend may be changing.



Chart 6: The SPX on this two hour chart has just nudged below the uptrend channel from January, and further weakness seems likely. (A live chart is here.)

QQQ Sets Up Down-Trend Channel

I commented earlier (see Chart 5 of the post) that the QQQ breakout was on low momentum (see StochRSI in lower panel), and now QQQ has set up well-defined down-trend channels. The uptrend line from December is still offering support.



Chart 7: The QQQ has setup yet another down-trend channel, and the uptrend will surely be tested. (A live chart is here.)

Trend Strength by Sector

A ranking using the Chande Trend Meter shows bonds and XLU are the strongest sectors, as the trend strength of SPX sub-sectors have declined into the yellow (or trend-less) region. Key indexes such as SPX and QQQ have lost momentum. This is a significant change from earlier in the year.



Chart 8: Bonds and XLU are the strongest sectors, as a majority of SPX sub-sectors have not discernible momentum (they are all in the yellow trend-less region). . .

http://stockcharts.com/articles/chande/2017/08/has-the-curse-of-year-7-finally-caught-up-with-the-market.html

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