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Sunday, April 24, 2011 2:00:28 PM
Monday Morning Outlook: Bullish Chart Pattern May Be Forming Under the Radar
Can the SPX take out its looming year-to-date highs?
by Todd Salamone 4/23/2011 1:19 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=106013&trackback=mmoezine
There was no shortage of market action during the holiday-shortened week, thanks to a jam-packed schedule of corporate earnings. Building on the momentum of upside surprises from the likes of Intel (INTC), Apple (AAPL), and even underdog Johnson & Johnson (JNJ), the major indexes won key victories by Thursday's closing bell. The Dow settled its first week above 12,500 in nearly three years, while the S&P 500 Index closed just north of 1,333 -- a double of its March 2009 low.
Which is not to suggest that there isn't noteworthy resistance still lingering overhead, as Todd Salamone observes. On the plus side, recent option activity points to evidence of big-money players at work, and the charts reveal a potentially bullish technical pattern in the making. Beware that first trading day after the long weekend, though -- as Rocky White discovers, Easter seasonality promises some significant highs, and some very bumpy lows.
Notes from the Trading Desk: Still Bullish, but Buying Cheap Portfolio Protection
By Todd Salamone, Senior Vice President of Research
"...since the SPX burst above the round 1,300 level on the first trading day of February, nearly 80% of the daily closes since that time have been between 1,300 and 1,333, and these remain support and resistance levels in the near term. If these levels are taken out, the next areas of support and resistance are 1,280 and 1,340, respectively...the CBOE Market Volatility Index (VIX) enters the week trading in the 15 area again, which has been a floor since December. Evidently, those seeking protection against a downturn view portfolio insurance as 'cheap' when the VIX ventures down into its present area. And with many protective puts expiring this past week, it wouldn't be a major surprise to see index put buyers active in the days ahead... But the VIX is not as 'low' as it appears on the surface...Based on SPX historical volatility, the VIX has room to move lower."
- Monday Morning Outlook, April 16, 2011
The 15 level on the CBOE Market Volatility (VIX - 14.69) indeed acted as a floor, albeit briefly. The VIX popped to a high of 19.07 Monday morning, as the S&P 500 Index (SPX - 1,337.38) quickly retreated to support in the 1,300 region, site of its 80-day moving average. But the Monday morning selling quickly abated, as the remainder of the week saw equities head north while the VIX headed south. The SPX defied the odds and closed higher for the week, even though the first leg of a five-week expiration cycle has an historical tendency for stocks to trade lower.
Moreover, the VIX experienced its first close below the 15 level since July 6, 2007. In July 2007, the index was ascending from a sub-10 level in November 2006. The close below 15 this past week confirms our thesis that the VIX has room to move lower.
Two weeks ago in this space, we said, "The good news for bulls as we enter earnings season is that expectations appear to be low." And it was earnings reports, particularly in the tech sector, that drove stocks higher. Low expectations set the table for positive reactions, and we saw plenty of those last week.
Moreover, as we discussed last month, there is evidence that hedge fund managers are tip-toeing back into U.S. stocks. This is critical as the major equity indexes make another assault on resistance levels.
Hedge fund accumulation is evident in our option activity analysis, as the ratio of combined buy-to-open puts versus buy-to-open calls on the PowerShares QQQ Trust (QQQ), iShares Russell 2000 Index (IWM), and SPDR S&P 500 ETF (SPY) continues to climb higher from recent lows. Hedge fund managers will usually buy exchange-traded fund (ETF) puts as they accumulate certain equities, thereby creating a bias toward put buying on these ETFs. This is encouraging for bulls -- as it will take buying from this group to push the major indexes through resistance levels, since retail investors have again disappeared during the past month.
Technicians might take interest in the potential for a bullish "ascending triangle" breakout on the SPX, if the index were to move above resistance in the 1,340-1,345 area, as this would set up a target in the 1,430-1,435 region. This potentially bullish technical development is not being discussed in a lot of trading circles, which we find of particular interest, as this is indicative of a crowd that remains cautious and skeptical.
In other words, it is the bearish technical patterns that seem to garner the most attention. One example is the bearish "head & shoulders" (H&S) pattern in July 2010 that got a lot of play in the media and various other social outlets, with many technicians building the case for a bloodbath. The "bearish" pattern proved to be a crowded short trade that presented a golden buying opportunity instead.
The sentiment at present is somewhat similar to that which existed around the time of the SPX's bullish "inverse H&S" breakout above 1,125-1,130 in September 2010 that had a target of 1,220. The bullish technical pattern received a small fraction of the attention of the July 2010 "bearish" development. However, the bullish pattern played out on cue and the SPX reached its target in November, as this was a much less crowded trade when the signal was triggered.
We enter the week with the bulls in control, as the SPX has made a strong advance from support at 1,300, which is the site of its 80-day moving average. Plus, the VIX is trending lower, with the close below 15 last week. But resistance still lies overhead, with the 1,340-1,345 calendar-year highs lingering just overhead on the SPX, and the S&P 400 Midcap (MID - 995.16) and Russell 2000 Index (RUT -845.64) sitting below their respective resistance levels at 1,000 and 850.
We remain bullish. At the same time, this appears to be a decent time to buy portfolio insurance to hedge against the unexpected, as the VIX is lower and SPX actual volatility is slightly higher relative to last week. This implies you are getting a slightly better deal on portfolio protection -- just as we're entering the heart of earnings season, and with an important Fed decision on the calendar next week.
The spring 2011 issue of SENTIMENT magazine is now available here.
Indicator of the Week: Easter Seasonality
By Rocky White, Senior Quantitative Analyst
Foreword: Easter is upon us. According to the table below, the fact that the S&P 500 Index (SPX) is positive on the year should make us quite optimistic for the rest of 2011. Since 1975, when the SPX was positive through the Easter holiday, it continued higher for the rest of the year an incredible 20 out of 21 times, or 95%. The only time the SPX declined after being positive through Easter was in 1987 -- the year of the Black Monday stock market crash. Also impressive is the fact that the market averages a 10% return for the rest of the year. This is a much better performance compared to when the SPX is trading lower year-to-date at Easter.
Shorter Time Frame: Still looking at the SPX since 1975, below is a table that shows market returns in the next day, week and month after the Easter holiday. For comparison, I also have a table showing typical, "anytime" returns for those time frames.
Judging by this data, it looks like buyers take an extra day of Easter vacation and don't show up to the office at all on Monday. The day after Easter is positive only 39% of the time, and averages a significantly negative return. Despite Monday's dismal performance, the week and month after Easter tend to be slightly bullish. According to this historical pattern, if you want to buy this market after the Easter holiday, then you'll want to wait until Tuesday to get in.
SPX Returns Since 1975
This Week's Key Events: FOMC Debuts Post-Meeting Press Briefing
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* The week begins with the Commerce Department's new home sales report for March. On the earnings front, we'll hear from Netflix (NFLX), Kimberly Clark (KMB), RadioShack (RSH), and Sohu.com (SOHU).
Tuesday
* Tuesday brings the release of the S&P/Case-Shiller home-price index for February, as well as April's consumer confidence report from the Conference Board. Meanwhile, the day's earnings docket promises plenty of major reports -- including 3M Company (MMM), Coca-Cola Co. (KO), Delta Air Lines (DAL), Ford Motor (F), Amazon.com (AMZN), and Valero Energy (VLO).
Wednesday
* The key economic news on Wednesday will be the Federal Open Market Committee's (FOMC) interest rate decision, followed by a press briefing with Fed Chairman Ben Bernanke. Also on tap are durable goods orders and the Chicago Fed manufacturing index for March, along with earnings reports from Boeing (BA), eBay (EBAY), Baidu (BIDU), Starbucks (SBUX), and Aflac (AFL).
Thursday
* The Commerce Department's advance report on first-quarter gross domestic product (GDP) is due out on Thursday, and we'll also hear about pending home sales for March. The earnings schedule includes quarterly results from Exxon Mobil (XOM), Microsoft (MSFT), International Paper (IP), Colgate Palmolive (CL), and PepsiCo (PEP).
Friday
* The economic calendar wraps up with the Chicago purchasing managers index (PMI) and the final Reuters/University of Michigan consumer sentiment index for April. Caterpillar (CAT), Chevron (CVX), Merck (MRK), and American Axle (AXL) are scheduled to report earnings.
Can the SPX take out its looming year-to-date highs?
by Todd Salamone 4/23/2011 1:19 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=106013&trackback=mmoezine
There was no shortage of market action during the holiday-shortened week, thanks to a jam-packed schedule of corporate earnings. Building on the momentum of upside surprises from the likes of Intel (INTC), Apple (AAPL), and even underdog Johnson & Johnson (JNJ), the major indexes won key victories by Thursday's closing bell. The Dow settled its first week above 12,500 in nearly three years, while the S&P 500 Index closed just north of 1,333 -- a double of its March 2009 low.
Which is not to suggest that there isn't noteworthy resistance still lingering overhead, as Todd Salamone observes. On the plus side, recent option activity points to evidence of big-money players at work, and the charts reveal a potentially bullish technical pattern in the making. Beware that first trading day after the long weekend, though -- as Rocky White discovers, Easter seasonality promises some significant highs, and some very bumpy lows.
Notes from the Trading Desk: Still Bullish, but Buying Cheap Portfolio Protection
By Todd Salamone, Senior Vice President of Research
"...since the SPX burst above the round 1,300 level on the first trading day of February, nearly 80% of the daily closes since that time have been between 1,300 and 1,333, and these remain support and resistance levels in the near term. If these levels are taken out, the next areas of support and resistance are 1,280 and 1,340, respectively...the CBOE Market Volatility Index (VIX) enters the week trading in the 15 area again, which has been a floor since December. Evidently, those seeking protection against a downturn view portfolio insurance as 'cheap' when the VIX ventures down into its present area. And with many protective puts expiring this past week, it wouldn't be a major surprise to see index put buyers active in the days ahead... But the VIX is not as 'low' as it appears on the surface...Based on SPX historical volatility, the VIX has room to move lower."
- Monday Morning Outlook, April 16, 2011
The 15 level on the CBOE Market Volatility (VIX - 14.69) indeed acted as a floor, albeit briefly. The VIX popped to a high of 19.07 Monday morning, as the S&P 500 Index (SPX - 1,337.38) quickly retreated to support in the 1,300 region, site of its 80-day moving average. But the Monday morning selling quickly abated, as the remainder of the week saw equities head north while the VIX headed south. The SPX defied the odds and closed higher for the week, even though the first leg of a five-week expiration cycle has an historical tendency for stocks to trade lower.
Moreover, the VIX experienced its first close below the 15 level since July 6, 2007. In July 2007, the index was ascending from a sub-10 level in November 2006. The close below 15 this past week confirms our thesis that the VIX has room to move lower.
Two weeks ago in this space, we said, "The good news for bulls as we enter earnings season is that expectations appear to be low." And it was earnings reports, particularly in the tech sector, that drove stocks higher. Low expectations set the table for positive reactions, and we saw plenty of those last week.
Moreover, as we discussed last month, there is evidence that hedge fund managers are tip-toeing back into U.S. stocks. This is critical as the major equity indexes make another assault on resistance levels.
Hedge fund accumulation is evident in our option activity analysis, as the ratio of combined buy-to-open puts versus buy-to-open calls on the PowerShares QQQ Trust (QQQ), iShares Russell 2000 Index (IWM), and SPDR S&P 500 ETF (SPY) continues to climb higher from recent lows. Hedge fund managers will usually buy exchange-traded fund (ETF) puts as they accumulate certain equities, thereby creating a bias toward put buying on these ETFs. This is encouraging for bulls -- as it will take buying from this group to push the major indexes through resistance levels, since retail investors have again disappeared during the past month.
Technicians might take interest in the potential for a bullish "ascending triangle" breakout on the SPX, if the index were to move above resistance in the 1,340-1,345 area, as this would set up a target in the 1,430-1,435 region. This potentially bullish technical development is not being discussed in a lot of trading circles, which we find of particular interest, as this is indicative of a crowd that remains cautious and skeptical.
In other words, it is the bearish technical patterns that seem to garner the most attention. One example is the bearish "head & shoulders" (H&S) pattern in July 2010 that got a lot of play in the media and various other social outlets, with many technicians building the case for a bloodbath. The "bearish" pattern proved to be a crowded short trade that presented a golden buying opportunity instead.
The sentiment at present is somewhat similar to that which existed around the time of the SPX's bullish "inverse H&S" breakout above 1,125-1,130 in September 2010 that had a target of 1,220. The bullish technical pattern received a small fraction of the attention of the July 2010 "bearish" development. However, the bullish pattern played out on cue and the SPX reached its target in November, as this was a much less crowded trade when the signal was triggered.
We enter the week with the bulls in control, as the SPX has made a strong advance from support at 1,300, which is the site of its 80-day moving average. Plus, the VIX is trending lower, with the close below 15 last week. But resistance still lies overhead, with the 1,340-1,345 calendar-year highs lingering just overhead on the SPX, and the S&P 400 Midcap (MID - 995.16) and Russell 2000 Index (RUT -845.64) sitting below their respective resistance levels at 1,000 and 850.
We remain bullish. At the same time, this appears to be a decent time to buy portfolio insurance to hedge against the unexpected, as the VIX is lower and SPX actual volatility is slightly higher relative to last week. This implies you are getting a slightly better deal on portfolio protection -- just as we're entering the heart of earnings season, and with an important Fed decision on the calendar next week.
The spring 2011 issue of SENTIMENT magazine is now available here.
Indicator of the Week: Easter Seasonality
By Rocky White, Senior Quantitative Analyst
Foreword: Easter is upon us. According to the table below, the fact that the S&P 500 Index (SPX) is positive on the year should make us quite optimistic for the rest of 2011. Since 1975, when the SPX was positive through the Easter holiday, it continued higher for the rest of the year an incredible 20 out of 21 times, or 95%. The only time the SPX declined after being positive through Easter was in 1987 -- the year of the Black Monday stock market crash. Also impressive is the fact that the market averages a 10% return for the rest of the year. This is a much better performance compared to when the SPX is trading lower year-to-date at Easter.
Shorter Time Frame: Still looking at the SPX since 1975, below is a table that shows market returns in the next day, week and month after the Easter holiday. For comparison, I also have a table showing typical, "anytime" returns for those time frames.
Judging by this data, it looks like buyers take an extra day of Easter vacation and don't show up to the office at all on Monday. The day after Easter is positive only 39% of the time, and averages a significantly negative return. Despite Monday's dismal performance, the week and month after Easter tend to be slightly bullish. According to this historical pattern, if you want to buy this market after the Easter holiday, then you'll want to wait until Tuesday to get in.
SPX Returns Since 1975
This Week's Key Events: FOMC Debuts Post-Meeting Press Briefing
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* The week begins with the Commerce Department's new home sales report for March. On the earnings front, we'll hear from Netflix (NFLX), Kimberly Clark (KMB), RadioShack (RSH), and Sohu.com (SOHU).
Tuesday
* Tuesday brings the release of the S&P/Case-Shiller home-price index for February, as well as April's consumer confidence report from the Conference Board. Meanwhile, the day's earnings docket promises plenty of major reports -- including 3M Company (MMM), Coca-Cola Co. (KO), Delta Air Lines (DAL), Ford Motor (F), Amazon.com (AMZN), and Valero Energy (VLO).
Wednesday
* The key economic news on Wednesday will be the Federal Open Market Committee's (FOMC) interest rate decision, followed by a press briefing with Fed Chairman Ben Bernanke. Also on tap are durable goods orders and the Chicago Fed manufacturing index for March, along with earnings reports from Boeing (BA), eBay (EBAY), Baidu (BIDU), Starbucks (SBUX), and Aflac (AFL).
Thursday
* The Commerce Department's advance report on first-quarter gross domestic product (GDP) is due out on Thursday, and we'll also hear about pending home sales for March. The earnings schedule includes quarterly results from Exxon Mobil (XOM), Microsoft (MSFT), International Paper (IP), Colgate Palmolive (CL), and PepsiCo (PEP).
Friday
* The economic calendar wraps up with the Chicago purchasing managers index (PMI) and the final Reuters/University of Michigan consumer sentiment index for April. Caterpillar (CAT), Chevron (CVX), Merck (MRK), and American Axle (AXL) are scheduled to report earnings.
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