** Trader's Tips Stock Market Newsletter **
Published January 04, 2015 ...by oextradingresources.com
2014 marked another positive year in the broad markets. The benchmark S&P 500 index ended at the 2,058.90 level, up 210.54 points for the year, +11.3 %. The OEX (S&P 100) market climbed from 823.81 to 908.38, up 84.57 points, +10.2 %. The Dow 30 advanced from 16576.66 to 17823.07, 1246.41 points, +7.51% gain. The tech market, Nasdaq Comp closed for the year at 4736.05, up 559.46 points, +13.4%. By looking back at the recent years, a trend can be seen here, the Dow 30 tend to be the weakest performing market in general, while the Tech market seems to be the strongest.
P/E - Price/Earnings Update
The below updated P/E chart gives support to the view that a possible Grand Super Cycle degree bear market from 2000 is still underway, with the P/E ratio currently at 20.26, 0.85 points higher than from the previous year. As mentioned in the 2010 report: ..."It would take a reading between 5 - 10 to change this view. Compared to the 30's great depression low, even a P/E of around 5 - 6 is probable, before the bear market is likely over. Especially because a bear market of Grand Super Cycle degree could be underway from the 2000 peak."...
Current 12 month EPS S&P 500 Earnings 102.73, reported June 2014.
The increasingly popular P/E10 Ratio was originally developed by Benjamin Graham (Warren Buffet's teacher) and David Dodd, after Graham's observation of odd P/E behavior during the roaring 20's, before the great market crash. And because of it, he wanted to find a more accurate way to calculate market value. The solution was to divide the price by a multi-year average of earnings and ended up with 5, 7 or 10 years as denominators.
These days, professor Robert Shiller, the author of Irrational Exuberance is the reason behind P/E10's growing popularity. He use a 10 year average of real (inflation adjusted) earnings as a parameter, which he calls the Cyclically Adjusted Price Earnings Ratio (CAPE) or P/E10. The P/E10 average is 16.5 historically, while the most recent value is at the highest since December 2007, at 26.5. The market is considered highly overvalued with P/E10 Ratios in the top 20% and highly undervalued with Ratios in the bottom 20%.
It's currently 40% above it's Regression line, while the market is 93% above it's Regression line. In comparison, P/E10's value at the 1929 major top was at 32.6. P/E10 is now higher than the peak reading before the 70's bearish decade started. Where we are now in terms of the P/E10 Ratio compared to 2007 and 1929, is visually better seen from the chart found below the P/E10 chart. For more in depth information about P/E10, here is an interesting blog post by dshort.com.
Source & Charts courtesy dshort.com
The current S&P 500 Dividend Yield is 1.87%, + 1.93 basis points.
Heavy Fed money printing in the aim to buy up bonds and fuel the stock market, apparently worked out in 2013 and 2014. In addition, gradually lower interest rates made it cheaper for investors to borrow in 2014, which also contributed to pushing up the stock market, for the 6th year in a row. With QE3's new buying ended and any potential QE4 probably politically difficult to get through, with the new Republican Congress, let's see what 2015 could bring, possibly without the support from QE.
As the below chart shows for the 2009 - 2014 period, with the SPX overlaid the Fed's QE and Balance Sheet, a high correlation can be seen. So that's why the stock market could face trouble, without or less of the fuel it has been so dependent on for years.
Chart courtesy zealllc.com
Under the advancing market surface, technical factors like Breadth continues to weaken. Here reflected by the 18 MA bearish divergence, in the long term monthly Advance - Decline Issues indicator. It's in fact in a worse condition now, compared to the Oct. 2007 A/D divergence, even with S&P 500 climbing roughly 500 points since then.
All charts labeled StockCharts in this Report is courtesy stockcharts.com
Serious divergence weakness is also observed in the monthly NYSE Summation Index since 2012 vs. the price advance since then. Here a triple bearish divergence is developing.
Over a 90 year period, only 3 times before has the stock market advanced 6 years in a row, after World War 2, then around 1982 and also back in the 90's. In all those cases, the U.S. went through huge economic expansions.
In comparison, since the Fed started it's QE stimulus program in 2009, the S&P 500 soared more than 200%. During the same period, the number of Americans on food stamps has doubled to 46.23 million, 1/6th of the population.
By looking back at the 2014 trading year from a TA point of view, the MACD monthly had a short lived dive into bearish mode, caused by the significant seasonal market correction experienced in the Fall 2014. It turned positive again after the November trading month and now after the just finished December trading month, it's once again bearish on the S&P 100.
This at a time when the market has climbed slightly above the earlier discussed giant Megaphone pattern resistance area, as shown in the Dow 30. It's not uncommon to see a price 'throwover' of such major trendlines, before the market turns south, but i would be surprised in case the advance from 2009 should continue way above it, over the 2,150 level in the S&P 500, which would be above the + 2/8th MML (Murrey Math Line).
In the OEX, the December trading month formed a similar Hammer candlestick as observed at the October 2007 top, although the range was a bit larger. Monthly RSI-25 has entered it's overbought zone and is tracing out a bearish divergence vs. the 2000 major top.
Using the conservative approach, a confirmation of a major market top was never seen in 2014, with larger S&P 100 - Dow 30 and Nasdaq Comp Wedge support still intact. As seen on i.e. the S&P 100 chart, the lower Wedge line caused the Fall correction Low, in this and other markets.
Rising Wedges can be very bearish in nature and once those breaks, sharp declines are often the outcome. So that's the next likely event i'm looking for in 2015, a downside breakout from these Wedges, in the Real Estate market included. In the stock market, (especially the Dow) prices are now so close to the Apex (where the two trendlines meet) of these Wedge patterns, that one side has to give in at some point in 2015. And after a 6 year Bull run, i doubt it will be to the upside.
A 2014 non-confirmation was also the case from a Volatility (investor fear) point of view. After several attempts within the year, the VIX monthly has not yet been able to clearly break through an important long term resistance area. However, it rised above two of the three drawn trendlines after the December trading month, so it will be interesting to see what happens in January. This is also a well known indicator month for the new trading year, as the saying goes in this industry, how the January stock market closes, so could the whole trading year.
Major market tops should normally occur on heavy Volume readings, i emphasize normally because of the Fed's continued impact and i'm not sure what role this will play around a major top formation. Maybe it would take a potential March 18 Fed hike, to turn the market tide, as in April Bradley indicator also happens to show a major high for the year, if not inverted. If it's inverted, another possible scenario would be market weakness into April and then an advance into September, when the seasonally weak part of the year often starts.
The above average Volume reading observed after the October trading month, was caused by institutional selling, forcing prices sharply lower and then these big boys entered the market again, pushing prices higher once again. In my view, that OEX Volume spike was not of the size you would expect to see around a major top, especially from an Elliott Wave of Cycle degree, which is probably in it's last stages, if not turning into an even more complex wave structure and stretching out further.
But that we saw the start of some institutional distribution in the Fall, is not out of the question. The fact that the Nasdaq Comp Volume was heavier than observed at the 2000 peak, should be taken with a grain of salt though, as the markets have evolved since then, with gradually higher trading Volume in general. The Volume reading at the 2010 market peak was even higher than in October 2014 and the outcome was only a minor correction.
Using the year 2000 monthly closing high, the Nasdaq Comp ended 2014 up against this major resistance area, so i'm not ruling out a huge Double Top pattern from 2000 forming these days. Either at this level or up against the next major horizontal resistance line, coming in from the 2000 5,132.52 All Time High before likely breaking out from the Rising Bearish Wedge thereafter.
Because of the shape of the Wedge, this could take the form of some more upside price oscillations within the Wedge, until reaching that resistance area. But the level the Tech market finally stalls, doesn't matter much really, as the key lies in looking for the upcoming Wedge breakout, (monthly closing basis) which would technically be a strong bearish signal and a good time to exit the stock market on the Long side and instead consider buying Bear ETFs or LEAP Puts. That's just my opinion. As seen on the same chart, the overbought RSI-25 is currently showing a lower (Bearish Divergence) reading compared to the 2000 closing high.
Cycle studies shows that the stock market tend to collapse after every 7 years, it happened in 2007, in 2000 and also back in 1993, into the 1994 low. The next bear phase is due from Dec. 2014. Because of this and other factors like the rare 6th year market advance in a row, my stock market outlook for 2015 is overall bearish. But seeing price swings in both directions, would be the normal fluctuations in an overall dominant trend. In the Fall 2015 (September - October) we may see a more significant market correction.
To come up with some DGL (Dynamic Gann Level) support projections to use for 2015 and beyond, let's say for the DGL calculation sake that December's price hit to the key long term monthly L3 DGL was the last gasp of the S&P 500 market and is heading lower from there, in the coming months. If so, i've drawn the first long term L1 DGL and also the L2 level for now, based on the December high.
Then these could be the DGL support areas we could see significant rebounds starting from, at some point in future. Since the L1 projection happened to be horizontal, this support is down around 1,520 for the S&P 500. For the L2 long term DGL, the support level depends on when the line is hit, from 1,300 and gradually lower. The old (grey) L2 resistance the market broke through in 2012, should now instead act as support, around the 1,800 level.
As for possible 2015 market turns in terms of time targets, i've already mentioned the 7 year (1800 trading days) cycle due on December 05, 2014 which is calculated from the 10/11, 2007 high. I've added this important bear cycle phase, as it could have impact into 2015-16.
Next, as mentioned earlier, a major Bradley turn is due on April 27, i'll observe the directional trend going into it, marking a major high is a likely scenario, in case it doesn't invert.
Then later in 2015, there is a Gann Angle Cycle convergence due on June 05, +/- 1 week. This one marks 90 Trading Weeks from the December 2013 high, 180 TW from the March 2012 high and 270 TW from the July 2010 low. The mid term directional price trend going into this GA time window, would point to a reversal in the opposite direction, due when prices enters the time window.
Thereafter, in the seasonal weak part of the year, there is another 1800 TD cycle due on September 28, calculated from the 8/11, 2008 swing high. Because of the often seasonal weakness going into October, that one could mark a high in the market.
Elliott Wave Analysis (Free Elliott Wave Principle Tutorial)
Because of the complex Primary degree wave development from 2012, as shown on the below weekly chart, a major top has been delayed even further, although it has not yet ruined the larger degree wave count as outlined in previous reports, so that analysis is still valid:
..."So this could mean a wave B of Cycle degree (for new readers, a free Elliott Wave Principle tutorial is available) is underway from the March 2009 low. In the S&P 500, if not a Regular Flat pattern is developing, a potential Expanded Flat could even take prices slightly above the 2000 & 2007 highs but with not much easing effect on the serious downside magnitude of the Super Cycle wave C, probably starting in 2013 ( --> revised to 2014) and going into 2016-2020. A huge double bottom pattern is not ruled out then, wave 3 of C termination around 2016-17 and the wave 5 of C around 2020-21. So good buying opportunities could show up in the Stock, Real Estate and other markets, later in this decade."...
..."As for trying to keep an open Elliott Wave mind and have alternate views about the long term market development, even a so called Megaphone pattern or Broadening Top of giant proportions is another wave possibility not ruled out, here represented by the Dow monthly chart. In this scenario a Grand Super Cycle degree wave (III) top could be the outcome, once the E part of this huge Triangle has reached it's termination point, likely confirmed by a downside breakout from the Dow Rising Wedge at some point in 2015. The end of this wave E would also mean the end of a wave V of Super Cycle degree."...
NYSE Investor Credit
Lance Roberts's Credit Balance is the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. Below with an overlay of the S&P 500. Nominal data used, not adjusted for inflation. The negative Credit Balance is currently at an extreme reading, compared to summer 2007.
Source & Charts courtesy dshort.com
The popular Google stock made a 'Double Top' pattern in 2014 and pulled back to a major trendline coming in from 2008, which also caused the Hammer low in December. Strong resistance is up around 605. Any break below the Symmetrical Triangle and major trendline (monthly closing basis) at some point in 2015, would indicate long term trouble for this stock, with price weakness towards long term Fib. support levels, calculated from the 2008 - 2014 advance.
Although a larger top scenario is over due, the potential effect of Gann's 18 & 42 year Composite Cycle still can't be ruled out, pushing sharply lower into 2016.
The 4 Seasons of the Kondratieff Cycle.
The ongoing "Winter" part is projected to last until around 2020-21.
For those new to Bradley, here is an excerpt from an earlier Outlook Report:
..."The Bradley Siderograph is a popular indicator many traders rely on, to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley, could give useful clues about future larger tops and bottoms."...
Bradley dates indicating market turning points in 2015, dates in bold marks more important turning points:
As of December 30, 2014 CC is at 92.6, slightly below the Investing.com forecast of 93.2.
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.
As of 12/23, 2014 "Smart Money" (Commercial Futures Traders) is net positioned deeply on the Short side, with 28,172 contracts. COT Chart (Commitment of Traders) courtesy of timingcharts.com
AAII (American Association of Individual Investors)
This survey report is used to determine the percent number of Bulls to Bears, to find sentiment extremes that can lead to market reversals. This Article by Wayne A. Thorp is about Investor Sentiment as a Contrarian Indicator.
As of 01/01, 2015 the AAII report shows:
Bullish Percent Index
12/31 - Long term BPI (monthly) ended the year at 73, up against trendline resistance.
See the description for this sentiment indicator.
Forex - Currency Market
In the 2014 Outlook Report i stated: ..."The long term strength we have experienced in the EUR/USD pair is most likely over. It reached major trendline resistance in December, with long term momentum at the same time getting overbought. So i'm taking a bearish stance on this pair for 2014. A minimum downside target would be the major 5/8th MML support at 1.26."...
The EUR/USD pair has fallen over 1,900 pips since that report, from roughly 1.3900 down to the 1.2000 area. The outlook for 2015 is bullish for this pair, although some more weakness towards the major 4/8th MML support (1.1720 area) is possible first, before likely heading higher, long term. But any January reversal candlestick formed at the major Triangle support it reached in December, would indicate a reversal at current levels. Any close below it, near the Jan. low, would signal more weakness coming, towards the 4/8th MML.
Using the Bond market ETF TLT as a proxy, 2014 was a very positive year for this market, probably fueled by investors moving over to this market, concerned about the economic condition. In December it closed above the 2012 high, which could mean further strength coming in the first few months of the new year. If the stock market breaks down in 2015, then even more 'flight to safety' could be the outcome, which could push Bond prices even higher. So the 2015 outlook for the Bond market is positive in the beginning and then probably pulling back for some time. We may see notable swings in both directions, as a soon overbought RSI-25 may cause a pullback towards trendline(s) support, on it's overall long term positive path higher.
The previous report suggested some corrective work in store for Yields and since it moves in the opposite direction of the Bond market, the TYX even fell through key Fib. support in 2014 and is probably going for a test of the major 2008 & 2012 lows in early 2015. Any reversal patterns forming down there, would signal a rebound as the next likely event, towards trendline resistance. However, if this 2008 & 2012 strong support area (25) is ignored right away, it could open up for even lower Yields in the months thereafter.
The buck took off in 2014, blasting through the 82.5 & 86 resistance targets given in the previous report. The positive trend should continue (at least early in the year) until the 2004 & 2005 swing highs are reached, around the 92.5 level. A pull-back starting from that area, would be signaled by any monthly reversal candlesticks closing up against this strong resistance area. Any firm monthly close above it, on the other hand, would indicate an even stronger Dollar, later in 2015. Here too, like the Bond market, a potential flight to safety (Cash) could force the USD even higher, if stock market weakness is coming in 2015.
Well, i was dead wrong on the 2014 outlook for this market, as it joined the stock market on it's route higher. Like seen in the stock market, a possible bearish Rising Wedge pattern could be forming. As it tend to move along with the stock market in general, the bearish 2015 outlook for the stock market, would paint the same picture for this market as well. A strong signal that the tide is turning, would be a downside breakout from this Wedge at some point in 2015, which would give increased evidence of a major top in place for Real Estate.
Some Oil commentators thinks the reason for the oil price collapse, is manipulation done by some powerful forces, as a sanction or punishment for Putin's actions i Ukraine. Putin is very dependent on good oil prices to run his economy smoothly. Russia is probably facing an economic depression soon, caused by the falling oil prices, the Ruble collapse and the soaring interest rates. Some expert oil analysts believe oil prices could fall to $20/barrel. If so, the U.S. economy could lose millions of jobs, energy bonds could default and energy industry related derivatives could implode.
In the previous report i was neutral on Light Crude Oil, awaiting a directional breakout from a long standing Triangle pattern prices were stuck within. And finally it came, to the downside, big time... Light Crude has fallen hard in the last 6 months, ignoring all Fib. support levels and even closed in December, below an important trendline drawn through the 2001 & 2009 major lows. The close near it's Dec. low portend continued weakness in January, at least intra-month.
LC Oil is down roughly 45% so far and there is more downside potential in 2015, because of this technical situation. By the look of it, it could go for a test of the major 2009 low, at around the $33 per barrel level. Since the oil market is most likely forced lower by a powerful wave 3 impulse, a clue as to when a significant rebound may start, would be when the last wave 5 is finished, which could take the form of a Double Bottom pattern or go slighly below it's wave 3 low. So i'm taking an overall bearish stance for LC in 2015.
Since the XOI oil index closed in December at major trendline support, a reaction up is looked for in early 2015, before it may resume on it's bearish path thereafter. Rebound resistance is up around the 1540 level. Any clear monthly close below the major trendline at some point in the new year, would be increased evidence of a possible major Double Top in place, from 2008. RSI-25 still has plenty of downside room, before it's getting oversold, long term.
Gasoline (Regular) prices, lowest since May 2009.
Charts courtesy dshort.com
Spot Gold is still working on a five wave structure to the downside it seems, as the lower degree waves morphed into a more complex Triangle pattern. December's Shooting Star candlestick up against this Triangle area, could mean some more weakness coming in 2015, likely towards the 1,000 support, before a significant rebound may start. Any firm close above trendline(s) resistance, would change this view and instead signal a rebound underway.
So a monthly close above the 1,300 level in early 2015, would turn the market picture positive, probably for the remaining part of the year. Given the likelihood of stock market weakness in 2015, Gold would then most likely be targeted as a safe place to stay invested, like in Bonds and the USD. Simple Supply & Demand economics would then dictate higher prices for the yellow metal, also because of increased demand for it, in technology related products.
XAU - Gold & Silver Index
The beautiful XAU Hammer candlestick at trendline support, i talked about in the previous report, actually marked a positive reversal in the Gold & Silver market. But the magnitude of the advance was less than expected, as it soon turned south again, caused by what turned out to be a Triangle (wave 4) pattern development. Since a full five wave structure from the 2010 high can now be counted, it bodes well for a significant rebound scenario for Gold & Silver, throughout 2015. Any monthly close above trendline resistance would give more evidence of this.
GDP - Gross Domestic Product
CPI - Consumer Price Index
Charts courtesy dshort.com
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