Today’s video starts with the S&P 500 SPDR to put the four week reversal and outsized decline into perspective. We will look at performance since the early September ROC shock, weigh the long-term evidence and compare the current setup with November 2016. Bank ETFs stood out this week as they bucked broad selling pressure and small-caps are holding up better than large-caps, short term. Even with the S&P 500 falling since early September, the 20+ Yr Treasury Bond ETF (TLT) is not picking up the bid. Gold remains stymied as the Dollar attempts a rounding bottom.
ETF ChartNotes
Saturday, 31 October 2020
It is easy to say that volatility will rise next week and this seems to be the consensus. There is no shortage of reasons: election, pandemic, election, lockdowns, election, Fed, election, stimulus, election, earnings, election, solvency issues etc… Yeah, you get the picture. This would be a great time to simply vanish into an autumn forest without internet or cell phone signals for a week. No news, beautiful trees, wild mushrooms and fresh air. Enter the forest on Sunday, November 1st, and emerge on Sunday, November 8th. Anyone with me?!
So how about the charts? Volatility is indeed picking up on the charts and rising volatility is associated with price weakness. Truth be told, it is a bit of a coincident indicator. Nevertheless, we can compare levels to see when the trouble may start. The chart below shows the 10-day EMA of Normalized ATR, which is ATR(2) divided by the close. A 10-day EMA is added to identify up turns and down turns in volatility. Notice how volatility started working its way higher in January-February and broke out with a surge in late February. In general, volatility is quite bearish when the indicator is rising and above 2.
The indicator fell from late June to August and this coincided with a nice advance in SPY (red/green arrows). The indicator also moved well below 2 during this run. There was a pop above 2 in early September, a decline until October 23rd and a smaller pop over the past week. Volatility is rising and this is short-term bearish. A further rise above the September high would trigger a volatility breakout and this would be longer-term bearish.
Despite an uptick in volatility this week, the long-term evidence is bullish for SPY and the ETF is at a moment of truth. The Thrust and Trend Breadth Models for the S&P 500 remain bullish, SPY is above its 200-day SMA, StochClose is bullish and SPY is testing its September low. The ETF is down 7-8% from its October high and RSI is in the oversold zone (30-50). The bigger trend is up, a 7-8% decline is pretty normal and oversold conditions could pave the way for an oversold bounce.
I show the Fed balance sheet and yield spreads every Friday as a way to monitor QE and the credit markets. The St Louis Fed publishes a Financial Stress index based on 18 indicators. Zero is the baseline. Values below zero indicate average financial stress and values above zero show above average stress. The series is updated every Friday, but the last data point is October 23rd. So we have to wait til Monday or so for an update. As the chart shows the index moved below zero on July 10th and remained largely below zero. There was a tick to +.0026 on September 25th. This indicator is bullish for stocks as long as it remains negative and I will watch for an update early next week.
The Ascending Triangle is still possible for the S&P 500 EW ETF (RSP) and this ETF is also at a moment of truth: long-term uptrend and short-term oversold. A surged off the last October low and triangle breakout would be very bullish. Conversely, a break below the September low and 200-day would reverse the overall uptrend.
Even though the fundamental backdrop is a lot different now, the current setup in SPY looks similar to the setup in November 2016. SPY hit a new high in early September 2016 and then fell with a falling channel into early November. The ETF retraced just over 50% of its prior advance and returned to the rising 200-day SMA with a 5% decline. Stocks surged the Monday before election day with a breakaway gap in SPY. This advance continued after election day with a clear breakout – and the rest is history.
The stock market is a forward looking beast that will price-in events well before they occur. Guessing those events is a fool’s errand for two reasons. First, we have to guess the event correctly. Second, we need to guess the market’s reaction to the event. Pundits initially thought a Trump victory would be negative for markets and SPY gapped down .80% the day after the election. SPY then rose 2% from this opening low and broke out. As usual, there are a zillion knowns and unknowns out there affecting the market. Price, the final arbiter, reflects everything we can possibly know and is the best indicator of all.
Thus, SPY is just above its rising 200-day and September low, and modestly oversold. A gap-surge from current levels could be the catalyst to spark a breakout. Failure to bounce and a break below the rising 200-day would be quite negative. Remember that the S&P 500 is the most widely followed index and the 200-day SMA is the most popular moving average. Institutions use this and will notice.
Check out this weekend’s ChartBook and ranking tables (links above) because RSI is in the oversold zone for a number of ETFs and several are near support from the September lows. Small-caps are still holding up better than large-caps (IWM, IJR). Banks and Utes (KRE, XLU) are holding up better than tech-related ETFs recently. Despite weakness in stocks, the 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) did not break out and remain with falling wedges. REMX has a bull flag, XBI has a bullish wedge and XME held up relatively well. The Dollar Bullish ETF (UUP) is in a long-term downtrend, but has a rounding bottom working. EEM does not like a rising Dollar, but Chinese-related ETFs are performing quite well with breakouts working in ASHR and CQQQ. China also seems to have a better handle on covid.
