Grinding Upward
by Jerome "Mel" Hickerson
The session opened with a downward move, quickly surged five points to a morning high before returning to test the lows soon after 11am. The low of the day was put on the chart just four minutes after the open while the afternoon surge carried the SPX to the high at 3:04. The final hour was mostly a modest pullback as traders seemed cautious ahead of the INTC earnings report.
Today’s session was another grinding session with the late afternoon ramp up to force the bears to run for cover. But net on the day was less than three points; days like today make every point seem magnified.
So now what happens? Everyone is extremely bullish as we dig deeper into earnings season. SPX 1200 is within sight and many investors believe there is no stopping the market from getting there and beyond. They may well be right; this market no doubt feels destined to explode higher. But historical data is strongly suggesting otherwise. I keep hearing, “But this time is different.” Maybe so, but people always believe that real-time. I believe in just playing the historical odds and taking my chances with the odds in my favor. Over time, that works.
These are the facts:
• When bullish sentiment is near historical high levels (as measured by the put/call ratios and other data) entering earnings season, sentiment is almost always lower, as well as the indices, a few weeks later. Newsletters are the most bullish since 1993.
• We’re seeing extreme highs of bullish sentiment. Expectations are extreme for this earnings season; those high expectations are priced into the current index levels.
• Market internals have slowly deteriorated during this slow grind higher. This has been evidenced by the financial and technology sectors (in spite the recent rebound in the XLF.)
• We are constantly aware of the “grinding upward.” But this is evidence of stock churning which usually indicates distribution.
• Traders are simply not hedging against the possibility of a downward move. Evidence is in the put/call ratios. Now consider what happens if an unhedged trader (especially a leveraged trader) finds the market in a minor pullback? Without being hedged, the trader is much more likely to liquidate to protect himself, thus adding to any downward move.
• The market is overdue for a correction, and has been for a long while. But no market continues upward without a correction; the market simply can not keep going higher without a correction.
These are the possibilities:
• It is possible the market will “correct” by going sideways.
• The “buy the dips” mentality may rush in every time there is a minor pullback.
• People may continue trading off optimism on the economy and the Fed’s zero rate policy.
• Liquidity from the FED may continue skewing the real dynamics of the market.
- or –
• The slow grind will turn into a correction.
• Somewhere between 1150 and 1170 the market hits the wall and turns back for a significant correction.
• The lack of hedging will force traders into some forced selling.
• The 50 day moving average would be the likely first line of support, with the 1085 area as the next area of support.
You make the call; it’s your money. My money says we get a decent pullback; the real question is timing, not if but when. I am gently layering in on the short side. The key here is carefully and gently layering in.
For Friday, our model is easing up on calling for a down day but still suggesting a struggle for the SPX. With options expiration falling as early in the month as possible, also during the first week of earnings season, tomorrow should be entertaining. There will be plenty of economic news to stir things as well.
Friday, January 15
Economics
08:30 Core CPI 0.1% cons.
08:30 CPI 0.2% cons.
08:30 Empire Manufacturing Survey 11.25 cons.
09:15 Capacity Utilization 71.8% cons.
09:15 Industrial Production
09:55 Michigan Sentiment 73.8 cons
Earnings
Before: JPM
The Consumer Price Index (CPI) in December is expected to have risen 0.2% after rising 0.4% in November. The Core CPI is expected to have risen 0.1% versus an unchanged reading in the previous month. The Federal Reserve reports on manufacturing activity in the morning. Industrial production is expected to have risen 0.6% in December after rising 0.8% in November. Capacity utilization is expected to have risen to 71.8% in December from 71.3% in the previous month. The University of Michigan's consumer sentiment index for January is expected to have risen to 73.8 in early January from 72.5 in late December. The Empire Manufacturing survey, a regional manufacturing reading, is also due in the morning. Federal Reserve Governor Jeffrey M. Lacker speaks Friday afternoon.
Mel’s Random Hits:
• Total tick for the day was 148,000. Breadth was very briefly negative at the open, turned positive until about 10:45 when it turned negative for about 30 minutes. The rest of the day was positive.
• The day's range was 6.61 points. I repeat: Long stretches of daily range under 1% strongly suggests a topping pattern rather than more ramping upward.
• The day's volume was 70.6% of the average daily volume for the last year. Volume was 97% of the last 10 day average.
• 12% of the SPX stocks closed with two day RSI above 90. 26% closed with RSI above 80. 14% closed with RSI below 20 and 6% closed with RSI below 10.
• 53% of the SPX are above their five day moving average, 64% are above their 10 day average, and 73% are above their 20 day moving average.
• 9% of the SPX stocks closed below their most recent previous lows.
• 32% of the SPX closed above their most recent previous high.
• 62.4% of stocks closed in the top half of the day's range. (37.6% closed in bottom half.)
• 11.8% of stocks closed in the bottom 20% of the day's range.
• 13.0% of stocks closed in the top 10% of the day's range.
• 28.2% of stocks closed within 2% of their 52 week high.
• 22.0% of stocks closed within 50% of their 52 week low.
• 23.4% of stocks closed within ¼% of their high for the day.
• 7.8% of stocks closed within ¼% of their low for the day.
• 51.4% of the SPX closed up from the previous close; 59.4% closed higher than the open.
• Sectors weaker than the SPX for the day: Basic Materials, Industrials, Utilities, Consumer Discretionary, and Consumer Staples.
• Sectors stronger than the SPX for the day: Energy, Financials, Technology, and Health Care.
• The $SOX index strength was weaker than the SPX today.
• The 2 Day RSI of the SPX is 68. The Dow RSI is 78, NASDAQ is 64 and Russell 68.
• SPX components move upward slightly during the after hours with almost 130 million shares traded.
• INTC had a blowout earnings report after hours but the market reaction during the evening session seemed rather subdued.
Have a great Friday!
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"Mel"
