(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)
T2108 Status: 80% (overbought day #39)
VIX Status: 18.0
General (Short-term) Trading Call: Close more bullish positions. Begin but do NOT expand an existing bearish position.
Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
Commentary
I know it seems “quaint” now to even talk bearish talk, but I have to call it as I see it. T2108 managed to DROP to 80% even as the S&P 500 punched into multi-year high territory. This continues a 2-week downtrend in T2108 that has taken the indicator back to 6-week lows. I consider this a bearish divergence that suggests some formerly strong stocks are starting to lose their momentum even as the S&P 500 continues its climb. The bearish warning is supported by the continuing lack of buying volume. Traders want to see a surge in buying as an important index like the S&P 500 makes such an historic move.
So, instead of convincing firepower, the S&P 500 gets all the more vulnerable to the good fortunes and fans of a narrowing group of stocks. On a related note, see “Apple: A Sector Unto Itself, Says JP Morgan“. Granted, the current divergence is subtle, but subtle changes matter a lot more when the surface of the market appears constantly and stubbornly serene.
The BIG caveat is that IF T2108 rebounds from support again, the bearish divergence can get repaired. Indeed, at that point, we should expect a major catch-up that finally breaks T2108 to 90% and perhaps higher. A breakdown below 80% will pretty much confirm the bearish divergence in my mind. Stay closely tuned on this churn!
I also duly noted that volatility did not sink to new lows, another potential bearish divergence.
T2108 is now tied for #7 in duration of all the overbought periods since 1986. The next highest is a 47-day stretch that followed the Federal Reserve’s “telegraph” at the end of August, 2010 that another round of quantitative easing was on its way, aka QE2. Ironically enough, that overbought period ended around the time of the Federal Reserve’s official QE2 announcement in November.
The 7.1% performance to-date in this overbought period (measured from the close of the first overbought day) sits neatly in-line with the strong correlation between maximum returns and overbought duration AFTER the 25th day (review my overbought analysis for a refresher on these important statistics). In other words, if this overbought period ends in a few days, its behavior will be very consistent with the other outlier overbought periods. If it manages to keep trekking higher, we should see a very strong and positive correlation between time and returns.
Charts below are the latest snapshots of T2108 (and the S&P 500)
Refresh browser if the charts are the same as the last T2108 update.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Weekly T2108
*All charts created using freestockcharts.com unless otherwise stated
Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108
Be careful out there!
Full disclosure: long SDS and VXX; long VXX puts