(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. 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 occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)
T2108 Status: 72.4%
T2107 Status: 65.7%
VIX Status: 11.7
General (Short-term) Trading Call: neutral
Active T2108 periods: Day #209 over 20%, Day #29 over 30%, Day #28 over 40%, Day #26 over 50%, Day #20 over 60%, Day #2 over 70% (overbought, period ended 4 days under 70%)
Commentary
The S&P 500 (SPY) quickly returned to overbought status, but it crept its way above this threshold in an unimpressive style. T2108, the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed on Friday at 70.4% and on Monday at 72.4%. This entry into overbought conditions pales in comparison to the impressive breakout that launched the last overbought period.
When T2108 entered overbought conditions on Friday, the S&P 500 actually closed for a slight loss which represents a bullish divergence. I was not willing to flip the short-term trading call from cautiously bearish to cautiously bullish until I observed the follow-through. The follow-through barely registered with a mere 0.2% gain for the S&P 500. However, I decided to respect what is likely to be benign trading over the holiday period and switch the short-term trading call to neutral. I also hope to avoid getting churned with a market falling in and out of overbought conditions. Moreover, this move keeps the trading call consistent with the trading strategy for overbought trading where the short-term trading call does not go bearish until the end of the overbought period or upon a pullback from a climactic top pattern.
While the S&P 500 stayed within a calm consolidation range, the volatility index, the VIX, DID make a dramatic move. The VIX lost 4.0% to close at recent lows which are also barely above the low for 2016. This increased complacency is consistent with benign holiday trading (could it even signal the beginning of a Santa Claus rally?).
There are a few reasons for my caution and hesitancy to jump on the potential for an extended overbought rally. First and foremost, the reflation trade of the Trump Rally has definitely slowed down and even corrected in many cases. Since December 7th, the day the last overbought rally burst onto the scene, stocks like commodity and industrial Freeport McMoran (FCX), Caterpillar (CAT), U.S. Steel (X), and Consol Energy (CNX) have sold off nearly every day sometimes on very heavy volume. I will focus on their charts in another post. For now, I note that many of these stocks completed full reversals of important breakouts or rallies. I also remind readers that CAT is a key stock for me in gauging the health of a bull run. While I duly bought into some of these pullbacks as I explained I would do in an earlier post, I have now put that program on pause as I wait for signs of life like a successful test of key support lines and trends.
There are also the likes of SPDR S&P Retail ETF (XRT) which started corrections one day after the last overbought period began. XRT even gapped down on the first day of the current overbought period.
Finally, the U.S. dollar index (DXY0) looks like it regained its post-Fed muscle. While dollar strength has been celebrated as a proxy for American economic strength, I strongly expect that very soon continued strength will once again become feared for its potential to hurt American exports and send commodity prices spiraling back downward.
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Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Weekly T2108
*All charts created using freestockcharts.com unless otherwise stated
The charts above are the my LATEST updates independent of the date of this given T2108 post. For my latest T2108 post click here.
Related links:
The T2108 Resource Page
Be careful out there!
Full disclosure: mixed positions on the U.S. dollar, long CAT call and put options, long call options on X, CNX, and FCX, long SDS
CAT has been the best bellwether for many years, but it may not be for the next few, if isolationism and a stronger US dollar curtail CAT’s ability to make money outside north America.
Good point. But for now, the market is believing in CAT as a beneficiary of the Trump Trade. I know – pretty ironic!
Another thing to consider is that IF CAT stumbles because of the downside of Trumpism, then CAT could actually end being a perfect indicator because every company like CAT will tumble. We also know that protectionism will be an overall drag on the economy and the stock market *should* suffer mightily as a result.