(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: 63.6%
T2107 Status: 56.8%
VIX Status: 12.5
General (Short-term) Trading Call: Neutral. Despite NASDAQ all-time high, assuming market remains in a chopfest until the S&P 500 hits a fresh all-time high.
Active T2108 periods: Day #128 over 20%, Day #87 above 30%, Day #31 above 40%, Day #15 over 50%, Day #2 over 60% (overperiod), Day #197 under 70%
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)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).
Commentary
You would think with the NASDAQ (QQQ) hitting a new all-time high, T2108 would FINALLY trip overbought status. Instead, it closed at 63.6% which is still below last week’s high from U.S. tax day. On the other hand, T2107, the percentage of stocks trading above their respective 200DMAs, is back in breakout mode. My second favorite indicator closed at a fresh (albeit marginal) seventh-month high.
This breakout is important because it may form the basis of a bullish call if/when T2108 finally turns overbought and the S&P 500 hits a fresh all-time high. Stay tuned.
In honor of the NASDAQ’s historic accomplishment, I present a series of related and telling charts. This is especially important for those of you too young to have lived through the historic madness that was 1999 to 2000. (I have to use stockcharts.com for the zoom on historic daily charts).
Source: Stockcharts.com
Source: Stockcharts.com
I included the daily close-up as a reminder that the end of a big rally does not have to come in a complete and sudden collapse. In fact, the 2-year chart shows, amazingly enough, the reversal of the big 1999-2000 run-up took longer than the run-up. The summer of 2000 even provided fresh hope for recovery as the NASDAQ gave one last major rally. After that rally ended, the NASDAQ provided one last recovery rally that failed right at the previous high. It was enough to drive bears and bulls nuts! Mind you, this was back in the days when we thought super-easy monetary policy was a few interest rate cuts in a row!
So, with THIS history I know to respect the trend if we get into an overbought condition. Technicals could and should be more important than ever in a breakout scenario.
Here is the S&P 500 (SPY). Note the minor downtrend is over which creates the setup for a breakout to fresh all-time highs. I still consider the index in the middle of chop but the slight tilt upward has the S&P 500 looking more and more like a coiled spring.
With all these bullish tidings, why am I not yet flipping the trading call from neutral? One word – volatility. The VIX is back to very low levels. While the volatility index has shown some brief signs of life, it has every so subtly drifted lower. The VIX could of course continue lower – 7 1/2 -year lows were set last July just above 10 –
but current low levels mean that an abrupt surge becomes a higher and higher trading risk. Accordingly, I loaded up on some ProShares Ultra VIX Short-Term Futures (UVXY) call options earlier this week…”just in case.”
Traders need to continue keeping an eye on currency markets. The U.S. dollar index is right back to testing support at its 50DMA. I have been positioning in anticipation of a firmer bounce and a resumption of the primary uptrend. A breakdown here could fundamentally change sentiment in a way that could have profound ripples through multiple markets.
Ironically, a falling dollar should give the Federal Reserve more breathing room to go ahead and get this first rate hike over with. I dare not hazard to guess what the market will interpret as positive and what will be considered a negative. I prefer to react rather than anticipate on that score.
Note that as I type during overnight trading, the euro is once again trading ABOVE its 50DMA as the dollar is losing fresh ground against most currencies. The euro briefly breached this level yesterday for the first time since December 16th! I always take interest in such moves as they can signal the beginnings of a bottom. The euro is key to the direction of the U.S. dollar index given it is just over 50% of the index. The biggest issue looming over the euro right now is more drama around Greece. Short-term yields are soaring amid fears of a debt default yet almost nothing else in financial markets indicates much concern for the potential risks…including the resilience of the euro at current levels.
Since today is all about tech, I conclude with two interesting bookends from tech: International Business Machines (IBM) on the low and forgotten end and Apple (AAPL) at the high end.
IBM made a strong move toward a breakout ahead of earnings. The market was underwhelmed afterward, so I took my eye off the ball. Suddenly, it is breaking out again. The stock faded slightly from 200DMA resistance, so it is subject to some pullback action. Overall, IBM looks like it is bottoming with a breakout from a classic consolidation phase.
The market left IBM for dead after it collapsed following October’s earnings and subsequent follow-through selling. Now a gap-fill seems within a reach.
AAPL is on the other end of the spectrum. It is trading within a whisper of its all-time high but has struggled since the Apple Watch announcement. In the past two days the stock has finally garnered enough momentum to pull away from its 50DMA. This uptrending line has provided important support and a pivot point for a month. Yet, the steps upward have been small enough and choppy enough that the stock continues to fit very neatly within a trading range extending back to February/March. The current momentum sets up a potentially explosive earnings event next week.
The bullish signals presented here are now converging on “sell in May.” This old adage has failed mightily to provide a good trading signal for a while now. IF it finally works, I imagine it will work in a big way….if it fails yet again, the upside could be spectacular. Buckle up! I think T2108 should provide a good roadmap going forward.
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 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 USO put options, net long the U.S. dollar, long RUSS, long Z shares and puts, long RUSS, long CAT put spread