The Sabrient Blog

The market continues to confound trend riders. No sooner does a trend seem to take hold than it soon reverses. After the ugly “death cross” of the 50-day moving average down through the 200-day in early July, the two averages are converging once again. Post-Labor Day, somewhat surprisingly we are still in an ultra-low-volume trading environment, and the bulls have been able to hold support. However, it is quite easy for the big players to manipulate the markets when the volume is this low.

The bear flag that I described last week was confirmed last Monday—as was the head-and-shoulders top—when the support lines gave way, but then the market turned quickly in another double-bottom reversal (similar to early June) to take the SPY (SPDR Trust ETF, reflecting the S&P 500) from 105 back up to 111. With MACD now curling over, we might see a simple 50% retracement like we saw in early July. Or with the return of the senior portfolio managers and renewed volume, we might find that this was a false rally. I wouldn’t be betting on the start of a fall rally just yet—particularly given that September is historically the worst month for stocks. Read more…

Tweet This Post

Bulls put up a valiant offensive in the last 20 minutes of trading on Tuesday to push the Dow Jones Industrial Average (DJX) back above the 10,000 level as the month of August came to a close. For the last six days of August, bears either succeeded or gamely tried to penetrate this psychologically important level intraday only to be repelled by the bulls. And then of course today (Wednesday) the market gapped up strongly and stayed strong all day.

In this low-volume trading environment, the bulls have been able to hold support, and today saw a combination of speculating, bottom-fishing, and short-covering such that almost every component of the S&P 500 finished positive on the day. When volume returns over the next week or so, it will be harder to defend. Plus, the technical picture is still not pretty in my eyes.

The bear flag that I described in my blog post on Sunday night (“Where to Next? Technical Analysis of the SPY Chart” http://www.sabrient.com/blog/?p=2048) was confirmed on Monday when the support line gave way. Yesterday, about the only positive aspect in the charts was the possibility of double-bottom support for the major indices, e.g., SPY (105), DIA (100), QQQQ (43), and IWM (59), and that was what happened, with each index now attempting to overtake its 50-day moving average once again. The SPY is now back up to the resistance line of that bear flag pattern. Read more…

Tweet This Post

Last week provided the start of another leg down in what has been an unpredictable stock market, and the market now appears to be in the midst of forming another bear flag. Since rolling over and selling off strongly in late April, the market has demonstrated all sorts of conflicting formations that have confounded trend traders and investors.

That’s why at Sabrient we prefer an absolute return long/short approach that is indifferent to market direction, relying upon our fundamentals-based quant models to create relative rankings among stocks for identifying the best longs and shorts for a given portfolio, no matter what direction the market takes. Nevertheless, for long-only traders or those who use our quant rankings to create watch lists for swing trades based on technical entries and exits, an indication of where the charts are indicating the overall stock market might be headed can be helpful.

So, as we enter the final week of summer, I’d like to review the various chart patterns that we’ve seen since the market peaked in mid-April, and take a stab at where the charts are telling us the market might go from here. I’ll focus on the widely traded SPDR Trust exchange-traded fund (SPY), which tracks the broad S&P 500 Index. Read more…

Tweet This Post

As I pointed out back in June, cash on hand among S&P 500 companies has been at record levels, and up 25% over the same time last year. One would presume that such cash levels would eventually be used for share buybacks, M&A, or dividend increases – all of which would impact the market favorably.

Well, there are signs that the purse strings are loosening up. Last week, BHP Billiton (BHP) made a bid for Potash (POT). Then, Intel (INTC) moved on McAfee (MFE), and this week Hewlett-Packard (HPQ) is bidding against Dell (DELL) for data storage firm 3PAR (PAR). Now there’s speculation about potential deals in the oil & gas sector, given the huge capital requirement for exploration & production in remote areas.

When the BHP/POT announcement came out last Tuesday, the market took it as a sign of impending M&A mania and a reason to soar, but the excitement only lasted one more day before the selling set in.

Bears got more aggressive today after the release of existing home sales for July. Sales dropped -27% month-over-month to an annualized rate of 3.8 million units – far below expectations of 4.7 million units and the worst since records began in 1999. Housing supply is now 12.5 months. I think the constant talk about a double dip in housing is becoming a self-fulfilling prophesy as lenders and buyers alike listen to the news and become afraid to either lend or buy. Anecdotally, I’m hearing that some institutions are calling in small business loans that are collateralized by real estate, in an effort to reduce their exposure. Read more…

Tweet This Post

The market found pleasure in manure today. When Australian miner BHP Billiton (BHP) proposed to acquire Canadian fertilizer maker Potash (POT), the market saw this as an opportunity to soar. Perhaps traders took it as a sign that corporate cash is ready to be deployed…or perhaps it was simply a low-volume oversold bounce on the flimsiest of catalysts.

In any case, low-volume trading can make for volatile markets. The S&P 500 spent the first seven days of August above its 50- and 200-day simple moving averages, seemingly on the start of a new uptrend. Then during two days of selloff, it plummeted below both moving averages, where it stayed for three full trading days. The start of a new downtrend? Don’t blink, because with today’s rally, it is back above its 50-DMA.

We’ll see what Wednesday brings, but this constant reversing from uptrend to downtrend is tough on swing trading or investing. Only the daytraders are thriving. Read more…

Tweet This Post

We have all heard the experts recommend “hedging” your stock portfolio. You may have meticulously researched and selected all of your portfolio longs as your core holdings for long-term appreciation. You have performed due diligence on each company’s fundamentals, its management, the news, the analyst opinions, and even the charts – and you are confident that your stock portfolio is positioned to outperform the major indexes. But you worry that a major market downturn will take your high-quality stocks down with it, so you would like to create a hedge against such an event. Let’s compare a commonly used hedging method with the “hedge basket” strategy that we prefer here at Sabrient. Read more…

Tweet This Post

The SPY sold off early today in advance of the FOMC decision, but bounced strongly from the support line of the bearish rising wedge formation, which also is quite close to its 200-day moving average. Just as I said last week, all market indexes appear a bit extended and ready to pullback, but the bulls are game. Put/call ratio and volume is low. In fact, Monday saw extraordinarily low volume for a full (non-abbreviated) trading day.

Overall, the market’s resiliency remains intact, and all major indexes remain above their important 50-day and 200-day moving average. Although many technical indicators appear to be rolling over, that hasn’t phased this market lately.

Market volatility represented by the VIX spiked about 10% early in today’s session and then settled back down near the lows of the day – as it has tended to do often since peaking around 28 in mid-July. It closed today at 22.37, which along with the low put/call ratio certainly doesn’t reflect much fear among traders. Keep in mind that the VIX tends to move opposite the market, so finding a support level (like it seems to be doing lately in the 22 range) is typically bearish for the market – although it’s not an indicator that you can time the market on.

Sabrient’s SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. Other than the high ranking for Tech, current quant rankings are starting to reflect a more neutral stance among analysts. Read more…

Tweet This Post

The SPY finished the month of July up a robust +7%, and then started the first day of August by tacking on another +2% gain. All market indexes appeared a bit stretched from the mean and ready to pullback today, but the bulls fought on mightily to keep the day’s loss minor. Market resiliency remains intact, and all major indexes held above their important 50-day and 200-day moving averages.

As I said last week, after trending strongly off its March V-bottom last year, this year’s market has not made itself very easy to figure out, so I wouldn’t back up the truck quite yet on bullish positions.

Enhancements to the Model:  Sabrient’s quantitative SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. We are constantly testing, refining, and enhancing our models, and last week we introduced major changes to the SectorCast model. Read more…

Tweet This Post

The market continues to look strong and resilient. Whether the news, economic reports, and earnings announcements are bad or good, the market has been absorbing the blows or chasing the momentum like a champion. Now it is struggling with various resistance levels from moving averages and chart formations, but continuing to hold up in this low-trading-volume environment.

Although I have been looking for more downside action to test support, the market’s resiliency has been impressive. All major averages are now back above both their 50-day and 200-day simple moving averages – and well above their exponential moving averages – which would suggest a new uptrend is firmly established. But this market has not made it quite so easy to figure out this year, so I wouldn’t back up the truck quite yet.

Enhancements to the Model: At Sabrient, we are constantly testing, refining, and enhancing our quantitative models, and I’m pleased to say that we have introduced major changes to our SectorCast model. The newly enhanced version will be used by Sector Detector starting today. The biggest change is a reduction in the importance of projected price-to-earnings ratio (PPE), plus differences in the way our proprietary relevance scoring approach is implemented for the given factors and the way the composite scores are compiled. Read more…

Tweet This Post

It is surely understandable if an investor is afraid to participate in this choppy stock market. Bounces from support are met with selloffs from resistance. In 2008, we got a strong downtrend, and in 2009, we got a strong uptrend, but this year has been difficult to gauge. Yesterday, IBM had a poor earnings report and the market tanked badly in the afterhours and opened quite weak this morning, but then recovered strongly to close at the highs. Apple just gave a great report, and the market is up afterhours. What’s an investor to think for tomorrow?

Although I’ve been looking for more downside, the market’s resiliency has been impressive. Weak housing starts were reported, but then sectors like housing and building materials outperformed, going against the grain of Sabrient’s quality ratings. Our fundamentals-based Company Outook rank has been serving us well this year in this uncertain market, doing a great job of identifying the highest quality stocks to go long and the lowest quality stocks to go short. But today was a crazy day, for sure, as the lowest ranked stocks strongly outperformed the highest. That doesn’t happen often.

Despite market resiliency, the 50/200 moving average crossover (i.e., the “death cross”) is still intact for the large caps, while the mids and smalls are sitting below both their 50 and 200. Today, the indexes are testing resistance from their 20-day moving averages. Read more…

Tweet This Post