Trading the Bounce

[gartley]

Looks like the NASDAQ maybe starting to run out of steam for the time being here. Has formed some type of ending diagonal which might lead to a correction. This is confirmed by 8hr dynamic cycles which are bearish. The daily is on the verge of a sell, although hasnot triggered yet. Will know this evening if that happens and until it does no sells as 8h sells sometimes only lead to minor moves.

 

[ducati916]

So the battle rages on at the 300 level:

Some further under-the-hood observations:

There's been a number of different stories flowing around this morning regarding the fact that more than 90% of stocks in the S&P 500 are above their 50-day moving averages (DMA) and how that has historically been a bullish indicator for the subsequent performance of the market.

A second notable aspect of the names listed pertains to recent performance. In going through the charts of the names listed, you would expect to mostly see charts of bombed-out stocks that were so weak that they couldn't even manage to rally in this environment. While that was the case for many of them, there were also a number of stocks that actually outperformed in the initial stages of the bear market, but have started to fall apart either later in the decline, or in many cases, after the market bottomed. The nine stocks shaded in the table below (charts below) all traded at 52-week highs at least two weeks after the S&P 500 peaked in late February. These are all generally names that investors thought would benefit from the pandemic and a prolonged decline. Not that markets have stabilized, though, and the economy appears to be on the mend, there's been a rotation out of them. One example is Citirix Systems (CTXS). After hitting a 52-week high as recently as May 11th, it now finds itself on the loser list.

Just the point that: identifying individual stocks is harder than identifying sectors. Even identifying sectors is fraught with difficulties. Unless you are using some form of mechanical system (new found appreciation for the mechanical chaps) that will put you in and take you out quickly, it is possible to get bogged down or back the wrong horse so to speak.

With regard to the battle at 300: currently I like (see as bullish) the rising 20SMA. That could well provide the support to push the index through that resistance point.

Financials coming to the party. Lagging for sure, many will be concerned on rising loan defaults and bank capitalisation. The 'major' banks (once again) will not be allowed to fail. There may well be issues, however, they will resolve. This essentially means that a very important sector for the overall health of the market will bolster the overall market performance.

Energy is a two edged sword as far as the market is concerned. Too little, and it negatively impacts. Too much and inflation becomes an issue. The bottom is in for energy. It will however take (quite a bit of) time to recover from all the issues. The energy sector won't be a drag, but neither will it support overmuch the move in the overall market.

This is the 'Military Industrial Complex'. Starting to move. It was never going to be allowed to fail. Moreover it will once the initial COVID issues resolve, become the focus in another cold war that is developing with China. The other sector will be Tech.

jog on
duc

 

[ducati916]

Looks like the NASDAQ maybe starting to run out of steam for the time being here. Has formed some type of ending diagonal which might lead to a correction. This is confirmed by 8hr dynamic cycles which are bearish. The daily is on the verge of a sell, although hasnot triggered yet. Will know this evening if that happens and until it does no sells as 8h sells sometimes only lead to minor moves.View attachment 103857 View attachment 103858

The US averages tend to track each other. The Q's had significant outperformance over the last few years due to concentration in the big Tech names. Everyone else just catching up currently.

jog on
duc

 

[ducati916]

RenMac: Renaissance Macro Research‏ @RenMacLLC


The struggle of value investors vs growth investors has been real, persistent and brutal. Here's the drawdown of value vs growth back to the 1920s.....ouch.

View attachment 103842

Unfortunately, that does seem to be the case. This is another reason that some form of mechanical selection process (that incorporates that growth aspect) would seem to be the way to go. Just remove any bias you may hold (value chaps, myself) and simply trade what is succeeding.

jog on
duc

 

[ducati916]

Consumer spending.

It is down. Unemployment levels through the roof. But, it is already picking up. Markets price forward. Something to keep an eye on.

jog on
duc

 

[aus_trader]

So the battle rages on at the 300 level:

Like the historical one, looks like it'll be an epic battle...

 

[ducati916]

Thanks Joules MM1. I knew instinctively that value investors were getting smashed compared to all the money going into growth stocks and this chart just validates it quantifiably.

I am trying to figure out is this the new normal or it is a growth/tech stock bubble that is going to pop sometime in the future ? Similar to say 2000 tech wreck ?

Tech will remain an area (sector) to be in. The big guys benefit from the networking effect. Here is my worst call ever: when GOOG listed they did it via a public auction (which was pretty unusual, most will engage an investment bank for the IPO) and were valued at $90 (before stock splits). I was into valuing companies on the financials. I had them overvalued at $90. The rest is history.

Financial analysis (value investing/micro) is really only necessary if:

(a) you are buying a stock (company) and you want to ensure that it is not fraudulent;
(b) you really want to understand its business model (which often requires looking past the financials);
(c) buying for the dividend stream;
(d) buying the entire company;
(e) other.

Value investing is usually micro. Fundamentals macro, however is a separate issue and I would argue, incredibly important. My focus evolved from micro to macro. Any analysis (technicals/etc) will always start from a macro analysis, moving down the hierarchy.

Tech, particularly now, will play an increasing role in society. The big guys will continue to win. There will of course be new entrants who potentially will grow huge. Finding those (which are value) is no easy task.

jog on
duc

 

[Joules MM1]

Walter Murphy‏ @waltergmurphy 5h5 hours ago


Both the S&P and DJIA are moving through a 61.8% retrace of the Feb-Mar decline. I am more impressed that the VL Arithmetic is too.

 

[ducati916]

Made a pretty solid move through that 300 level. It will (most likely) backfill and retest the resistance as support at some point.

Assuming the level holds as support, we'll be off to the races.

jog on
duc

 

[Beaches]

So much money forced into the market that PE can not be meaningful again, so we are just in a bidding war attached to any ticker

I don't consider PE values are meaningless. The market is where it always sits, some stocks overvalued, some fairly valued and some undervalued. The only thing that changes is the extent of over or under valuation, which at times can be excessive in either direction.

While there are obviously companies on the ASX with extremely high PE values and probably highly overvalued, there are still plenty of companies that are either fairly valued or undervalued based on both current and future earnings.

As an example, take Emeco Holdings EHL. The half year report to 31 December had the following results
EBITDA - $119m
NPAT - $27m
EPS - 8.13c

Today they announced a full year guidance of $244m to $247m EBITDA. Increased costs were mentioned, however these related to mine site costs and I have assumed are included in the EBITDA figure

Using the first half figures of $119m EBITDA producing a profit of $27m. The full year guidance of $244m EBITDA would imply a profit of around $55m for the year to 30 June, giving earnings of 0.15c per share, taking into consideration the dilution from the SPP earlier this year.

The share price closed today at $1.085 and with earnings per share of 15c, they have a PE of around 7.2 times.

A PE of 7.2 would be undervalued for me and the announcement of a new contract today is positive for future earnings.

PE values are still relevant and there is still value to be found, just not for every stock on the market.

 

[Chronos-Plutus]

The stock market isn't reflective of the real economy. The stock market has decoupled from the real economy due to Central Bank intervention; has been from the 2008 GFC.

Example: How can QANTAS shares be at ~$4.10 when QANTAS will be on its knees by the end of the year if the macro global fundamental status-quo is maintained. International and domestic travel will not return to their pre-COVID levels by the end of the year, not a chance.

 

[Student of Gann]

SP500

 

[aus_trader]

Tech will remain an area (sector) to be in. The big guys benefit from the networking effect. Here is my worst call ever: when GOOG listed they did it via a public auction (which was pretty unusual, most will engage an investment bank for the IPO) and were valued at $90 (before stock splits). I was into valuing companies on the financials. I had them overvalued at $90. The rest is history.

Financial analysis (value investing/micro) is really only necessary if:

(a) you are buying a stock (company) and you want to ensure that it is not fraudulent;
(b) you really want to understand its business model (which often requires looking past the financials);
(c) buying for the dividend stream;
(d) buying the entire company;
(e) other.

Value investing is usually micro. Fundamentals macro, however is a separate issue and I would argue, incredibly important. My focus evolved from micro to macro. Any analysis (technicals/etc) will always start from a macro analysis, moving down the hierarchy.

Tech, particularly now, will play an increasing role in society. The big guys will continue to win. There will of course be new entrants who potentially will grow huge. Finding those (which are value) is no easy task.

jog on
duc

There is no easy answer even with regards to value investing. Your GOOG example is "Once in a Blue Moon" outcome that you feel particularly emotionally attached to as you missed the gains that followed. I have had similar examples on the asx where I thought "It's too expensive, so I'll pass and wait for a cheaper entry" and missed out as the stock continued higher. But these are some exceptions that are somewhat rare.

If valuations are of no value at all your GOOG example would have applied to every Tech stock that went bankrupt or pretty much worthless during the tech wreck. They had lofty valuations in the 100's with minimal or in some cases no earnings at all but people thought this is the 'new normal' i.e. the Tech mania removed any common sense and reality check from punters, speculators, traders and even seasoned investors who threw the value books in the bin and joined in at the latter hysteria stages.

So just remember, for every GOOG or MSFT or NFLX tech stock that made it big time, there were 100's (maybe 1000's) of Tech stocks that failed. So these are the few that rose from the ashes of the Tech bust. Predicting these were the winners (and would later become household names) amongst thousands of Tech hopefuls would have been near impossible without some form of time travel or future telepathy.

 

[sptrawler]

There is no easy answer even with regards to value investing. Your GOOG example is "Once in a Blue Moon" outcome that you feel particularly emotionally attached to as you missed the gains that followed. I have had similar examples on the asx where I thought "It's too expensive, so I'll pass and wait for a cheaper entry" and missed out as the stock continued higher. But these are some exceptions that are somewhat rare.

If valuations are of no value at all your GOOG example would have applied to every Tech stock that went bankrupt or pretty much worthless during the tech wreck. They had lofty valuations in the 100's with minimal or in some cases no earnings at all but people thought this is the 'new normal' i.e. the Tech mania removed any common sense and reality check from punters, speculators, traders and even seasoned investors who threw the value books in the bin and joined in at the latter hysteria stages.

So just remember, for every GOOG or MSFT or NFLX tech stock that made it big time, there were 100's (maybe 1000's) of Tech stocks that failed. So these are the few that rose from the ashes of the Tech bust. Predicting these were the winners (and would later become household names) amongst thousands of Tech hopefuls would have been near impossible without some form of time travel or future telepathy.

Never a truer statement made.
Would have, should have, could have, we all have had those opportunities, the trick is not to dwell on them, but learn from them.

 

[ducati916]

Economy improving:

Obviously not where it needs to be: but definitely moving in the right direction.

jog on
duc

 

[qldfrog]

Above related to US, just to clarify

 

[ducati916]

And here is the pullback to former resistance and now potential support:

Which is the scenario addressed earlier.

So tomorrow morning we'll likely open lower and the outcome will be decided by the close.

Futures indicating a lower opening tomorrow.

jog on
duc

 

[ducati916]

Going forward into tomorrow:

As for bearish sentiment, after the 1.17 percentage point decline to 42.13% this week, AAII's survey is reading the lowest level of bearish sentiment since mid-April. This week was the third consecutive week with bearish sentiment declining, but despite that it is still fairly elevated. In fact, this week marked the twelfth consecutive week in which bearish sentiment was at least one standard deviation above it historical average (30.48%). That is the longest such streak since a 14-week long streak in 2008.

Seasonality:

Feeling bullish?

jog on
duc

 

[ducati916]

The 50SMA has already been identified as an important data point in an earlier post.

Currently, 96.24% of S&P 500 stocks are above their 50-DMAs. On a sector basis, Consumer Discretionary, Energy, Industrials, and Materials all have 100% of their stocks above their 50-DMAs. That is a huge share of the index sitting above their 50-DMAs at once. As shown in the chart below, times in which there have been this many stocks above their 50-DMAs have been few and far between. Of all days since the start of 1990, there have only been four other days with a reading as high or higher than the current 96.24%. The most recent of these was March 5th, 1991 when 96.59% of the index was above its 50-DMA. Other than that, only February 11th through 13th of that same year saw these types of readings (97.4%, 96.6%, and 97.8%, respectively).

This increases the probability of breaking through (above) and remaining above that 200SMA.

The 200SMA (rightly or wrongly) is commonly perceived as the demarcation point between a Bull and Bear market. If the market stays above that 200SMA and starts to move higher, the overall mood of the market will alter. The next big target will become the previous (all time) highs. The chart above (although it looks like noise) is signal.

The caveat however is that the chart (above) is extended. How long will 90%+ of stocks remain so elevated? The trend prior to the crash had 80% participation (above the 50SMA) and this is fairly typical of a higher trending market. I would therefore expect this number to fall back into the 80% range over time.

If we shift into lower (faster) timeframes: the noise to signal ratio increases: 20, 10, 5, 3SMAs will all trigger signals that are daily variations rather than return that can accrue to a trending market. These are valid for daytrading strategies, but not for longer timeframes where the idea is to catch big moves.

Assuming (always a dangerous undertaking) that the market stays above the 200SMA, this thread will be concluded as the bounce is renamed a 'trend'.

jog on
duc

 

[qldfrog]

I believe that one of the uniqueness of the current situation, one of the real "it is different this time" is the speed factor.
Mostly due to technology changes, mood and market swings are faster, previous developments which used to take months are done in weeks, crashes fully develop in days.
As such, it is harder to parallel todays to past 1900's or even 2000 events.this is both a problem and an advantage.your learnings mental or quant becomes obsolete, my weekly systems are too slow to be efficient, going daily becomes a pain:
By the time you get last world data, you have only a few hours before Sydney opening.
On the other end, you can potentially beat the old timers and it removes the advantages of some self learning systems