Saturday, May 10, 2014 - Let's take a walk through the S&P 500 for 2014!

Interesting:

Today, I want to take you on a tour of the S&P 500 price for 2014, using the ES mini futures contract (which is the June contract on this chart), and the daily, weekly chart for SPX.  

Friday's 30-minute chart shows a very choppy market on Friday.  I've tried many ways to measure trends and choppiness, and I always come back to Welles Wilder's ADX.  This is  not an education in the ADX indicator, but the indicator is showing there was no 30 minute trend on Friday. The blue lines are the range for the 1st hour.  While I have not found the first hour range a good indication of direction for the day, other famous traders have published directional forecasting after the first hour indicates the "close" price.  However, one would be hard pressed to predict direction after the first hour in S&P500 on Friday.

Let me open up the time perspective, and show the week's trading on a 30 minute chart.  

If that looks like chop to you, then we agree.  What is interesting, however, is the ranges during the week.  There were trends up then trends down, until Friday. By the end of the week the market reached an equilibrium.  Do you observe the same?  Then Friday the market closes for the week with a very slight positive gain.  As I already published on the blog, the S&P 500 was not the only market that was undecided.

The cross currents are extending across all markets in all time frames.  Now having said that, someone will surely point out some market somewhere is trending.  For example, you could have invested in the Russian ETF and done very well indeed. None-the-less, to make money on Russian ETF, the investor would have had to have perfect timing to get in, and then they must be ready to exit before any collapse.  Of course, if any of you follow Behavioral Analysis, you will recognize investing using that method requires deep knowledge of human behavior; not fundamentals.  However, if you had invested in ETF emerging markets (that included Russia), you would find the same story as the rest of the markets - choppy.  Starting in middle of March, VWO exploded up until April.  Then it started chopping big time.    Russia's play on the Ukraine is definitely causing uncertainty, but it is not causing fear.  ($VIX is showing 12.92 which is indicating investors are not very afraid of the stock market falling in the short term.)

Let's observe the 1st hour of trading since the 1st of the year. 

• ·  The most interesting thing to me is the ATR, which shows the ranges are fairly large.  What is not apparent by looking at the chart is that ATR measured this way is also an indication of "range" for day and night trading.  Why?  Because ATR includes the "gap" between one bar and another.  (See Welles Wilder's ATR calculation on Stockcharts.com)
• ·         There are many ways to calculate volatility.  However, range is a simple way to measure volatility.  During 2013 the price range was fairly low, but during 2014 ranges are getting larger, with a tail off as the market becomes uncertain.  Large ranges are very good for HFT (high frequency trading) and day traders.
• I like to think why a statement like that is correct.  Why is it good for HFT or day Traders?  Because both of these approaches to trading (vs. long term investing) rely on price to move; they don't need trends that show on daily charts.  Now there is a hint for those that have eyes to see.  What is that hint?  Haa...  Van Tharp expresses it as traders require a system to trade the type of market we are experiencing.  Having asserted that, however, consistently calling the market we are in is very difficult indeed.   
• ·         So what is the type of market we are experiencing? It is bullish and choppy.  Now, you can define bullish as you wish, but looking at the charts so far in 2014, the market may be bullish, but the market is choppy with very wide ranges.  Long term investors have not made much return in the stock market on their investment so far this year; while HFT is very likely ecstatic. During times like this, investors move to dividend stocks, which may (stress may) indicate why the large cap stocks are outperforming small cap in a significant way.  Day traders?  Many of them are retail traders, and they have very likely lost their shirts, pants, wives and first born; whether they are trading stock indexes, currencies, gold, silver or whatever.  

Starting the first of March 2014, the market has gone into a very large range chop. 

SO?  What are am I trying to suggest?  Good question amigo.  This market will break out of that green box to the upside or the downside.  It won't stay in that box much longer.  I have May 14 listed on my long term chart. Why? Go ask Larry Williams.  https://www.ireallytrade.com/  (No, he is not publishing that date that I know of, but he will teach you how to calculate the cycles based on historical data.)

Now, to a weekly chart, and you will (hopefully) observe the market is still in a very long term uptrend.

What you will notice is ADX is showing a loss of momentum starting in March of 2013.  So what, you say? You also say that the market has made significant gains since March of 2013.  All true, but one needs to "insure" their positions for a major correction right now.  Momentum is not confirming the market's price rise. 

How do you insure?  A blog may (or may not) be the place to "teach" how to use options, ETFs, and other mechanisms to insure your long positions (or short positions if you are on that side).  Unfortunately, I have found that most retail traders do not know how to take out insurance.   

Would you like to observe a market that is moving?  

This is a daily chart of Soybeans.  Ouch, watch out for your grocery bill.

Want another? 

The above chart is of live cattle.  I wonder why beef is going up at the super market and down in the futures market?  

Let's look at Milk Class III from CME.

Is the price of milk related to Soybeans?  Since no one reads, this blog, I leave anyone who trolls across this blog to answer that question. 

Take away?

1. The Stock market measured by the S&P 500 is bullish, and has entered a very large range choppy period.  Watch out for false breakouts of the range (either direction). 
2. Liquidity provided courtesy of the Federal Reserve (and other central banks) is driving the move in the stock market.  Until liquidity dries up, the market is bullish.
3. Emerging markets are suffering in a choppy period as well.  They have been financing themselves on artificial low interest rates.  Much of the large cap stocks are using a similar mechanism to go into low cost debt to buy back shares. 
4. The markets will correct, but I caution all who will listen that market timing is very difficult if it is even possible.  I have no idea when a major correction is coming, but it will happen.
5. The agricultural markets are beginning to move to the upside.  Wait until the investors across all investors (Commercials, Big Traders, and Retail) discover this.  Hold on to your hats, because possibly we will observe the worst of all situations: Runaway hyper-inflation and consumer's out of jobs.  Of course, I can hear you now... That will never happen in the USA, because Dr. Krugman http://www.krugmanonline.com/ is telling us everyday it won't happen here. (Actually, he would vehemently disagree with my stating he tells you this, and I would understand his concern.  None-the-less, he is not calling for any collapse except for hinting if the Conservatives come to power, the USA will collapse.)   There is a better reason for no inflation, however.  If people do not have jobs, then they cannot borrow.  Without jobs and borrowing in an economy whose GDP is based 70% in consumer spending (so I'm told), how can there be inflation?  
6. Tricky world right now, but it has been since the Great Recession started.

Have you solved the riddle?  What is the riddle?  Have we recovered from the "Great Recession"? Or have we had a "false" breakout to the upside with the stock market providing and optical illusion of recovery?