ADHD

The chart below shows the average investors holding period for stocks from just before the great depression until now.  I don’t know if the recent declines are more a reflection of the increase in the use of HFT computers or really echo investor’s (and society in general) shortening attention span. It’s likely a combination of these items and more.  Sadly and in spite of the direct correlation with performance, investors time horizons continue to shrink

One of the consequences of such a short investment time horizon is that investors have begun to fear short-term market events and volatility as much or more than the factors that shape prospects for long-term economic and profit growth that drive stocks over the longer term. Ironically short term time horizons add to the volatility, the exact same thing these skittish investors are trying to avoid.

Is This Why the FED Did Not Raise Interest Rates?

While the Fed has a dual mandate, there is no question they look at a plethora of data not just inflation and employment to determine what to do with interest rates. We are bombarded with so many regular reports but there is so much more going on behind the scenes that give insight into the shape of our economy that we aren’t necessarily privy to.  The good thing is the FED does not hide this information, in fact they publish it and make it available to everyone. Why it is not reported by the mainstream media is anyone’s guess but I thought the graphic below fills in some noteworthy voids.

While we may not have agreed with the FED’s decision to keep interest rates where they were, clearly these charts show areas of definite underlying economic weakness and concern in spite of positive unemployment and inflation data.

(As much as I would like, I cannot give proper recognition to the person who put this chart together as I was unable to find the author)

India ... on the Ropes

Below is a chart of India’s Bombay Sensex index. You can see they broke out of a sideways consolidation in October of 2013. For the next 2 ¼ years, price rose almost 50% topping out in March of this year. Since peaking, it has been a choppy downward move creating negative momentum divergence and eventually gapping down through the 3 year (blue) uptrend line.  Currently the moving averages are bearishly configured, pointing down and signaled a death cross in early May. Two months later it found at least a short term bottom stopping exactly where you would have expected, at the upper red horizontal support line. Looking to the left of where we are today we see that price has essentially gone nowhere over the past 19 months and has formed multiple different bearish topping patterns telling us there is a lot more downside if this support does not hold. 

Like so many investments I am watching, this is do or die time. Will price bounce off current support and move higher or will it consolidate for a few more weeks or months and then finally give way under its own weight with an ultimate target at the lowest red horizontal support line some 20% below?

Again, if you look left to the left side of the chart just below the upper support line you will notice there exists very little supply of buyers who might be available to step in and cull any move to the downside until you reach the target zone. As such any confirmed close below the 25000 level will likely be followed by a swift and intense move lower. While I like India’s long term outlook, the short to intermediate term has me leaning neutral to bearish.

Risk On - Risk Off

It’s time to blow the dust off my “risk on/risk off” chart as it’s been a while since I have shown it. For those that have not seen it before, in the upper pane of the chart is a 20 year look at the SP500 stock index to 30 year US Treasury bond price ratio. In a “risk on” environment (where investors want to own stocks) the lines on this chart will be moving higher. When investors become risk averse money moves into bonds (or cash) and out of stocks as they are perceived as a safer haven and the direction of the line will move lower. This illustrates the concept that investment dollars are always rotating, moving from one investment to another. Most of the time money moves to where investors believe will provide the best returns. I said “most of the time” because there are times where investors become fearful and when that occurs it’s not about return “on” capital but rather return “of” capital (capital preservation).

In the bottom pane is a plot of the SP500 index price.

The beauty of this long term view is that it goes far enough back to include the past 2 major bear markets (2000 and 2008) and as such provides an analog of what the chart may look like the next time a bear market arrives. What should stand out is that in the past two bears this ratio did an excellent job of identifying stock market tops and provided a heads up to investors to reduce risk and lighten up on equity exposure. As you get with most long term moves that are running out of gas, divergence forms which cements the bearish story as the ratio rolls over and begins its decent. The one thing I find very interesting is that tops in this ratio have preceded actual tops in the stock market, in other words it has been a leading indicator

If you are struggling interpreting the chart the main thing you should take away is that we are at a decision point. Starting very soon, the stock market needs to outperform bonds otherwise this indicator is warning of the potential for a much deeper equity selloff. As always, no one knows where prices go in the future and indicators and charts can only provide potential paths. As investors, we need to make decisions based upon a weight of the evidence and this chart provides one more piece that shows the markets are at a crossroads. Until I get additional confirmation (in either direction) I continue to believe erring on the side of conservatism is the prudent path. 

Post FOMC Market Closing Commentary

A rare 2 post day but I thought I would give a quick update since all eyes were on the FED's announcement today.

Apparently the markets did not want to hear the Fed was not going to raise rates. You see the markets hate uncertainty and the FED provided nothing today to answer the question of “whither now”. Initially the market powered higher on the release of the FED minutes but faded strongly into the close creating a very bearish shooting star candle on the SP500.

The shooting star is made up of a candle with a small lower body, little or no lower wick, and a long upper wick that is at least two times the size of the lower body. The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed but encountered selling pressure which drove prices back down for the period to close near to where they opened. As this occurred in an intermediate term uptrend, the selling pressure is seen as a potential reversal sign.  The longer the candle's wick the greater the potential reversal. As always, you need volume to confirm price action and we saw the number of shares traded more than 2x the average.

Because these patterns require 3 days to form and confirm, we need to see either a gap down and/or close tomorrow for a loss in order to validate the pattern and reversal signal. If that were to occur it is likely additional selling pressure would be on the immediate horizon. If not and the market powers higher, consider it a blessing and use the rally to sell into strength if you are still overweight equities.

No one knows where we go next but market action is telling us to be careful here.

Have a great evening.