Market Breadth: With this past week’s market advance, our Bull/Bear Point and Figure Ratio at 1.54 rose from 1.35 last week, continuing within bullish territory. The total count of securities in bullish or bearish patterns increased 1% to 2854. The count of bearish stocks decreased 6%, while the count of stocks in bullish patterns increased 7%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now eight weeks in bullish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.
The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) rose 75 points for the ninth advance in thirteen weeks. At a positive 240.49 points, it has risen above the February 2015 top and continues below the five remaining tops above +100, and it continues above all four bottoms below -100 in the last 3 years.
Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in neither Accumulation nor Distribution mode with average daily volume higher than the prior week. In the last two weeks the NASDAQ had four (4) Accumulation days and zero (0) Distribution days. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week the NASDAQ ended in neither Accumulation nor Distribution mode on higher average daily volume.
Momentum: The CCI(20) daily is now at +123.59, down from +151.22 last week. At Wednesday 7/19 close, the CCI(20) daily had 6 consecutive days above zero for a change in Woodie’s trend to Up. We wait for the CCI(20) daily to return to the +/-50 range for another ZLR (Zero Line Reject) entry signal.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend sixty-four weeks ago, while the Daily CCI(20) began a Woodie’s up trend this past week.
The CCI(20) weekly has risen to +132.81, up from +99.51 last week. We await the return of the CCI(20) weekly to the +/-50 range for another CCI(20) weekly trade.
Industry Rotation the last two weeks: All of thetop five industries are positive and only two of the bottom five are negative. Summary: Some Tech, Gold & Silver, and Oil Services on top; Oil, Brokers, and Banks on the bottom. Bullish: Computer Hardware and CompTech continue in the top five. Disk Drives have entered the top five. Oil has entered the bottom five. REITs have left the bottom five. Bearish: Gold & Silver PHLX continues in the top five. KBW Bank and Brokers have entered the bottom five.
For the last two years, short interest in the US stock market’s largest ETF has collapsed as bears have been squeezed back to their lowest level of negativity since Q2 2007 (the prior peak in the S&P). But, there’s a bigger issue – despite record highs and ‘no brainer’ dip-buying, anxious longs have dumped S&P ETF holdings for four straight months – the longest streak since 2009 – seemingly confirming Canaccord‘s recent finding that “it’s not complacency, it’s paralysis.”
Bearish investors say they are scaling back on these bets not because their view of the market has fundamentally changed, but because it is difficult to stick to a money-losing strategy when it seems stocks can only go up.
“There seems to be an overall view that people are invincible, that things will always go up, that there are no risks and no matter what goes on, no matter what foolishness is in play, people don’t care,” said Marc Cohodes, whose hedge fund focused on shorting stocks closed in 2008.
The absolute number of SPY shares short has not been this low since Q2 2007.
The Wall Street Journal points out that ‘times are tough for skeptics of the bull market’. Flummoxed by the endurance of a 2017 rally that produced its 27th S&P 500 record this week, investors are backing off bets that major indexes are headed downward.
“The shorts have been frustrated now for quite a while,” said Scott Minerd, global chief investment officer at Guggenheim Partners, which has $260 billion in assets under management.
And as we detailed earlier in the week, in one sign of capitulation among the bears, stock pullbacks have been getting shorter. This year’s 2.8% maximum drawdown (for now), continues a 6 year streak of drawdowns that are dramatically below the longer-term average of 14.1% drops intra-year.
The Journal notes that, if it finishes 2017 that way, it would be the second-smallest decline in a calendar year over the past 60 years, according to LPL Financial, an independent brokerage and investment firm.
So shorts have covered drastically… What about the longs?
As Bloomberg reports, even as the S&P 500 Index clawed its way to a fresh record and squeezed out a third consecutive weekly gain, signs of fading enthusiasm in U.S. stocks have become increasingly difficult to ignore. The latest can be seen in the SPDR S&P 500 Trust, the biggest exchange-traded fund tracking the U.S. equity benchmark. As of now, investors have pulled over half a billion dollars out of the ETF in July. That puts the fund on pace for a fourth consecutive monthly outflow, which would be the longest streak since the start of the bull rally in 2009.
So shorts are out, longs are fleeing.. so who is buying?
Simple – recall that as we showed earlier in the week, using a Credit Suisse chart, there has been just one buyer of stocks since the financial crisis: corporations themselves.
As we have shown in the past, and as Canaccord points out again, these relentless credit flows have fueled stock buybacks, “which have been the driving force for higher stock prices.”
And yet, despite those record buybacks, stock market volume has been anemic.
Those opposing forces have led to a compression of volatility. When stocks have rallied strongly, they have then been met with investor selling. When stocks sell off, the buybacks have picked up after the selling runs its course. That has been the case for more than eight years. Those forces have led to an equity bull market that moves higher in fits and starts, with some brief pullbacks from time to time. Given the positioning of equity investors and continued flows into credit, we do not see that pattern changing for some time.“
If Reynolds is right, and he may well be, there is just one catalyst that can break this chain of events: a forceful Fed intervention which will make it all too clear that what has worked until now, no longer will. To be sure, the Fed has made several very pointed statements in that regard in recent weeks, however as has been the case for the past 8 years, it still has to actually do something to prevent what increasingly more banks are openly calling an asset bubble and in some cases, even begging the Fed to intervene.