10-1-17 Market Commentary


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Market Breadth: With this past week’s market advance, our Bull/Bear Point and Figure Ratio at 1.75 rose from 1.21 last week, advancing further into bullish territory. The total count of securities in bullish or bearish patterns decreased slightly to 2949. The count of bearish stocks decreased 20%, while the count of stocks in bullish patterns increased 16%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now five 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 171 points for the fifteenth advance in twenty-three weeks. At a positive 491.14 points, it has risen above the February 2017, December 2016, and May 2016 highs, and continues above the July 2017 high and continues below the two remaining tops above +100, and above all five bottoms below -100 in the last 3 years. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in Accumulation mode with average daily volume higher than the prior week. In the last two weeks the NASDAQ had three (3) Accumulation days and two (2) 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 lower average daily volume.

Momentum: The CCI(20) daily in a Woodie’s Up trend is now at 142.38, up from +28.36 last week. At Tuesday 9/26 close, the CCI(20) daily was within the +/- 50 range for a ZLR (Zero Line Reject) Long entry signal at Wednesday’s close and Thursday’s open. We will follow the results of this trade simulation in next week’s commentary.

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 seventy-four weeks ago, while the Daily CCI(20) began a Woodie’s up trend three weeks ago.
The CCI(20) weekly has fallen to +119.54 from +127.77 last week after forming a ZLR (Zero Line Reject) Long entry signal for Tuesday 9/5 open. Our rule is to stay in the trade until the CCI(20) drops below +100. We will continue to follow the result of this trade simulation in next week’s commentary.
Industry Rotation the last two weeks: All of the top five industries are  positive and all of the bottom five are negative. Summary: Oil Services, Oil, KBW Bank, Brokers, and Disk Drives on top; Gold & Silver and REITs on the bottom. Bullish: KBW Bank and Brokers continue in the top five. Disk Drives has entered the top five. Gold & Silver PHLX continues in and leads the bottom five. Comp Tech and Computer Hardware have left the bottom five. Bearish: REITs continues in the bottom five.
Focus this week: From www.zerohedge.comEric Peters On Tipping Points: “It All Worked Incredibly Well, Until It Blew Up”“. The following are some key points.

  • Two years ago, long after we first suggested that the transformation of VIX from a measure of implied market volatility to a reflexive instrument that can be traded – and thus influence the underlying assets whose volatility it was supposed to measure – allowed the VIX to serve as the “fulcrum security” for broad asset manipulation, first the FT, then the WSJ confirmed what we said, namely that pervasive market manipulation was not only possible, but took place on a regular basis, courtesy of the VIX (see “Conspiracy “Fact” – VIX Manipulation Runs The Entire Market” and “Another Rigged Market: Scientific Study Finds Systemic VIX Auction Manipulation“).
  • “When a measure becomes a target, it ceases to be a good measure,” said the Englishman, stepping outside of himself.

    “That’s Goodhart’s Law.” Charles Goodhart observed that central banks measured money supply, and found certain M1 growth rates to be optimal. But once they targeted that optimal range, M1 lost its value as a measure.

    Market and economic actors adjusted their behavior to game the M1 system. So central bankers shifted to M2, then M3, and M4.

    “Investing is obviously not a science, but if it were, we would say that you can’t act on something and observe it at the same time.” French colonialists discovered this in rat infested Hanoi, when they offered a bounty for killing rodents. To receive the reward, the Vietnamese were required to produce severed tails. Soon thereafter, tail-less rats scurried throughout the city. The bounty hunters removed their tails and released them to the filthy sewers to breed. Boosting their bounty.

    “Today’s greatest example of Goodhart’s Law in action can be found in volatility markets.”

    The VIX index measures the expected volatility of the S&P 500, and is calculated by multiplying expected 30-day variance by 100.

    As a measure of market fear, it was quite useful, until it became something that could be traded. “The sheer size of outstanding positions in VIX futures, VIX options, ETFs, ETNs and bank volatility selling programs is such that those trading these markets can no longer separate the true measure of volatility from their own actions.”

  • Or, said simpler, “low volatility” is no longer a description of a market state, rather it is a characterization of the one, and perhaps only, trade strategy that has the explicit blessing of central banks, who themselves do everything in their power to crush volatility…
  • …speaking of tipping points, here are some further observations from Peters on this topic through…

    … a curious look at unexpected feedback loops involving cobras in India…

    The British Raj grew concerned by the abundance of venomous cobras in Delhi. A reward was offered for every dead snake. And in they slithered. One by one at first. Then in baskets, barrels. “Our strategy has proved a great success,” announced the Raj, yet still the number of captured cobras swelled. You see, the breeders had entered the business. When Raj learned of this betrayal, the law was abruptly abandoned. And the captive snakes, as worthless as they were abundant on a scale never before seen, were set free. Coiled throughout Delhi.

    … and finally through the (imminent) folly of the Swedish Central Bank:

    “The objective of monetary policy is to maintain price stability,” declared the Sveriges Riksbank Act. Stability is defined as 2% inflation, itself an oxymoron. “Sustainable growth and high employment are to be supported,” says the Act, though they’re of secondary importance. Inflation is now at the 2% target, a consequence of overnight interest rates at -0.50% and central bank bond buying, which weakened the krona, sparked +5.3% IP growth, +4.1% services output, unprecedented real estate speculation, and surging consumer debt.

–Donald Pirl www.s2pmarketsignal.com

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