A Deep Dive into Dow Theory and Its Relevance Today

In the ever-evolving world of market analysis, one thing is for sure: change is constant, and keeping up with it is crucial. Let's dive into the recent observations about Dow Theory and its relevance in today's market environment.

Charles Dow, the founding father of technical analysis, laid the groundwork for understanding market dynamics through his Dow Theory. By analyzing the relationship between the Dow industrials and the Dow transports, Dow aimed to gauge economic conditions by observing the producers and distributors of goods. However, in today's modern economy, where companies like Amazon have revolutionized the way goods are produced and distributed, the traditional Dow indexes may not fully capture the complexities of our current market landscape.

While the Dow Theory has been a staple in market analysis, its efficacy in 2024 is open to interpretation. The recent bearish signal triggered by a nonconfirmation between the Dow industrials and transports suggests potential weakness in the broader economy.

In adapting Dow's original work to suit the contemporary market, a shift towards a new Dow Theory may be warranted. I propose looking at a combination of the S&P 500 and the Nasdaq Composite to gain a more holistic view of the market. These indexes represent the old and new economies, respectively, providing a diversified perspective on market performance.

The recent market dynamics, with the S&P 500 and Nasdaq Composite reaching new highs, may seem bullish on the surface. However, delving deeper reveals nuances that challenge the conventional signals. The dominance of mega-cap stocks in these indexes skews the true breadth of market strength, prompting a closer look at equal-weighted versions for a more accurate assessment.

The equal-weighted S&P 500 and Nasdaq 100 not reaching new highs amidst the market rally raises concerns about breadth conditions and the underlying strength of the market. While the major benchmarks paint a positive picture, the reality may be more nuanced, hinting at potential challenges ahead.

Navigating through the complexities of market signals requires a keen eye and a discerning approach. As we move through May and into June of 2024, the question remains: Will Q2 finish stronger or weaker? The answer may lie in a comprehensive analysis that goes beyond conventional wisdom and embraces the fluidity of today's market landscape.

While the Dow Theory has stood the test of time, adapting it to suit the intricacies of the modern economy is essential for informed decision-making. As we continue to unravel the mysteries of market behavior, staying agile and open to new perspectives will be key in navigating the ever-changing financial landscape.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

As S&P 500 Hits New Heights, Here's the One Chart You Should Be Watching

The last few weeks have been sensational for risk assets, with the S&P 500 and the Nasdaq 100 breaking new all-time highs. Remarkably, the Dow Jones Industrial Average even touched 40,000 for the first time in market history. With the market on such a high, one critical question remains: Is this rise sustainable? Let’s explore further.

Before we dive into the charts, let me clarify a bit about my approach. As a technical analyst, I spend countless hours daily pouring over hundreds, if not thousands, of charts. However, my decision-making is not solely technical. I also consider fundamental factors, like macroeconomic data, Federal Reserve actions, inflation, and interest rates. These elements collectively impact the stocks and ETFs I monitor.

About a month ago, in mid-April, we were contemplating market breakdowns. The S&P had briefly dropped below its 50-day moving average, suggesting a target near 4800. But since that point, stable inflation data, a weakening dollar, and declining long-term interest rates have turned things around, shining a favorable light on equities.

When markets hit new highs, setting arbitrary price targets can often be limiting. Instead, follow the trend. From my experience with growth-oriented money managers, trend-following is more effective. Selling at an arbitrary price can cause missed opportunities if the trend continues upward. Focus on riding the trend and exiting only when it shows signs of faltering.

Have you ever sold a stock up 20%, then sit on the sidelines as it went up another 200%? Then you know why trend-following can be such a profitable strategy!

According to Charles Dow’s original work, an uptrend is formed by higher highs and higher lows. As long as we stay above 4950-5000 on the S&P, the uptrend by definition would still be in place.

I've compiled a chart combining S&P 500 analysis with two other pivotal metrics: the high yield bond market and the VIX (Volatility Index). The chart layers the S&P 500 on a closing basis, an inverted VIX for clarity, and the High Yield Index Option-Adjusted Spread (OAS) from Bank of America.

The High Yield Index OAS measures the spread between risky corporate bonds and Treasury bonds. Currently, the spread is around 3.1%, its narrowest in two years, indicating a low-risk environment as per bond investors.

An inverted VIX makes it easier to track market stress. Normally, a low VIX indicates healthy market conditions. Conversely, a spike in VIX signals increased investor anxiety. Inverting the VIX aligns it with S&P movements, simplifying interpretation. The VIX remains at extremely low levels.

So, why is this chart crucial now? It helps confirm the bullish trend. Tightening spreads and low volatility suggest favorable conditions for equities.

However, certain signs could indicate a shift. If credit spreads widen or volatility rises, it signals growing investor anxiety. Most importantly, if the S&P dips below 5000, breaking the uptrend, it would suggest a potential market shift.

In summary, the market remains bullish as of mid-May. Keep an eye on the spread, volatility, and the S&P's performance for any signs of change. Should these metrics shift, reconsidering your portfolio allocation may be wise.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Breadth Indicators as Market Guides: What They Tell Us About Future Trends

After the market took a promising turn from its mid-April lows, many of us are keenly watching to see if this upward trend has legs. Today, we'll explore a few vital market breadth indicators that can help us determine the strength and potential longevity of this bullish phase.

Before diving into those indicators, let's touch on the holistic approach we use here. Apart from the usual chart analysis, understanding economic indicators like Federal Reserve policies, inflation, and interest rates also plays a critical role in our assessments. Additionally, combining these insights with robust quantitative models gives us a clearer picture of potential movements.

Now, onto the essential indicators that could signal whether we're in for a sustained bull market:

Percentage of Stocks Above Moving Averages
This is one of the clearest indicators of market health. A considerable number of S&P 500 stocks are currently thriving above their 50-day and 200-day moving averages. This widespread positivity often suggests a strong and supportive market environment.

Daily Difference in New 52-week Highs and Lows
Focusing on market leadership, this indicator tracks the number of stocks reaching new highs versus those hitting new lows. Recently, we've seen more stocks scaling new highs, an encouraging sign that leadership within the market is robust and potentially driving the indices toward record levels.

Bullish Percent Index for Nasdaq 100
This index zeroes in on significant tech and growth stocks, measuring how many are currently showing bullish trends on their point and figure charts. As it hovers around 50%, a push past this threshold could indicate a powerful momentum build-up among these influential stocks.

These indicators serve as critical tools for both confirming the current market rally and helping us strategize our next moves. If these metrics continue to show strength, it's likely that the bullish trend is here to stay. However, any signs of their weakening could suggest the rally might be running out of steam and require us to reconsider our positions.

Let’s keep a close watch on these indicators and discuss their possible implications. What's your take on the current market trends? Do you feel optimistic about the sustaining power of this rally, or do you foresee a downturn?

Let's stay connected and navigate market changes together. Keep analyzing, keep questioning, and as always, invest wisely.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Let’s Unpack Why Apple Remains A Titan

Apple, with its monumental earnings boost last week, commands attention once again. Before diving into the tech giant's stock performance and what this could mean for future investments, give that a moment to sink in. Apple, arguably still the crown jewel in Warren Buffett's portfolio at Berkshire Hathaway, has managed to hold its appeal despite declining iPhone sales, thanks to substantial buyback increases and dividend enhancements.

Let’s unpack why Apple remains a titan in the investment world, blending technical analysis with the kind of fundamental powerhouse insights that Warren Buffett himself might nod approvingly at. As a technical analyst and a keen observer of Buffett’s investment strategy, I find the intersection of these disciplines revealing. While charts and technical data paint one picture—the short-term gains, medium-term stabilizations, and long-term uptrends—understanding the underlying business dynamics and macroeconomic factors adds depth to our investment decisions.

In the spirit of full disclosure, I am not just a chart enthusiast. I also dig into the fundamental aspects driving companies like Apple to sustain growth over multiple years. Considerations such as Federal Reserve policies, inflation, and interest rates are critical in shaping my outlook on stocks and ETFs that I follow.

As many make their way to Omaha to gather pearls of wisdom from Buffett at the annual Berkshire Hathaway meeting, it's crucial to remember why Apple is a mainstay in Buffett's portfolio. His strategy often involves holding large, concentrated positions in key, blue-chip companies, and Apple’s long-term growth story fits this mold perfectly.

Drilling into the technicals—Apple's shares, on a short-term basis, show promising signs, such as overcoming key moving averages and an RSI indicating increasing momentum. However, the real magic happens when we stretch the timeframe. Employing a Fibonacci analysis on the stock provides insights into potential support levels which have historically held well, providing rebound opportunities for the stock.

On a longer timeline, a look at Apple’s charts over the past 16 years reveals a compelling narrative. The consistent pattern of hitting new highs, followed by manageable lows, illustrates a robust growth trajectory that few companies can match. It's like what I always say, individual trading days can be deceptive, the real story unfolds when you zoom out.

Apple’s long-term uptrend is marked by multiple tests of an ascending 150-week moving average.

Reflecting on Buffett’s interest in Apple, it becomes clear that the investment mogul’s strategy aligns with the broader patterns shown in Apple’s long-term chart. Each touch of the 150-week moving average has historically presented a buying opportunity—a pattern echoing through Apple’s stock history.

While daily fluctuations can be enticing or nerve-wracking, a multi-timeframe analysis is quintessential. Such an approach not only aligns with how legendary investors like Buffett operate but also equips us to make more informed decisions, balancing immediate opportunities with long-term strategies. Remember, understanding timeframes and the interplay between them is an invaluable part of any investor's toolkit.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

What's Next for the S&P 500？

When considering where the S&P 500 index might head over the next six to eight weeks, I like to take a holistic approach that balances technical, fundamental, and quantitative analysis. Let’s discuss the four potential future scenarios for the index, laying out what each scenario might look like and what could drive it. This is designed to help us think beyond our immediate biases and consider a variety of possible paths.

Before diving into these scenarios, I want to clarify my perspective. I'm a technical analyst, which means I spend countless hours examining stock charts. But my approach isn't purely technical. I also consider fundamental factors influencing companies, including their growth prospects, macroeconomic data, and quantitative models. This balance provides a more comprehensive view of market dynamics.

I rely on tools like Seeking Alpha's sophisticated quantitative model to provide ratings for various stocks and ETFs. This helps me cross-reference leading stocks and identify strong technical opportunities. You can learn more about this at marketmisbehavior.com/seekingalpha.

With that in mind, let's look at the current chart of the S&P 500 and explore four potential scenarios:

Scenario 1: The Very Bullish Scenario

In this scenario, the recent pullback was a viable dip. The index rallies strongly to new all-time highs, potentially reaching 5350-5500 by the end of Q2. This scenario could be driven by strong earnings from mega-cap growth stocks, like Alphabet, and continued gains from the Magnificent Seven. Additionally, weaker economic data could ease inflation concerns, prompting the Federal Reserve to cut interest rates.

Scenario 2: The Mildly Bullish Scenario

Here, the S&P 500 drifts higher but remains range-bound. We may see divergences within the Magnificent Seven, with some stocks performing well while others struggle. Economic data might show some improvement, but not enough to push the market significantly higher.

Scenario 3: The Mildly Bearish Scenario

In this scenario, the market fails to climb higher and breaks below the April low. The sell-off is gradual, driven by stronger economic data and stubbornly high inflation, which limits the Fed's ability to cut rates. The market may see limited gains, with few sectors performing well.

Scenario 4: The Very Bearish Scenario

In this scenario, the S&P 500 breaks below key levels, such as the 38.2% retracement and the 200-day moving average, potentially falling to around 4550. This outcome may be driven by economic data that indicates the Fed can't cut rates, leading to a risk-off environment where even mega-cap growth stocks struggle.

Each of these scenarios provides a different outlook for the market, emphasizing the importance of considering multiple possibilities. This helps mitigate biases and gives us a more balanced view of market movements.

So, which scenario do you think is most likely for the S&P 500 over the next six to eight weeks? Drop a comment below, and let's discuss which scenario you see unfolding and why. Remember, the goal is to think beyond your immediate biases and consider various potential paths for the market. This exercise can help us make more informed decisions moving forward.

For more insights, stay tuned to Market Misbehavior, and let's see how these scenarios play out!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Mega Cap Growth Confirms Bear Phase

In the first quarter, the S&P 500 and Nasdaq soared, but since mid-March, breadth conditions have shifted, signaling potential trouble for investors. Mega-cap growth stocks like AAPL and TSLA have shown weaknesses in their charts, suggesting a shift to a new bear phase.

AAPL, long seen as a market stalwart, is showing signs of vulnerability. Similarly, SMCI, MSTR, NFLX, and AMZN, despite their market dominance, exhibit chart fluctuations indicating market turbulence.

What does this mean for investors? Stay vigilant and consider risk management strategies. Long-term perspective is key; focus on fundamentals and stay informed about market dynamics. Seeking guidance and diversifying investments can help weather market volatility.

In summary, while Q1 showcased market strength, deteriorating conditions signal potential challenges ahead. By staying informed and maintaining a long-term perspective, investors can navigate through uncertainty and strive for financial success.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.