A very brief Christmas technical update as the US markets soar to new all time record highs capping a wonderful year for speculators and investors alike.

2013 has conformed perfectly to second half of December strong positive seasonal period. Some call it ‘window dressing’ and some call it Santa’s Rally. For whatever reason we have new all time highs across US indexes and so Santa’s Rally sustains with 1850 in line of sight now for the sp500.

According to Stock Trader’s Almanac the equities market has gone up in December about 80 percent of the time for the past 20 years. Today I closed out most of my year end leveraged short term trades to take the winnings off the table. We are paid on price but price in itself can be a poor indicator when volume are light. Broad index levels and even sector index levels can be easily manipulated when volumes are low.  Even market breadth measures of 52week highs may not be enough to provide a true picture of market health when market volumes and participant rates are low.  Here an article from market watch on the issue of low volumes from Sept. Nothing has changed in respect of low market volumes.

http://blogs.marketwatch.com/thetell/2013/09/03/sp-500-trading-volume-lightest-in-15-years/

These low volumes are even more surprising when you consider market leverage is at all time highs and private participation is at multi decade lows. Ie few large institutions have massive leverage on their market bets. But even this huge leverage isn’t enough to support increased volumes. This is a clear indication of a very unhealthy (and risky) market structure.

From Reuters yesterday.

“Data from the NYSE shows that margin debt hit another all time record high of $423.7 billion in November 2013. This already hit a new high of $412.459 billion in October, and it puts the streak for higher borrowings at five consecutive months. After going further back on the NYSE margin tables, it turns out that margin debt has been more than $400 billion for three straight months, and that same margin debt at the NYSE has not been less than $300 billion since August of 2012”.

And looking inside the market breadth issues although the number of stocks making 52 wk highs has improved across most US indexes. Even the broader NYSE has improved her breadth. A higher high from the prior breakout level high but not a wholly convincing score. It is better however and therefore notable.
But given the volume lets question this a little and look at other measures of market breadth like the number of stocks over their 200 dma, as one example. Here is a chart here of the sp500 and her number of stocks over their 200 dma. This continues to tell the very selective story we have here of this market strength. And increasing selectivity is usually a good indicator of an approaching market top.

Another indicator of a near term market top of the put call ratio.

Here you can see the dow index price and the sp500 overall put call ratio. The ratio is a contrarian indicator and scored a new year low today. Ie the number of market participants holding option puts rather than calls is at all time year long record lows. According to this option market sentiment indicator participants are super bullish at new all time levels. Very few participants have any downside protection or speculation in the options market. Alongside leverage being at all time record highs and market breadth continuing to show great selectivity as the indexes make new all time consecutive highs in thin trade. Its a horribly risky cocktail this mix.

Here the Yardeni report issued just now.

yardeni-24-12-13

Yes this market can move higher but the risks are clearly growing here as the ten year treasury pushes on through the 3% yield market. I’ve taken profits on leverage trades on this basis.

Much more to come for VIP members but for non members i wish you a wonderful holiday season.

All the best

Rich

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