Simon Says: This May Be The Only Bearish Looking Broad Market Index Chart

Aside from the autumn colors, everything is green on Wall Street. Stocks are up almost everywhere you look. There is only one broad market index that could reasonably be interpreted as being bearish.

The Dow Jones, S&P 500 and Nasdaq are at new (all-time) highs, and it takes a permabear or nit-picky glass half empty kind of a person to find anything alarming in those charts.

Perhaps the most bearish looking chart is that of the NYSE Composite Index (NYA). The NYA measures the performance of all common stocks listed on the New York Stock Exchange (NYSE). There are currently 1867. The iShares NYC Composite ETF (NYSEArca: NYC) replicates the performance of the NYA.

Unlike the Dow Jones and S&P 500, the NYA also includes small cap stocks, which explains why the NYA is lagging.

In fact, the NYA chart gives hope to all those who missed the latest rally. Why?

The NYA is bumping up against a serious resistance cluster made up of:

  1. 78.6% Fibonacci resistance
  2. Trend line resistance
  3. Prior support shelf

In addition, (bearish) Elliott Wave aficionados may be quick to point out that the NYA’s decline from the September high to the October low could be counted as five waves.  Such a 5-wave move would suggest at least one more leg lower.

Complex Analysis Made Easy – Sign Up for the FREE iSPYETF E-Newsletter

The overall strength of the “October blast” rally suggests that NYA will eventually surpass this resistance cluster. But if NYA is going to pull back and fill some of the open chart gaps, right about now (or at 10,850 – 10,900) seems like an appropriate time to do so.

The Dow Jones is also about to run into the same resistance level that caused the September correction.

Solid resistance levels, like the ones shown above, increase the risk of a pullback, but obviously don’t guarantee said pullback. Higher targets are unlocked if the NYA and Dow Jones sustain trade above resistance.

A detailed forecast for the remainder of the year – based on an analysis of seasonality, sentiment, technical indicators and historical patterns – is available in the November 2 Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Advertisements

The Hindenburg Omen is Back! Will it Stick This Time?

Dogs that bark don’t bite. Like a barking dog, the Hindenburg Omen’s market crash signals have been notoriously off. However, there is one statistical signal that may restore the bruised signal’s reputation and credibility of the latest signal.

The Hindenburg Omen had its glory days (2007), but more recently it’s become famous for notorious misfires.

Despite many hyped up Omen sightings in recent years, the Dow Jones (DJI: ^DJI) and S&P 500 (SNP: ^GSPC) are trading near all-time highs while the VIX is hovering near historic lows.

But (and this could turn out to be a big but), I stumbled upon a statistical nuance that may restore the bruised indicator’s image.

Hindenburg Omen Crash Course

Here’s a quick nutshell definition in case you’re not familiar with the Hindenburg Omen (HO).

The HO is a combination of technical factors that attempt to measure the health of stocks traded on the New York Stock Exchange (NYSE: ^NYA). The Omen triggers if a particular number of NYSE-traded issues hit new highs and new lows.

The Omen’s ‘claim to fame’ is its ability to signal a stock market crash (or at least the increased probability of a crash). Over the decades there’ve been some amazing hits and misses.

Hindenburg Omen is Back

The latest rally leg has brought a whole cluster of Omens in its wake. Omen clusters (not just scattered signals) appear to be the key to the signal’s reliability (or lack thereof).

An Omen here or there may get the media’s attention, but it doesn’t consistently phase stocks. However – this observation may restore the Omen’s credibility – a cluster of a dozen or so Omens in a 50-day period, tends to be bearish for stocks.

We are seeing such an Omen cluster right now. The chart below plots the S&P 500 (NYSEArca: SPY) against the most recent ‘Dozen-Omen-Cluster’ sightings. They occurred in January/February 2000, March/April 2006 and July/August 2013.

The chart looks somewhat ominous, but does this mean that stocks will crash and burn tomorrow?

No, even when correct, the effect of the Omen doesn’t have to be instantaneous.

Nevertheless, the Omen is yet another indicator that cautions of a looming market top.

With stocks near all-time highs and momentum slowing, now is certainly the time to keep our eyes peeled for unwanted bearish surprises. In fact, a drop below key support will likely trigger a wave of selling and lower prices.

Where is key support? Must hold support is shown in this article: The S&P 500 is Revealing Must Hold Support.

How Will Hurricane Sandy Affect Stocks and the U.S. Economy?

Hurricane Sandy has shut down the New York Stock Exchange. The last time a natural catastrophe forced Wall Street to go into hibernation was Hurricane Gloria in 1985.

Even though trading at the NYSE has halted, investors never stop looking for the next opportunity. What sectors will be most affected by this or any other hurricane and are there any profit opportunities?

Insurance Sector

It’s yet to be seen what kind of damage Sandy will cause. According to the National Oceanic and Atmospheric Administration (noaa.gov), Katrina was the most expensive hurricane with damages of $145 billion.

Someone has to pay for that damage and insurance companies (that’s what we have insurance for) will end up paying a fair share of the repairs.

Property and Casualty Insurance companies collected about $471 billion worth of premium in 2010. According to a report by the Congressional Research Service, done right after hurricane Katrina devastated New Orleans. The net profit earned on the $471 billion worth of premium should be about $40 billion.

The same report states that: “Most insurance experts would agree that the $100 billion-plus catastrophic event remains a challenge for the U.S. property and casualty insurance industry.”

A common sense approach to investing suggests to stay away from the insurance sector and ETFs like the SPDR S&P Insurance ETF. Of course, the ultimate cost of any disaster will be passed on to policyholders via increased insurance premiums.

Energy Sector

The New Jersey coast is home to more than six large refineries and has a refining capacity of 1.2 million barrels per day. As of Monday, two thirds of the refineries were shut down.

New Jersey refineries account for about 7% of total refining capacity in the U.S. In comparison, the gulf coast accounts for 45% of U.S. refining capacity.

The decreased energy demand of the densely populated East Coast caused by hurricane Sandy could be about the same or more than the loss of refining capacity. This means rising oil and gasoline prices nationwide are far from guaranteed.

In fact, immediately following hurricane Katrina, oil prices dropped a stunning 21%. Hurricanes are not an automatic buy signal for ETFs like the Energy Select Sector SPDR (XLE), S&P Oil & Gas Exploration & Production SPDR (XOP) and others.

Home Construction Sector

Home improvement stores like Home Depot and Lowe’s should attract a big chunk of the disaster prevention and disaster repair dollars spent. The iShares Dow Jones US Home Construction ETF (ITB) has an 8.7% exposure to Home Depot and Lowe’s.

Retail Sector

Will money spent at Home Depot and Lowe’s cannibalize the holiday spending budget? Retailers like Macy’s, Kohls, Gap, Nordstrom, Tiffany, Amazon, Best Buy – all part of the S&P Retail SPDR ETF (XRT) – could suffer from Sandy.

Hurricanes and the Stock Market

What’s the effect of hurricanes on stocks? The chart below shows all major U.S. hurricanes (since the year 2000) in correlation to the S&P 500 Index.

Allison in June 2000 came amidst the tech bubble deflation. Charly, Frances, Ivan, Katrina, Rita, and Wilma didn’t make a dent in the 2002 – 2007 market rally.

Gustav and Ike happened right before the financial sector unraveled in 2008 and Irene landed on shore at a time when we expected a major market bottom.

The August – October timeframe happens to be a tumultuous one for nature and stocks and recent hurricanes coincided with stock market inflection points.

This could be the case again with Sandy. Last week’s Profit Radar Report pointed out that the S&P 500, Dow Jones Industrials, MidCap 400 Index, and Russell 2000 are all above key technical support.

Like a stretched rubber band they should snap back, but if the don’t they’ll break. As such, the next opportunity will likely be triggered by technical developments not hurricane Sandy. The Profit Radar Report will provide continuous updates and trigger levels for the “stretched rubber band” condition.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.