Remember When - $SPX $SPY

Remember when the S&P 500 broke below its 200 moving average for the first time in something like 2 years, breaking its stellar track record? Not anymore! This morning the SPX gaped back above the 200ma and, as of this writing, is trending higher intraday. I'm sure today's move has caught many people by surprise (including myself) given the large pullback we saw weeks earlier. I noted recently that I didn't believe the risk/reward favored the long side but that I would continue to take setups on an individual basis, i.e., the stock's own merits.

I think many people strongly believed that last week's break of the 200ma signaled a further pullback in the market to come (e.g., 20-30% pullback). Again, while I thought the risk/reward didn't favor the long side at the time, I wasn't in the camp that the market had to see a further correction merely because the SPX's long-running streak above its 200ma had come to an end.

In fact, it's extremely common for the SPX to test its 200 moving average some time during the year, and the market certainly hasn't been down every year it has done so. Going back to 1970, there have only been 3 years where the SPX didn't test its 200ma intrayear: 1989, 1993, & 2013. (Thanks to @RyanDetrick for helping me out with this test). Clearly, testing the 200ma isn't such a rarity.

So remember, just because a trend ends doesn't mean we have to see a full on crash. Personally, I think we base a bit and end up rallying to new highs by year-end. But that's just speculation at this point. I'll take things as they come.

A Look Down Memory Lane - $SPX $RUT

We all know the stock market has been falling rather rapidly these past several weeks. From fears about slowing global growth (read Europe) to the Fed finally ending QE to potential rate hikes next year, we can speculate all day long as to what the reasons are for this change in character we're seeing in the market, but I personally don't see much benefit in doing that.

To get a better sense of the recent change in market trading behavior, consider this: the current daily average true range (ATR, 14) of the S&P 500 Index (SPX) is 31.77, which translates into an average percentage range of 1.70% based on yesterday's close, the highest it's been - on a point basis - in 3 years. Compare this to just one month ago when the ATR was 13.27, which translated into an average percentage range of a mere 0.76%! Volatility is clearly here. How long it stays is a different question.

Another aspect to consider is the fact that the S&P 500 is treading the positive year-to-date line, closing up 0.78% YTD as of yesterday's close (10/16/14). At one point - September 18 - the S&P 500 was up YTD by 8.82%. Having given back virtually all of those gains again speaks to increased volatility that we've seen in the market.

The most recent example of a similar type of market (that I can recall) was 2011 - specifically late summer and fall of 2011 during the whole budget fiasco and downgrade of U.S. debt. While the the headlines were completely different and separate then than they are now (for the most part at least), I thought it may be helpful to compare 2011's performance with this years performance to see if there are any similarities - or differences - that may be useful.

I've created a chart of 2011's "intrayear" year-to-date performance for the S&P500 as well as the S&P 500's YTD performance so far this year (note: the charts below are simply a rolling YTD performance tracker for each year). As you can see from the charts below, in 2011 the SPX fell hard during August of 2011, from being up about 7% for the year to falling down to over -10% YTD. After bottoming right around the beginning of October, SPX then recouped those losses in a volatile fashion and ended up closing flat that year.

Comparing this to 2014's YTD performance so far, you can see there are some similarities and differences. You can see that for 2014, SPX chopped around in the beginning of the year before finally trending up, albeit relatively mildly later this year, which is a bit different than 2011's chart. However, more noticeable (IMO) is the similarity - the increased volatility that sprung up right around the same time. Make sure when you're looking at the chart to mentally readjust for the incomplete data for 2014. 

So using 2011 as a guide, perhaps we rally back some near the end of Q4 which has historically been a positive period. Granted, in 2011 the SPX was rallying from being down sharply YTD while the SPX today is still positive. Note: I want to stress you shouldn't try to use 1 solitary data point in your analysis (like we're doing here). I'm not saying we have to do anything. All I'm doing is just trying to get an idea of what could happen going forward. 

SPX Performance YTD - 2011

SPX Performance YTD - 2014 (partial)

Compare this to the smooth, slow grind higher that we saw in 2013 where the SPX closed up 30% for the year (which honestly was just a freak of nature given not only the performance but just the way it got there):

SPX Performance YTD - 2013

If you're interested to see what the Russel 2000 (RUT) was doing back in 2011 - since that's all everyone seems to have been talking about this year, especially lately - I posted the charts below for 2011's performance as well as the RUT's YTD performance so far this year. The one striking similarity I see is that for both 2011 & 2014 the RUT was relatively weak compared to 2013 or even 2012, oscillating between flat and up 4-7% or so. Something interesting nonetheless.

RUT Performance YTD - 2011

RUT Performance YTD - 2014 (partial)

So maybe we rally later this year. Maybe not. I don't know. I'll keep my mouth shut and let the market do the talking. I thought this trip down Memory Lane might be fun nonetheless.

Trade well.

Market Commentary (10/10/14) - $SPX $SPY $IWM

Are you dizzy yet? The equity markets have seen increased volatility these past couple of week with the market rallying hard on Wednesday afternoon following the Fed minutes, only to give back the entirety of those gains the next day. Today, the market made new lows and ended up closing on dead lows.

The decline in the market is being attributed to fears concerning slowing global growth, the Fed finally taking away the magical punch bowl, probable rate hikes next year after 6 years of ZIRP, Ebola (or so I was told), the fact Katy Perry will perform at this season's Super Bowl halftime show, the unstoppable strength in the dollar, and just because. All said and done, the Nasdaq was down 4.4% this week, IWM was down 4.47%, SPX was down 3.1%, and QQQ was down 3.77%. To get a sense of the action these past weeks, take a look at the performance chart below for the past 3 weeks below:

3-Week Performance Chart

In all seriousness, though, there are some signs that concern me going forward. I'll lay out some of them below. I will say, though, that I agree this isn't the ideal place to initiate shorts - after the market has now pulled in 112 handles from its recent highs, but I am bearish on the market for the first time in a long time. If we bounce and start to reclaim levels, I have no problem switching my bias, but as things stand now, things don't look good. This isn't to say we have to have an '08 type crash, but strictly from a risk/reward standpoint, the long side is not favorable here and now in my opinion. Here are some reasons I feel this way:

• The VIX (CBOE Volatility Index) closed above its weekly 200ma for the first time in nearly 3 years. While I typically don't consider moving averages to be exact levels (more as "zones"), the weekly 200ma has acted as nearly perfect resistance for the VIX these past couple years, making it a level of significance. The close this week above the weekly 200ma tells me there may be some staying power in volatility, opposed to the quick spikes we've seen lately that are quick to dissipate. 

CBOE Volatility Index (VIX) - Weekly Chart

• The S&P 500 Index (SPX) closed below its weekly 21ema (this is just the moving average I happen to use) for the first time since 4/11/14. However, this week's close below the 21ema was much more decisive than the most recent close below. You can also draw trendlines as well, and SPX broke below them too.

SPX - Weekly Chart

• The average true range (ATR, 14) continues to climb, reflective of the increased volatility that we've been seeing lately. I noted recently on StockTwits that spikes in ATR (& thereby volatility) have marked turning points recently. The fact that volatility uncharacteristically continues to climb may be indicative of further gyrations going forward. Generally, a gradual increase in volatility (expansion) is a bearish signal, whereas when the market advances, it typically does so in a type of "grind mode" with the occasional quick pullback that ultimately resumes higher. 

SPX's ATR (14) - Daily Chart

• SPY (the ETF for S&P 500) touched its 200sma for the first time since December 2012. In addition, the Nasdaq Composite Index closed below its 200sma for the first time since December 28,2012. This doesn't necessarily have to be a bearish signal, as the 200ma for both are still trending up, but this could change eventually. However, I think at a minimum it speaks to the change in character we're seeing. 

I know you probably feel like you hear this too often, but it bears (no pun intended) repeating especially now: understand who you are as a market participant, have a clear grasp of your true time frame, and let price be the final arbitrator. One of my favorite quotes comes from @millenial_inv post, saying "Risk can only be accurately assessed in combination with a time horizon." Awesome, right!

I'm still long a small handful of names after getting stopped out of some names already. I'm still long TWTR, CELG, and AAPL. I acknowledge the faulty action in CELG and the nasty move today in TWTR (down nearly 9%). For these positions, I'm only in half size currently or less after taking profits and/or trimming risk weeks ago. My trailing stops for all 3 positions are relatively close, and I have no problem getting stopped out of all three (which doesn't seem all that implausible). 

This isn't about me (or anyone else for that matter) getting a pat on the back for trying to pick a top in the market. I don't know if September's highs will mark "the top" (whatever that's supposed to mean). I just know that from my perspective, the risk/reward does not favor the bulls currently.