From Convergex:
Looking at every time average sector correlations have dropped below 70% – 6 times in total since the beginning of 2010 – the average one month forward return is 0.6%. While that is lower than the 0.9% averaged compounded monthly return since the start of the period, the volatility of returns ranges from a loss of 2.6% (December-early January 2015) to a gain of 4.8% (August-September 2014). About the most we can say is that the current low correlations are a sign of more volatility on the horizon.
Last week here, I titled my post A Calm Week Ahead. Perhaps that was the wrong title as a short term trader given that from Tuesday on we played the rollercoaster game. Regardless of the title, the message in the post was sound. From last weekend:
“Price closed at 206.92 on Friday and thus may struggle to get over 207 or fail to remain over it if it does. With the bulls having the edge, any pullbacks into support are likely buyable opportunities, especially near the 204 level which coincides with Friday’s low.”
The high of the week was 207.7 and the low 203.09. Buying 204 would have led to minor pain, but profitable very soon after. At this point, 204 is considered strong support as every dip is being bought quickly; however, there are signs of weakening under the surface that most often lead to subdued returns and a nearby pullback.
Breadth:
SPX stocks at 20-day highs: As I said last week, the market had made a 20-day high, but stocks in the S&P 500 did not. That is not anything to get bearish about on its own, but it is a divergence that warrants attention. The other thing that warrants attention and perhaps caution is that 20-day highs finally were able to pierce 5% and importantly didn’t recover as fast as it had throughout the February and March rally.
SPX stocks at 20-day lows: This is another measure I taked about last week mentioning that when it begins to make higher highs it is a caution sign. Often the market will still hold up generally well and even move higher after the first few spikes, but as they get increasingly more frequent and make higher highs (meaning more 20-day lows in the S&P 500), it is time to lighten up on longs. At this point, and as a short term trader, I believe any longs would be better taken on pullbacks rather than breakouts and not held for very long. 
SPY open interest: There isn’t much to glean from the open interest at this point except that should there be a pullback to 200, it is a great risk to reward buy (at least upon the first touch). The fact that it aligns with technical support only makes the case stronger for buying at 200. However, price may never get there and in that case the open interest isn’t very helpful at the is point. Last weeks low is 203.09 and except for the Tuesday’s close of 203.95, price has managed to close above 204 for all of April. A close below puts the bears in short term control.
SPX levels of importance: The market has remained in a range of roughly 2040 to 2070 since mid March. If it should break to the upside the returns will likely be capped near 2090/2095 and longs should not overstay their welcome. Below 2040 opens the door to 2024, 2011 and then 1996. Similar to what was said above, shorts also should not overstay their welcome because based on the strength seen from the February lows, the market is likely not going to roll over very hard in the near term. Furthermore, with earnings season about to get underway, most dips will likely be bought until the majority of companies report.
In sum, the divergences that are beginning to build up in breadth are warning longs to lighten up on any strength, but not yet at a point that are troubling enough to expect very large pullbacks. The 2040 to 2070 range is likely to break next week. Below 2040 and 2024 is good support followed by 2011 and 1996. A break above 2070 has resistance at 2082 and 2090/2095. ETF and futures traders can easily find good scalping opportunities within there. The better trades during such chop however, are likely in equities. Good luck next week.
For more thorough analysis come join SassyOptions. Members receive two thorough posts each weekend along with intra-day analysis and real time trade alerts during the week. Last week we had a total of eleven fully opened and closed trades. One breakeven, Five losses and five wins (198%, 108%, 50%, 26% & 19% – all taking into account scaling out). For a sample of last weeks weekend posts see Open Interest for Expiration 4/8/16 and Set-ups and Game plan for 4/4/16 which I have unlocked.
Choppy Waters Ahead
From Convergex:
Looking at every time average sector correlations have dropped below 70% – 6 times in total since the beginning of 2010 – the average one month forward return is 0.6%. While that is lower than the 0.9% averaged compounded monthly return since the start of the period, the volatility of returns ranges from a loss of 2.6% (December-early January 2015) to a gain of 4.8% (August-September 2014). About the most we can say is that the current low correlations are a sign of more volatility on the horizon.
Last week here, I titled my post A Calm Week Ahead. Perhaps that was the wrong title as a short term trader given that from Tuesday on we played the rollercoaster game. Regardless of the title, the message in the post was sound. From last weekend:
“Price closed at 206.92 on Friday and thus may struggle to get over 207 or fail to remain over it if it does. With the bulls having the edge, any pullbacks into support are likely buyable opportunities, especially near the 204 level which coincides with Friday’s low.”
The high of the week was 207.7 and the low 203.09. Buying 204 would have led to minor pain, but profitable very soon after. At this point, 204 is considered strong support as every dip is being bought quickly; however, there are signs of weakening under the surface that most often lead to subdued returns and a nearby pullback.
Breadth:
SPX stocks at 20-day highs: As I said last week, the market had made a 20-day high, but stocks in the S&P 500 did not. That is not anything to get bearish about on its own, but it is a divergence that warrants attention. The other thing that warrants attention and perhaps caution is that 20-day highs finally were able to pierce 5% and importantly didn’t recover as fast as it had throughout the February and March rally.
SPX stocks at 20-day lows: This is another measure I taked about last week mentioning that when it begins to make higher highs it is a caution sign. Often the market will still hold up generally well and even move higher after the first few spikes, but as they get increasingly more frequent and make higher highs (meaning more 20-day lows in the S&P 500), it is time to lighten up on longs. At this point, and as a short term trader, I believe any longs would be better taken on pullbacks rather than breakouts and not held for very long.
SPY open interest: There isn’t much to glean from the open interest at this point except that should there be a pullback to 200, it is a great risk to reward buy (at least upon the first touch). The fact that it aligns with technical support only makes the case stronger for buying at 200. However, price may never get there and in that case the open interest isn’t very helpful at the is point. Last weeks low is 203.09 and except for the Tuesday’s close of 203.95, price has managed to close above 204 for all of April. A close below puts the bears in short term control.
SPX levels of importance: The market has remained in a range of roughly 2040 to 2070 since mid March. If it should break to the upside the returns will likely be capped near 2090/2095 and longs should not overstay their welcome. Below 2040 opens the door to 2024, 2011 and then 1996. Similar to what was said above, shorts also should not overstay their welcome because based on the strength seen from the February lows, the market is likely not going to roll over very hard in the near term. Furthermore, with earnings season about to get underway, most dips will likely be bought until the majority of companies report.
In sum, the divergences that are beginning to build up in breadth are warning longs to lighten up on any strength, but not yet at a point that are troubling enough to expect very large pullbacks. The 2040 to 2070 range is likely to break next week. Below 2040 and 2024 is good support followed by 2011 and 1996. A break above 2070 has resistance at 2082 and 2090/2095. ETF and futures traders can easily find good scalping opportunities within there. The better trades during such chop however, are likely in equities. Good luck next week.
For more thorough analysis come join SassyOptions. Members receive two thorough posts each weekend along with intra-day analysis and real time trade alerts during the week. Last week we had a total of eleven fully opened and closed trades. One breakeven, Five losses and five wins (198%, 108%, 50%, 26% & 19% – all taking into account scaling out). For a sample of last weeks weekend posts see Open Interest for Expiration 4/8/16 and Set-ups and Game plan for 4/4/16 which I have unlocked.
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