The Absolute Return Market Tour
A Daily Review of Market Indices, Internal Strength, and Asset Classes
At the close of each trading day, The Absolute Return conducts a streamlined yet comprehensive review of the financial markets. To short-cut the time spent reviewing the markets without compromising the key market indicators we have found to be most important to arrive at a trading strategy, The Absolute Return has devised a daily “Market Tour” consisting of about 30 charts made public and maintained on Stockcharts.com. These charts are organized into several categories:
- Index reviews
- Market Breadth
- Sentiment
- Sector relative strength
- Intermarket (bonds, commodities, stocks)
- Style (small cap, large cap, value and growth)
The charts are annotated with comments and colored based on bullish perspective (green), bearish (red), and neutral (black). Here is how our daily Market Tour begins:
Index Reviews: The Big Picture:
Our nightly tour starts with a price review of the major indices (the focus is on one daily and weekly chart each of the S&P500 and the Nasdaq); observing price behavior relative to trendlines (with a preference for a 34-day exponential moving average), confirmation and divergence using RSI and OBV, and volume and candle patterns.
We also look at moving average slopes for consistent direction, and a chart showing the percentage of stocks in these respective indices above or below their 50-day moving averages.
Breadth Indicators: the Market’s Internal Strength
Next is a tour of various breadth indicators. Charts of the NASDAQ and NYSE advance-decline data are reviewed using a moving average of the data to remove the daily noise. Overbought and oversold points on the breadth charts are compared to points on a chart of the respective index that have coincided with market trend changes.
We find the NYSE McClellan Oscillator to be key indicator of internal market strength. We look for NYMO to exceed zero to confirm the equity market’s bullish tone. Alternatively, NYMO crossing its 20-day EMA (and an uptrending EMA) supports the bullish case.
Relative Strength: Where is the Money Flowing?
The next stage of our daily market tour is to assess how the various sectors performed relative to SPX. This is particularly helpful in gauging the stage of the economic cycle. The sectors we focus on include financials, discretionary stocks, staples and technology. Watching financials underperform for most of November and into December, for example, is a cause for concern and has tempered our bullish stance, even though the indices are generally following an uptrend. We also believe that NASDAQ (technology) leadership is important.
Watching staples vs. discretionary stocks gives us a sense of the strength or weakness of consumer spending and expectations toward economic growth.
Finally, we like to keep Dow Theory in view, so we add a simple daily chart depicting the Dow Jones Industrial Average with the Transportation Index as we look for consistent performance between the two indices.
Sentiment: Gauging Fear and Complacency
The next phase of our Market Tour is sentiment. We review VIX relative to the S&P500 and its own trendlines, moving averages and RSI (we use the 50-line on RSI to assess whether VIX is bullish for equities (RSI below 50) or bearish (above 50). Extreme VIX readings relative to its EMA 34 raise the prospect of a short-term trend change.
Put/Call is reviewed to identify whether it has hit an extreme high or low value where market turning points have been experienced in the past.
Intermarket Tour: Confirming relationships between Commodities, Bonds and the Dollar
The Market Tour proceeds to review intermarket relationships among commodities, the dollar and bonds. Signs of divergence and trend exhaustion and sought, as well as evidence to either support or challenge positions in the equity markets.
Style: What’s in Fashion?
