#$psq

By some measures, trading in inverse ETF’s has hit record levels during the recent selloff.

For the past several weeks (or even longer) we have been warning about extremely complacent sentiment among stock investors. Specifically, data from the equity options market indicated that hedging (i.e., put volume) was as scarce as it had ever been in the history of the data. Now, such a condition may not necessarily equate to a catalyst for a market selloff. However, the lack of hedging, or downside protection, certainly suggested that any decline that may occur would run the risk of accelerating quickly as traders began scrambling for protection. This is a scenario that we have seen unfold over the past week.

Specifically, in the Nasdaq/large-cap tech space, the selloff that began a week ago — directly from all-time highs — quickly began to snowball, presumably as unprotected traders rushed to sell or adopt protection. The result of the tenuous market structure was one of the swiftest 10% declines from a 52-week high in market history — just 3 days in the Nasdaq 100!

That’s the bad news. The good news is that all that scrambling for protection has wrung out a good deal of the complacency that led up to the selloff. In fact, by some measures, we have never before witnessed such a rush to put on hedges. At least that is the case when looking at trading volume in inverse exchange traded funds (ETF’s).

Of course, inverse ETF’s are designed to go up when their corresponding indices go down. That is why we call them hedges, or protection. And based on relative volume in such products, Thursday and Friday marked the busiest days ever in terms of ETF trader hedging. Specifically, volume in inverse ETF’s accounted for 2.69% of total exchange volume on both Thursday and Friday. Those are the highest readings we have ever recorded since we began tracking this indicator some 10 years ago.

FYI, the computation for this indicator, which we first saw utilized on sentimentrader.com, is a proprietary one. It does not include an exhaustive array of inverse ETF’s, but rather a group that we have been tracking now for about 10 years. Thus, someone else may come up with entirely different figures, though, likely the same general curve.

What is the takeaway from this data? Well, the rush into inverse ETF’s represents a healthy reversal of the complacency and lack of hedging we saw in the weeks and months leading up to last week’s top. In fact, from the bulls’ perspective, the more panic, the better from a contrarian standpoint. Of course, after coming off such low levels of hedging, it’ll take extreme panic to even put sentiment back into some balance. However, the heavy inverse ETF activity was at least good enough to contribute to yesterday’s sharp bounce in stocks.

The question is — is it sufficient enough to provide for a longer-lasting rally or merely a flash in the pan? Today’s reversal back down suggests it is the latter but the jury is certainly still out on this one.

How much “stock” are we putting into this data point? How is it impacting out investment posture? If you’re interested in an “all-access” pass to all of our charts, research — and investment moves — please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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The Nasdaq 100 is hitting a potentially key piece of resistance computed from its 2000-2002 decline.

The tech sector, largely reflected by the Nasdaq 100 (NDX), has been a relative leader in the equity market for a long time now. Yet, as strong as the trend has been, at some point it will end. We try to stay with the relative strength trends until they are broken. But is there any way to identify when a rally may be hitting its peak, i.e., top, instead of waiting for the trend to be broken? In that hypothetical case, it may allow investors an opportunity to avoid giving back perhaps considerable gains between the time of the top and the point at which the trend is broken.

One tool that we have found to be effective, at times, in that regard are Fibonacci Extensions, which we’ve discussed in the past on a few occasions. As a refresher, these Extensions mark various magnitudes of potential price support or resistance following range breaks, based upon the Fibonacci mathematical sequence. The 161.8% is perhaps the most important Extension, based on the sequence. It signifies a move of 61.8% of the former range – out of the range.

In the case of the NDX, we observe that the index is now reaching the vicinity of the key 161.8% Fibonacci Extension of the major 2000-2002 bear market at 7300.

Now, clearly on a chart of such a long-term scale, there will be some wiggle room above and below that 7300 level. But is this general vicinity a logical spot to expect a major top in the NDX? In a Premium Post at The Lyons Share, we take a look at some other chart analyses in exploring that possibility.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Recent new highs in the tech sector have occurred on decreasing participation.

For the most part, the rally off of the early 2018 correction lows has occurred on strong breadth, or widespread participation from individual stocks. We are starting to see some potential signs of a change in that trend this week, however. As we mentioned yesterday, the small-cap market failed to keep pace with the new high in the Nasdaq 100 (NDX) on Tuesday. We saw another manifestation of the possible “thinning” of the tech rally as well on Tuesday (7/24). While the NDX closed at an all-time high, the accompanying breadth was relatively very weak for a new high.

As evidence, the % of both advancing issues and advancing volume on the Nasdaq exchange equated to less than one third of all exchange data on Tuesday. In the history of the NDX, that is the only time we have ever observed such conditions on the occasion of a 52-week high in the index. Furthermore, at 32.4%, the advancing volume was the lowest on record for any NDX 52-week high.

As the chart indicates, there have only been 15 occurrences now when the NDX closed at a new high with less than even 44% of advancing Nasdaq volume. A few of those instances marked tops of at least short-term significance in the index. So should we be concerned -- or is this just a 1-day fluke data point?

Given the strong participation throughout most of the current multi-month rally, we would tend to give bulls the benefit of the doubt. However, would an objective, historical examination of the data warrant such patience? In a Premium Post at The Lyons Share, we take a quantitative look at the historical data to determine how concerned we should be about a “thinning out” of the tech rally.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Despite the Nasdaq’s big drop yesterday, New 52-Week Highs on the exchange hit their highest level in nearly 2 months.

Yesterday’s action in the stock market was interesting, to say the least. In a year filled with strange developments, yesterday may have taken the cake. Right off the bat, you had the Dow Jones Industrial Average up nearly 100 points, while at the same time the Nasdaq 100 was lower by 111 points, or about 1.75%. The dispersion didn’t stop there as other market segments and sectors went separate ways as well, and in a big way in some cases. Banks, transports and retail averages were up 2-3% while semiconductors and other technology areas were down as much as 4-5%. So, again, it was a weird day.

Getting back to the Nasdaq, we find another odd occurrence, and the subject of our Chart Of The Day. While the Nasdaq Composite also dropped over 1% yesterday, the internals were not nearly so bleak. In fact, according to our data provider, New 52-Week Highs on the Nasdaq exchange totaled 311. That marked the highest level of New Highs in almost 2 months on the Nasdaq -- on a day the index dropped over 1%.

Is that unusual? Yes. Unprecedented? No. But it is just the 10th time since the beginning of our Nasdaq New High/New Low data in 1988 when New Highs hit their highest level in 40 days on a day when the Nasdaq Composite lost at least 1%.

What is the message behind this development? Is there a message? Well, as most of you know, we like to look at the historical precedents for clues as to any potential meaning or detectable pattern to similar developments. It does not mean that history has to repeat, but a study of the past can sometimes provide helpful instruction as to what to possibly expect, or not expect.

In this case, the performance of the Nasdaq Composite following the historical precedents is highly interesting -- especially in its multiplicity. In the very near-term, the index tended to bounce back a bit. In the long-term, well, check out the 1-year returns after the previous 9 occurrences:

6 of the 9 occurrences saw the Nasdaq HIGHER 1 year later by between 18%-71%

3 of the 9 occurrences saw the Nasdaq LOWER 1 year later by between 18%-40%

It’s important to note that there is essentially no over-lap to these 9 precedents. That makes the varied returns quite fascinating. What accounts for the difference? Or, better yet, how can we gauge which category our present case might fall into? In a Premium Post at The Lyons Share, we identify what we think is a significant factor in determining whether this development is more likely to end up a big winner, or a big loser.

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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No 52-week high in the Nasdaq 100 has ever been accompanied by as few advancing stocks as today’s.

As most readers know, we are big proponents of strong breadth, or participation, in signifying healthy markets. When rallies are accompanied by a large swathe of advancing stocks, it is more likely to go further and last longer than those coming on the back of just a relatively few stocks. As such, it was encouraging to see the significant level of participation during the August-October stock market rally. Recent efforts, however, have not been so robust.

Today’s action on the Nasdaq exchange is Exhibit A. On the one hand, the Nasdaq 100 (NDX) managed to rally -- again -- closing at a new all-time high -- again. Despite the new high, however, the breadth on the Nasdaq read as follows (according to our vendor):

Nasdaq Advancing Issues: 840

Nasdaq Declining Issues: 2105

If that seems unusually skewed to decliners considering the NDX hit a 52-week high, you are on to something. As a matter of fact, at 28.5% of all issues, today saw the fewest advancing issues ever on a day when the NDX closed at a 52-week high.

So, is this dwindling participation a serious warning sign for the rally? Or is today a random outlier, irrelevant to the bigger picture? In a member post at The Lyons Share, we look deeper into the issue of participation, using quantitative evidence to come to an informed conclusion.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering what we believe will be an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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Yesterday’s stock market bounce may not have been all it was “cracked” up to be.

We’ve been warning quite a bit regarding what we call “cracks” in the internal structure of the market. Specifically, while the large-cap stocks have held up quite well, there has been a distinct deterioration in the number of stocks market-wide that are still participating to the upside. Even during yesterday’s very nice bounce in the market, the internals were not all that impressive. In fact, for as good a day as we saw in the Nasdaq, some of the breadth figures were historically weak.

Specifically, although the Nasdaq 100 (NDX) rallied 1.5% yesterday -- and is within 1.5% of its 52-week high, there were still well more new lows on the Nasdaq exchange than new highs. That is a combination that has only occurred on 14 other days since 1990.

Like many recent charts, the former occurrences included some near major tops as well as some during unabated bull markets. So was yesterday’s rally all it was cracked up to be -- or was merely a dead cat bounce?

Once again, in a premium post at The Lyons Share, we address that issue by studying the historical precedents in depth to come to an objective conclusion. We also look at a unique twist to the study which carries potentially compelling implications.

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share, where we are currently running our PRE-”FALL” SALE. Considering the discounted cost and the current market juncture, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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Recently noted deterioration in market internals appears to be getting worse, as evidenced by this rare divergence in the Nasdaq market.

One of the hallmarks of our intermediate-term Risk Model that helps orient our investment posture toward equities is breadth, a.k.a., internals. Internals measure the level of participation in the stock market, e.g., how many stocks are advancing versus declining, the number of new highs versus new lows, etc. The more participation there is, the broader the foundation for a market rally -- and the more comfortable we feel being aggressively invested.

In recent weeks, we have published a series of charts and posts highlighting what appears to be a weakening of the internals, or participation, in the market recently. This trend has been interesting to note since the major large-cap averages have continued to trade near their all-time highs. That trend has not slowed down. In fact, it has arguably accelerated, as evidenced by today’s Chart Of The Day.

Today’s ChOTD shows that while the Nasdaq 100 (NDX) remains close to its 52-week high (i.e., less than 1% away as of yesterday), the number of new 52-week lows is now outstripping new highs on the Nasdaq exchange. Not only that, but the number of net new lows, i.e., new lows minus new highs, equated to more than 2.5% of all issues traded on the Nasdaq.

If that does not seem like a big number, it is actually just the 9th day ever that saw so many net new lows while the NDX was so close to its 52-week high.

As the chart suggests, prior occurrences seeing such conditions appear to have come at inauspiciously timed junctures. We’ve asked the question in our previous posts on “internal cracks” -- do these examples constitute discernibly negative events? Or could they be mere coincidences or stat-foolery?

In a premium post at The Lyons Share, we address that question by studying those historical occurrences above and the NDX’s subsequent performance. We also consider whether our present case might be different than its precedents. All of the research, as always, is made in an attempt to come to an informed, quantitatively-backed conclusion.

If you’re interested in this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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While the Nasdaq 100 has rebounded sharply the past 2 days, there have actually been more New Lows than New Highs on the exchange both days.

A growing concern among some stock market observers is the supposed thinning out of the rally of late. On the whole, we would not count ourselves among such observers subscribing to that concern – at least not in a serious way. Persistent rotation in leadership has more than made up for any breadth concerns thus far. That said, there is scattered evidence of thinning potentially starting to emerge. One such piece of evidence may be seen in the recent rebound in the NASDAQ following a bumpy month for the tech-laden exchange.

Why do we say that? During Friday’s more than 1% jump in the NASDAQ 100 (NDX), there were actually more new 52-week lows on the NASDAQ exchange than new highs. And while that’s not unheard of, it is unusual to see it occurring with the NDX so close to its own 52-week high, e.g., less than 4% away.  Furthermore, we saw a similar situation today, with the NDX rallying another two thirds of a percent, yet with new lows outnumbering new highs again.

This is just the 10th unique occurrence of consecutive days meeting this criteria in the last 20 years.

As the chart indicates, this situation represented a major warning sign in 2007 and 2015. However, after several of the other occurrences, stocks were able to power through the seeming sign of weak participation among the broader market. So is our present case a potentially serious topping signal -- or is it likely just a false alarm?

In a premium post at The Lyons Share, we address that question, looking at prior occurrences and their aftermath to come to an informed, quantitatively-backed conclusion. In this case, the conclusion may differ slightly from what is merely observed from the chart.

If you want this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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