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12/22/2013 – Market Update

December 22, 2013 Leave a comment Go to comments

Time for a Santa Claus Rally

Nearly every year, the broad stock market tends to have a “Santa Claus Rally” from the last week in December to the first week in January; such a rally is typically sweet but short. Also watch for emerging “January Effect”, i.e., small-cap stocks tend to outperform big caps in January. The S&P 500 index is still bounded with a fifth-wave extension (ending diagonal) pattern which usually appears at key market junctures. The broad stock market should be in a short-term bullish time-window until 1/6/2014.

Table of Contents

Broad Market in a Short-Term Bullish Time-Window

The LWX (Leading Wave Index) is Nu Yu’s proprietary leading indicator for US equity market. LWX>+1 indicates bullish (green); LWX< -1 indicates bearish (red); The LWX between +1 and -1 indicates neutral (yellow).

The LWX Indicator in Last Four Weeks (Actual)
Last 4 wks LWX 12-20-2013

The LWX Indicator in Next Four Weeks (Forecast)
Next 4 wks LWX 12-20-2013

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 8 on 12/20/2013 (down from 25 the previous week) which is below the panic threshold level of 42 and indicates a bullish market. Based on the forecast of the Leading-Wave Index (LWX), the broad market should be in a short-term bullish time-window until 1/6/2014 (see the second table above). The daily chart below has the Wilshire 5000 index with both the BIX and the Momentum indicators. The current market status is summarized as follows:

Short-Term Cycle: upward
Date of Next Cycle High: 1/6/2014
Broad Market Instability Index (BIX): 8, below the panic threshold (bullish)
Momentum Indicator: positive (bullish)

W5000 12-20-2013

Long-Term Picture: Elliott Wave Count on S&P 500 Index

The following chart is a weekly chart of the S&P 500 index, with my Elliott Wave count, in a four-year time span. The stock market crash of 2008 had a massive washout and reset the market in early March 2009 as “ground zero” for the beginning of wave count.

There are three degrees of waves: Primary, Intermediate, and Minor waves in this weekly chart. It shows that the SPX currently is in primary wave [3], intermediate wave (3), and minor wave 5.

A long-term price target for primary wave [3], projected at 1796 by using 0.618 extension of wave [1], has been reached recently. Primary wave [3] could extend to the next price target at 2063 based on 1.0 extension of wave [1].

SPX Elliott Wave 12-20-2013 (Weekly)

Short-Term Picture: S&P 500 Index in Fifth Wave Extension Pattern

As shown in the daily chart below, the S&P 500 index is forming a 5-month rising wedge pattern. This rising wedge is also characterized as an Ending Diagonal which substitutes for the fifth impulse wave and configures minor wave 5 extension pattern with five minute subwaves i, ii, iii, vi, and v confined between two converging lines. Therefore, the S&P 500 should still be in the late part of intermediate wave (3); intermediate corrective wave (4) should be next.

Although this fifth wave extension pattern could potentially reach 1890, we should keep it in mind that either a fifth wave extension or an ending diagonal implies dramatic reversal ahead. For more information about the ending diagonal, visit: “Ending Diagonal: A Pattern That Sends Shivers Down Investors’ Spines” at Elliott Wave International.

SPX Elliott Wave 12-20-2013 (Daily)

Market Ratio and Competitive Strength

The market ratio is very helpful to compare strengths between two markets. The table below tracks weekly performances for several pairs of markets, i.e., the euro vs. the US dollar, the Greek market vs. the Chinese market, the long-term rate vs. the short-term rate, the S&P 500 index vs. gold, small caps vs. large caps, and the US market vs. the world market.

For each pair of markets listed in the table, the market ratio is calculated by dividing one market by another. Then the competitive strength is further evaluated from a percentage change of the ratio against its 89-day exponential moving average. The results divide the markets into two groups: outperforming markets and underperforming markets, for this week as follows:

Market Ratios 12-20-2013

Each week I talk about one pair of markets in the table above. This week let’s have a look at small caps vs. large caps.

Small Caps vs. Large Caps: It is the time to check the “January Effect” that small-cap stocks tend to outperform big caps in January. The following chart is a typical way to gauge the “January Effect” by using the ratio of the Russell 2000 index of smaller companies divided by the Russell 1000 index of largest companies. When the ratio is rising, smaller companies are outperforming big blue chips. After about two months in its negative momentum, the ratio had a big jump to cross over its 89 day exponential moving average last Friday. This could be an early sign of starting the “January Effect”. Watch for strength in small-cap stocks.

RUT vs RUI 12-20-2013

Gold in 14-Month Descending Broadening Wedge Pattern

The gold index is in a 14-month Descending Broadening Wedge pattern on the daily chart. Inside this broadening wedge, gold is also forming another two sub-patterns: 1) a 4-month downtrend channel; and 2) a potential double bottom between July and December. Gold should be bearish before a bullish reversal or a bullish breakout from the broadening wedge.

GOLD 12-20-2013

Long-Term Picture: Silver in a 3-Year Falling Wedge Pattern

The silver index has formed a 3-year falling wedge pattern. Although silver will remain bearish with range-bounded swings before a breakout from the wedge, a likely double-bottom pattern in developing near $19 level could be a potential reversal.

Silver 12-20-2013 (Weekly)

Gold/Silver Mining Stocks Forming 8-Month Horizontal Trading Range

Gold/silver mining stocks are forming a 8-month horizontal trading range. They are still weak and are testing the lower boundary of the trading range. Please note a potential double bottom pattern between July and December.

XAU HUI 12-20-2013

Crude Oil Forming 8-Week Horizontal Trading Range

After a bullish breakout from 13-week downtrend channel, crude oil is forming an 8-week horizontal trading range between 92 and 99. Crude oil should be neutral before it a breakout from the trading range.

Oil 12-20-2013

US Dollar in 5-Month Bearish Downtrend Channel

The U.S. dollar has been bearish in a 5-month downtrend channel. Now it is testing the upper boundary of the channel. The dollar could become bullish once it breaks above the channel.

USD 12-20-2013

US Treasury Bond Forming a Bump-and-Run Reversal Bottom Pattern

The 30-year U.S. treasury bond is forming a Bump-and-Run Reversal Bottom Pattern. It has been in the bearish bump phase since June. In September prices reached the second parallel line with two times of the lead-in channel height. In September, prices crossed above the second parallel line (buy line). This crossing could be a bullish reversal sign for the treasury bond as long as it stays above the second parallel line. A likely double-bottom pattern is also in developing near 130 level.

USB 12-20-2013

Asset Class Performance Ranking with Equity Leading

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently equity is outperforming, and gold is underperforming.

Asset 12-20-2013

Sector Performance Ranking with Internet Sector Leading

The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Wilshire 5000 index, as an average or a benchmark of the total market, is 4.55% above the EMA89. Outperforming sectors are Internet (9.76%), Biotech (7.92%), and Industrals (6.53%). Underperforming sectors are Precious Metals (-7.75%), Real Estate (-2.11%), and Telecommunication (-0.62%).

Sector 12-20-2013

BRIC Stock Market Performance Ranking with the Chinese Market Lagging

The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89), also in comparison to the US market. Currently the Chinese market is lagging.

BRIC 12-20-2013
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