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January 18, 2022

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Reward/Risk probabilities are not favorable.

The stock market finished a choppy week moderately lower.

Seasonal tendencies based on historical performance for the week ahead have been indecisive.

Leading technical indicators, RSI, MACD and OBV (On-Balance Volume), have been diverging bearishly compared to price for months.

Our Colby Economic Expectations Index appears to have peaked. Actual economic data releases have been weaker than economists' estimates since June, 2021.

Sentiment indicators currently appear mixed, neutral to moderately oversold, for the short term. From a longer term perspective, bullish sentiment was far above average for 19 months, in a persistent overbought position from April 2020 to November 2021. It could take much more time to work off those longer-term, persistent levels of overbought Greed.

From a long-term perspective, stocks remain overbought and overvalued relative to traditional measures: sales, earnings, dividend yields, and book value. Stocks are priced for an extremely optimistic future, ignoring all potential bumps in the inherently unpredictable road ahead. Berkshire Hathaway's Charlie Munger thinks stock valuations are "crazier" now than they were in the dot-com bubble in years 1999-2000. History shows that overly high stock prices are followed by low returns, and overpaying for stocks is not profitable in the long run.

iShares Core U.S. Aggregate Bond ETF (AGG) price collapsed over the past 2 weeks. The down wave started before the Fed signaled a more hawkish monetary policy on 1/5/2022. Leading indicators, RSI, MACD and OBV (On-Balance Volume) confirmed the price downtrend. The trailing 50-day SMA (simple moving average) recently crossed below the 200-day SMA to signal a major price downtrend. Fixed-income investments appear to be in for a losing year in 2022.

The SPDR S&P 500 ETF Trust (SPY) price ended a choppy week moderately lower. Seasonal tendencies based on historical performance for the week ahead have been indecisive. Leading technical indicators, RSI, MACD and OBV (On-Balance Volume), have been diverging bearishly compared to price for months. Many other market indicators (shown below) persistently have shown negative divergences relative to the SPY. A few overpriced stocks accounted for most of the SPY's gains in year 2021. The S&P 500 index is capitalization-weighted, and the largest and most popular stocks dominated the stock market in 2021, while the typical stock was relatively unwanted. That trend is not continuing so far in 2022.

The Invesco S&P 500 Equal Weight ETF (RSP) has outperformed the SPY since 12/1/ 2021. Leading technical indicators based on the trend of price (RSI, MACD and OBV) are not bullish, however. The lesser weight of the big-capitalization technology stocks (which have been relatively weak since 12/1/2021) has helped the equal-weight RSP outperform the big-cap SPY somewhat. Given that a trend of rising interest rates should be negative for big-cap technology stocks, RSP could be in position to continue to outperform the SPY this year. Note that potentially better relative performance does not imply positive absolute performance, and so RSP still could lose but lose less than SPY.

The Percentage of S&P 500 stocks above their own trailing 50-day and 200-day SMAs (simple moving averages) fell below their SMAs, confirming the stock market's price downtrend. Peaking last April, both Percentages have signaled bearish divergences compared to stock index prices for more than 8 months.

The Cumulative Daily Advance-Decline Issues Line for the NYSE ($NYAD) crossed above its 50-day SMA (simple moving average) on Tuesday but fell back to finish the week on Friday only slightly above that SMA. Even when the SPY price rose in December and into January, $NYAD remained well below its peak on 11/8/2021, so it remained relatively weak compared to the SPY price. Therefore, $NYAD continued to indicate a bearish divergence compared to the SPY. Relative weakness in the A-D Line indicates that the demand for the typical stock has been lacking.

Net New Highs on the NYSE ($NYHL, now at -98) turned bearish, falling below zero and falling below its own trailing 50-day SMA and 200-day SMA. Also, the trailing 50-day SMA remains below the 200-day SMA, which is a weak position from a long-term perspective. Peaking last May, $NYHL signaled early warning bearish divergences compared to stock index prices for most of year 2021.

The QQQ Nasdaq 100 ETF (QQQ) price index, which is heavily weighted by technology stocks, underperformed the SPY since 12/1/2021. Leading technical indicators, RSI, MACD, and OBV (On-Balance Volume), peaked in November, are near their lowest levels in more than 2 months, and have been showing bearish divergences compared to price. Not at all a pretty picture.

The Cumulative Daily Advance-Decline Issues Line for the NASDAQ ($NAAD) remains in a persistent downtrend and in a bearish position relative to its SMAs (simple moving averages): below its 50-day SMA, below its 200-day SMA, and with the 50-day SMA below the 200-day SMA. $NAAD has been notably weak since 11/8/2021, and it fell to its lowest level in 15 months last week. It has been significantly weaker than the QQQ price since it peaked on 2/9/2021. QQQ is heavily weighted by the largest, big-cap Technology stocks, but the demand for the typical NASDAQ stock has been lacking.

Net New Highs on the NASDAQ ($NAHL, now at -600) turned bearish, falling below zero and falling below its own trailing 50-day SMA and 200-day SMA. Also, the trailing 50-day SMA remains below the 200-day SMA, which is a weak position from a long-term perspective. Peaking last February, $NAHL signaled early warning bearish divergences compared to stock index prices for more than 10 months.

The Russell 2000 ETF (IWM), which is composed of relatively small-capitalization stocks, underperformed the SPY again last week. IWM remains in a weak position below its own trailing 50-day and 200-day SMAs (simple moving averages). Leading momentum indicators of price, RSI, MACD, and OBV, remain bearish. There is no evidence of any change in the IWM's well-established underperformance trend relative to the SPY. The January Effect traditionally favors small caps outperforming large caps from mid-December through February, although that does not happen every year, and it is absent so far in 2022.

The Dow Jones Averages both declined again last week, continuing their short-term price pullbacks. The Dow Jones Transportation Average continued to underperform after failing to confirm the new closing price high by the Dow Jones Industrial Average on 1/4/2022. Such a non-confirmation, if it persists, could suggest market divergence, where the two Averages fail to pull together in the same direction. Non-confirmations often appear at turning points in a trend. Still, both of the Averages made new closing price highs in early November. Therefore, according to the Dow Theory, which considers only larger price swings of the daily closing prices of both Averages that last longer than a few weeks, the critical parts of the stock market were pulling together in the same upward direction as of early November, indicating a bullish stock market trend for the longer term. It would be bearish if both Averages close below their closing prices on 12/1/2021.

$VIX, Volatility Index is somewhat oversold, modestly above its 10-year average at 16.83. The extreme historical range is 90 to 8.

!NAAIM, The National Association of Active Investment Managers long-side exposure to US equity markets fell back to its 10-year average, suggesting neutral sentiment. The extreme historical range is 121 to -6.

!AAIIBEAR, the percentage of bearish individual investors is oversold at 38.30, which is above its 10-year average at 30.89. It was well below average most of the time from November 2020 to November 2021, however, and it could take much more time to work off those persistent levels of overbought Greed. The extreme historical range is 70 to 6.

!PCRATEQU, the Equity Put/Call Ratio Index at 0.64 is only slightly above its 10-year average at 0.63, suggesting neutral sentiment. !PCRATEQU was far below average most of the time from April 2020 to November 2021, and it could take much more time to work off those persistent levels of overbought Greed. The extreme historical range is 134 to 22.

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Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my
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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States.

 
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"PUTTING CANDLES TO THE TEST, How Profitable Are They Really?" by Robert W. Colby, CMT. Published in SFO, STOCKS, FUTURES AND OPTIONS MAGAZINE, Volume 5. No. 8. August 2006, pages 91-94. Please click here to buy this article. (Scroll to bottom of linked page.)
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Active Trader magazine September 2004 interviewed Robert W. Colby. 4 pages. "Robert W. Colby: Technical collector. A discussion with Robert W. Colby about technical trading and his revised Encyclopedia of Technical Market Indicators, Second Edition. By Active Trader Staff."
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MetaStock® PC Software for Technical Analysis
MetaStock® is a powerful technical analysis software program for your personal computer. It offers more than 200 built-in indicators and line studies to enable you to explore a wide variety of methods. And it empowers you to build, back test, and optimize custom trading systems to suit your own particular requirements.
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