Yield Curve Continues to Flatten

The yield curve for U.S. Treasuries continues to flatten, reflecting a dimming of expectations on significant economic boosts from President Trump's proposed reforms, continued thirst for yield globally, the Federal Reserve moving to tighten monetary policy, and some investor anxiety about the apparent separation of stock market prices from underlying fundamentals.

A comparison of the yield curves from May 1, 2017 (lighter blue line) and June 23, 2017 (darker blue line) shows the flattening process that began earlier this year and has continued into the summer. The flatter yield curve can be attributed to four primary causes:

I. Dimming of Expectations of Pro-Growth Reforms
After his election as president and through the first couple months of his presidency, Donald Trump advocated an agenda heavy with reforms that, if implemented as promised, would likely give a substantial short- to medium-term boost to the languishing economy. Some of his most notable campaign ideas included repealing and replacing the Affordable Care Act passed under President Barack Obama, significant tax reform, and substantially relaxing regulations on financial institutions (namely the Dodd-Frank Act). Market participants saw the potential bounty of economic growth that these reforms could bring, and have sent all four major stock market indexes skyrocketing in the time since the November 2016 election.

Stock Index Performance since the 2016 Presidential Election (11/8/2016 to 6/23/2017).
From top to bottom: Dow Jones Industrial Average, S&P 500, Nasdaq Composite, Russell 2000
Chart from stockcharts.com

Roughly five months since President Trump's inauguration, these reforms have not been fully realized as investors had hoped. Some progress has been made on easing regulations on financial institutions, but a significant defeat of the initial new health care bill a couple months back, paired with the newly-released health care bill this past week still garnering skepticism from within the Republican Party shows that any significant health care reform will take some time. Tax reform, another potential Congressional flashpoint, has yet to be proposed as legislation. As the year has gone on it has become apparent to many investors that if Trump's reforms are to be fully implemented as promised (still a very big "if"), it will take notably longer than they had expected. As such, any significant economic boost is still a ways off, and thus inflation expectations have dimmed to levels not seen since just before the 2016 presidential election. Bonds then become more attractive to investors, one reason why the yield curve has once again begun flattening.

II. Continued Global Thirst for Yield
This factor is much more long-term than the first factor we discussed. The search for yield has been intense for years now, amidst this global low-interest-rate environment, and while the global economy is beginning to pick up steam, American long-term debt remains much more attractive to foreign investors than those investors' own domestic sovereign debt.

Worldgovernmentbonds.com

Above is a list of major countries' 10-year bond yields. There are countries like Japan, France, Germany and the U.K., all with easy access to the global financial markets but with sovereign debt yields well below the United States' 10-year yield. Consequentially, as we have seen for a few years now, foreign investors are plowing money into long-term U.S. debt to get those higher yields. In turn, this is also helping keep the long end of the yield curve flat.

III. The Federal Reserve Tightening Monetary Policy
The federal funds rate now stands at a range of 1.00% to 1.25% after three rate increases, each by a quarter of a percentage point, over the last six months by the Federal Open Market Committee. Let's first be clear in recognizing that even despite these increases, a 1.25% federal funds rate is still quite accommodative. It is not the 0.25% that this range ceiling reached at the nadir of this cycle, but a range of 1.00% to 1.25% remains quite accommodative by historic monetary policy standards. The St. Louis Federal Reserve branch's Financial Stress Index also portrays how loose monetary policy remains:

Intriguingly enough, this index has been falling even amidst the FOMC's rate hikes, but that's another discussion for another post. For now, the focus is on the Federal Reserve's tightening of monetary policy (through rate hikes and reducing its $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities, set to begin later this year) sending short-term U.S. Treasury debt yields higher, as typically happens in tightening monetary policy.

It is worth noting that when the Federal Reserve begins allowing its Treasuries to mature and not re-invest to maintain the size of the $4.5 trillion portfolio, longer-term Treasury debt yields are expected to rise somewhat as supply increases in the market without a clear replacement buyer as the FOMC steps away. But again, this is another discussion for another post.

IV. Some Investor Anxiety
Let me first start off and assuage you that this discussion will not be about the CBOE's Volatility Index, or VIX. We are all well aware that the VIX continues to remain incredibly subdued, whether due to complacency or genuine investor confidence in the economy or even a side effect of massive central bank stimulus. There is likely a degree of all three present in where the VIX lies today, but that's not relevant to this section.

Rather, there is some investor anxiety over a culmination of the uncertainty in President Trump's promised reforms from above, weaker economic data as of late that raises questions of if the Federal Reserve may accidentally tighten monetary policy too much and cut off economic growth, very high stock price valuations even in the face of improved corporate earnings, geopolitical tensions (which seem to rise every other day in some aspect), and more. To me, it comes down to substantial risks to the market being at least partially offset by continued strongly accommodative monetary policy by central banks worldwide. I say partially because we have seen some rattled nerves in recent months following bouts of increased uncertainty or tension, but overall this has not been enough to persuade investors to fully dive into haven assets like U.S. Treasuries or gold. Gold is up over $100/ounce from the start of 2017 to 6/23, and the U.S. 10-year Treasury yield has dropped 30 basis points in that same timeframe. Again, these signal some investor anxiety, but not enough to make the stock markets or other riskier assets notably less attractive.

So what's the outlook? Unless Congress can force the most recent health care bill through in the near term, it looks to be more of the same: A gradually flattening yield curve as uncertainty over Trump's promised reforms, tightening monetary policy, an insatiable global thirst for yield, and hints of investor anxiety amidst heightened geopolitical tensions.

Andrew

Dow Jones Industrials Looking Distressed

I'm entering the fifth week of being contaminated by some kind of illness. This time, it's a nasty cold that developed last Thursday, and gave me a fever every day this past weekend, into Monday morning. That was accompanied by an incredibly sore throat, cough, and inordinate amounts of post-nasal drop. Not exactly the most fun way to spend a weekend, but thankfully it looks like things are turning a corner.
A handful of technical indicators on the Dow Jones Industrial Average are flashing warning signs that the market might be slightly distressed.

StockCharts.com

Attached above is a picture of the Dow Jones Industrials over the last six months, with the Average Directional Index (ADX) posted below. The +DI (Positive Directional Index) and -DI (Negative Directional Index) are superimposed on the ADX. In a nutshell, an ADX value over 20 generally indicates the presence of a trend in the market. Using the ADX alone, one can't determine the direction of the trend without looking at the values of the stock or index. The Directional Indexes help out by separating the ADX into positive and negative components. When the ADX exceeds 20 and the +DI is greater than the -DI, the trend of the security is generally positive/upward. Likewise, when the ADX exceeds 20 and the -DI value is greater than the +DI value, the trend of the security is generally negative/downward. This is by no means foolproof, but can be a guide to identifying trends and momentum, to some degree.
The ADX has been stuck in a pretty tight range since middle September, eyeballing it says it's hovering between roughly a 22-27 value window. Although the index has stagnated, it remains above 20, and therefore it is plausible that a trend still exists in the market. How can there be a trend if the Dow is stuck in a sideways pattern, you ask? Well, that's the gist of it. The trend is for the sideways pattern to continue, it would appear, as has been the case since last month. When taking into account the Directional indexes, we get a different story. Since mid/late August, the -DI line has consistently been above the +DI line, save for a brief come-together in late September. This was not a red flag back in August and early/mid September, because the ADX was below that key 20 threshold. However, it's been about a full month that the ADX has been above the 20 mark, and the -DI line has exceeded the +DI line. This has bearish implications for the Dow, and while there's nothing from this particular index screaming "correction" in the very near future, this indicator is raising the possibility that a correction cannot be ruled out down the road. A sideways trend with -DI exceeding +DI isn't something I'm fond of.

StockCharts.com

We now turn to another indicator, using the same 6-month timeframe as the ADX analysis. This time, we're looking at the Moving Average Convergence/Divergence Oscillator, or the MACD. This is a momentum oscillator, and will work in tandem with our ADX analysis above. The MACD, while a wonderful indicator, is also a rather complicated indicator to learn, given the number of crossover signals and such that can be learned. For this analysis, we will be focusing solely on the positivity or negativity of the MACD line itself (black line). In a nutshell, when the MACD value is positive, the momentum for a gain in the security is increasing. Taking this point further, a strongly positive MACD value can predict a strong upward breakout, whereas a weakly positive MACD value may anticipate weak gains or even stagnation. Similarly, when the MACD value is negative, the momentum for a loss in the security is increasing. A strongly negative MACD value may anticipate a large drop in the security's value, whereas a weakly negative MACD value may predict small losses or stagnation.
Something right off the bat that worries me is that the MACD has been negative since early September. This implies that there is more momentum for the index to lose value than to gain value. However, as we saw with the ADX, we are stuck in a rather small window, and in order for the MACD or ADX to succeed in anticipating this downward momentum, we need something to break out of the small window. Perhaps a series of worse-than-expected earnings, as we're in the thick of earnings season, or some other shock to the system. Those kinds of things can't really be anticipated, but when a breakout does occur, the MACD agrees that a downward movement is more likely than an upward movement.

Of course, we can't discuss stress in the market and not bring up everyone's favorite fear gauge.

StockCharts.com

The CBOE's Volatility Index, or VIX, is Wall Street's 'fear gauge', measuring volatility in the markets. When investors get jittery and uncertainty over the future increases, the VIX goes up. When markets are calm and the economy's looking good, the VIX goes down. As of the day this post was written (Tuesday), the VIX closed at 13.46, about where it's been since this past spring. That's something that I find a bit concerning.
As we described above, when volatility is low and investors are calm, the VIX is down. When you take into account that the 52-week range of the VIX currently stands at a high of 32.09 and a low of 11.02, you don't need a financial analyst to tell you that investors are pretty complacent with economic conditions right now. In some aspects, this is good; stock markets generally stay up during calm periods, enabling a prolonged, slow appreciation of capital if this calm period were to extend into the longer term. In other aspects, this is not good; investors are a little too complacent right now. The Federal Reserve is well on its way to boosting interest rates, either in its November or December meetings (likely the latter), and while experts are pricing this likelihood in, I don't believe the stock markets are doing the same. To some degree, this is warranted, as the FOMC has lost some credibility in the last few meetings after building up the case for a rate hike and then keeping rates steady. Despite this, I believe a correction will occur at some point if/when the markets realize that interest rates could very well rise in December. It shouldn't be a big correction, but at least a few days in the red ought to accurately price in a rate hike.

Another thing to discuss concerning the VIX is the Relative Strength Indicator, or RSI, placed above the VIX price chart. The RSI is an indicator of whether a security is overbought or underbought. Values above that dashed line at 70 indicate a security is overbought and a pullback in value can be expected soon. Similarly, values below the dashed line at 30 indicate the security is underbought, and a rise in value can be expected in the near future. The 'neutral' line is at 50, so anything between 50 and 70 generally is accurately priced but perhaps a bit too pricey, while anything between 30 and 50 is generally accurately priced but perhaps a bit too cheap for its real value. The VIX stands at about 46 at Tuesday's close, below the neutral line of 50 but not below the 'underbought' line of 30. In other words, volatility is about where it should be based on recent history, but might be just a bit too low. The RSI isn't perfect of course, but it's one of the more accurate technical indicators. Using the RSI, the VIX should be watched for a slight short-term boost.

Lastly, we apply the ADX we discussed earlier to the VIX. I'll save you the trouble of re-explaining the ADX and +/-DI, as it's all explained at the beginning of this post, so we'll just analyze the chart. The +DI line has exceeded the -DI line ever since the first few days of September, up until the last couple of days before this writing. Over the last few days, we've seen the -DI and +DI switching back and forth, seemingly fighting over which is more dominant. In a situation like this, I would call it neutral. But it doesn't really matter too much because the ADX itself (black line) is below that key 20 threshold, indicating there isn't really a trend present for the -DI and +DI lines to anticipate momentum. The momentum recently has been negative, and while that momentum and the trend are currently neutral, it could very well return and place continued upward pressure on the VIX.

Lastly, adding on to this theme of losing momentum and being stuck in a sideways pattern, let's check out just how low volatility has been, using numbers.

TradingViews

Shown above is the Dow Jones Industrials over the last year, with two price change windows on the right side of the chart. The larger window is where I measured the range in index values from highest close/open to lowest close/open. Since mid-August, a period of about 2 months, the Dow has varied by 626 points, or 3.36%. That's not much of a move at all, when looking at other 2-month periods over the last year. Applying the same method to the last month and a half, we get the Dow varying by 320 points, or 1.74%. These two price changes, particularly the window over the last month and a half, show this pattern we've been stuck in. The Dow Jones has been moving sideways on this chart, hence the 'sideways pattern' references. While there is downward pressure on stocks as we described above, until we get out of this pattern there's really nothing that can be done. Thus, we're waiting for an event that triggers either an upward breakout, such as a slew of much better-than-expected earnings from big companies, or a downward breakout, such as a series of poor earnings and a decrease in economic conditions. Time will tell just when this breakout happens, but until then, it's a waiting game. Which direction will it go? What will be the trigger for the breakout? Those two questions are at the forefront of my mind for the medium term.

Andrew

Testing Technical Analysis

I’ve finally managed to recover from the worst of my illnesses, after getting a fresh round of antibiotics to take care of something called ‘hemophilus influenzae’ that was making things pretty unbearable for a while. As I type this on this Wednesday, the third week anniversary of when I first went in to the doctor for an illness, I’m still stuck with a cold, but I am feeling far better than before.
The same cannot be said for financial markets in the last couple of days. Between the GBP/USD flash crash and continued weakness and stocks taking a nasty hit on Tuesday, I imagine there’s an abundance of Advil circulating around trading floors. If technical analysis is to be believed, painkillers could soon be flying off the shelves.

Bloomberg

Let me first assert that, as a college student, I’m not going to pretend like I know what I’m saying is completely accurate. I’m more or less learning as I go, and there’s bound to be times where I say one thing and the complete opposite happens. Caveats aside, above is a screenshot of the Dow Jones Industrial Average from Monday with a bearish pennant formation. This pennant is bearish as per the 2.88% contraction (flagpole) around the early part of September, which kicked off the pennant formation. The Dow fell 200 points on Tuesday, and as of this typing, is up about 34 points on this Wednesday at 18,163 points. Needless to say, Tuesday’s big drop was the downward breakout point for the Dow we were looking for. The drop came on the heels of uncertainty over the OPEC “deal”, a surging Dollar, and general anxiety over market volatility, certainly not helped by the Cable flash crash earlier. While conditions today (10/12) are slightly better and major indices are showing modest gains, DJIA remains below the pennant’s line of support. I’ll be watching carefully in coming days to see if this line of support is treated as a new line of resistance, or if markets rally and the pennant formation was likely a false alarm. Only time can tell.

Bloomberg

I’m not too convinced that this is just a flash in the pan with respect to the pennant formation yet. The S&P 500 has been exhibiting the same kind of bearish pennant formation as the Dow, with a drop of ~60-70 points at the flagpole. As a result of Tuesday’s sell-off, this pennant too was broken, and again I’m watching carefully to see if this holds and the index remains at subdued levels relative to what we saw in the pennant.

Bloomberg

The ‘kicker’ to me is a strong bullish pennant formation we saw in the VIX. This formed at the same time as the S&P 500 and Dow pennants, though this flagpole was bullish with a 71.47% gain in early September. Tuesday’s sell-off saw this pennant broken, and the VIX stands at 15.71 as of this typing (Wednesday). With the VIX pennant broken in an upward movement as expected, the idea that the bearish pennants in DJIA and SPX were valid gains traction. Again, it’ll take a couple more days to see if this is actually true, but things are certainly looking that way.

Ideally, I’ll be over this cold in the next couple days and I can finally have a day where I’m not sick with anything. That day should come very soon, but if technical analysis is to be believed, the same cannot be said for stocks.

Andrew

Deutsche Bank: TBTF Edition

Over this past summer, I had the pleasure of reading Andrew Ross Sorkin's book 'Too Big To Fail', a beautiful reconstruction of the financial crisis at its roots. The book claims to have been based off of many interviews & previously-secret pieces of knowledge, and the material inside confirms it; it really is a fascinating book about the crisis.
The other day, I received in the mail another book titled 'Too Big To Fail', this one penned by Gary Stern and Ron Feldman, published in 2004. This book was essentially the 'warning shot' for the 2008 financial crisis, as it spoke of the dangers of bank bailouts. I have yet to dive into the book, but I'm very eager to do so. Aside from all the literature, while we thought the era of TBTF was more-or-less over, if not heavily reduced, Deutsche Bank this week proved that this is not the case.

Yahoo Finance

Attached from Yahoo Finance is a chart of Deutsche Bank's stock price from somewhere early in the trading session Tuesday, to the end of the trading session Friday. The Dow Jones Industrial Average is superimposed in green. You don't have to have a paid subscription to fancy charts and graphs to tell that DB was under some intense pressure both Thursday and Friday.

Thursday was not a good day for the banking sector. Two prominent events contributed to this general malaise, the first stemming from Commerzbank and the second from Deutsche Bank. Commerzbank announced that it would be eliminating nearly 10,000 jobs and suspending dividends for its stock on Thursday, news that sent a chill throughout the financial markets. This news came about prior to the start of the trading day, if my phone alerts are to be believed, and more or less set the tone for the financial sector before the American trading had even begun.

Trading kicked off for Deutsche Bank on Thursday pretty stationary from where it had closed Wednesday, hovering right around $12.25 per share. However, at around 12:20 PM ET Thursday, word got out that a handful of hedge funds were either pondering, or already commencing a cut in exposure to Deutsche Bank. This, of course, is not what investors wanted to hear, after the news about Commerzbank was already promoting a little more Advil than normal on this trading day. In a span of 40 minutes, from 12:20 PM to 1:00 PM ET, Deutsche Bank's stock plummeted from $12.22 per share to $11.39 per share, a 5.37% drop. The Dow responded similarly, dropping from 18,315 points to 18,151 points in that same timeframe. It eventually scraped the 18,100 mark right before 2 PM, but bounced back to close down over a hundred points on the day.

There are a lot of editorials out there with far more knowledge and experience than I possess, and that's fine; ideal, actually, as it gives people like me an opportunity to keep learning. And something that's been made a point of in some of these articles is that Deutsche Bank may remain Too Big To Fail. The financial markets certainly believe that; the CBOE'S VIX index jumped over two points in that same 40-minute time span we looked at above.

The nice thing here, though, is that this isn't Lehman Brothers 2.0. You'll notice that DB is sitting on a large quantity of cash reserves, has bonds that can be converted into equity if needed, and after Lehman in 2008, as well as observing the current state of our global economy, it would be nonsense to even imply that a bank as significant as Deutsche Bank would be allowed to fail. Deutsche is not Lehman 2.0, and is far from it.

StockCharts.com

After Thursday's scare, Friday brought a heavy dose of optimism back to the overall market, and especially Deutsche Bank. Its stock ended the day just over $13, a jump of over 10% compared to its Thursday closing price. This jump came on the heels of reports that the US government's settlement with the bank may come in around $4-6 billion, a fraction of the ~$14 billion charge initially levied against Deutsche Bank. I'm practically hitting my head on the wall at how I didn't realize that the settlement would be lower than the initial charge, leading to a rally like this; the bears got trapped and the bulls are running free in Deutsche Bank's stock, for now.

Technical indicators like the MACD and Bollinger Bands as portrayed above indicate that another, certainly more modest drop could be in the cards over the next couple days until the MACD crosses above the signal line again. What might be a bit alarming is how even despite Deutsche Bank's stock hitting an all-time low Thursday, it still stayed within the Bollinger Bands, which delineate the +2 and -2 standard deviations. Friday's rally has brought the price back just below the middle of these Bollinger Bands, but when you put together the still-iffy MACD and now-very-wide Bollinger Bands, a non-zero chance for further selling remains. I don't see it anywhere as severe as Thursday's selloff, but similar to the gradual downward trend we've seen since about May, depicted in the chart above.


Deutsche Bank is a Too Big To Fail bank, but it's a strong TBTF bank compared to the position Lehman Brothers was in when they started taking big beatings from hedge funds cutting exposure. Even if, for whatever reason, DB ended up needing government assistance to survive, common sense all but guarantees the bank would not go under, unless the end goal here was another significant shock to the system, and we know no one wants that.

Andrew

Monetary Easing Wells Running Dry?

As a former meteorology major, I found myself intrigued by how steadfast a drought can be. Case in point, the Southwest remains in a deep drought after several years without a good, prolonged rainfall weather set-up. There was even a rumor or two about some water wells running dry in the Northeast as western New York is experiencing a pretty notable drought at this point. It just so happens that the monetary easing wells across the world may be running dry, too: not for a lack of 'water', but a lack of confidence that pulling up more water will further benefit the global economy.

StockCharts.com

A look back at the last month of trading across the Dow Jones Industrial Average shows how large Friday's drop in stocks was. The index shed just under 400 points on the day, closing down just over 2.1%. Other American equities didn't fare any better, with the Nasdaq dropping 2.55% and the S&P 500 closing down 2.45%.

Global bonds took a significant hit worldwide after Friday's apparent broad turning-of-the-tide in central banks, and yields continue to rise as I type this at roughly 2:00 AM on this Monday. European peripherals are looking a bit shaky, too:

Investing.com

Italy's 3-year government bond yield has risen over 117% as of 0700 UTC Monday, but even as I type this sentence about a minute after that screenshot, the yield has jumped to 139% in the last day. Longer-term bonds are generally showing 2% to 10% gains, with bonds beyond 10 years hovering near 3%. 

Elsewhere, Ireland's 10-year government bond has jumped over 30%, Spain's 10-year and 30-year bonds are both up over 2% in the last day, with their 3-year bond up nearly 70% as of this typing at 0704 UTC. Emerging markets have been acknowledged as a substantial part of the bond rally, as the hunt for yield has bled from developed economies into these riskier, but profit-producing bonds. Now, as we see a global bond sell-off continuing on from Friday into this workweek, one can't help but entertain the thought of what the global economy will look like even a month from now if this kind of anxiety over potential central bank hawkishness persists.

Forgive me, I feel like a guest at a party who's been talking for far too long. Let me introduce how we got here. Back on Friday, global markets began to wake up and smell the reality that is the limits to central bank action. The last week or so has seen the European Central Bank, the Bank of Japan, and the Federal Reserve all display increased hawkish tones in their actions. From the ECB, we saw President Mario Draghi refrain from any further monetary easing. The Bank of Japan was found to be in a tough spot, with concerns that it is running out of debt to purchase as part of its monetary easing program. And, to put it all together, usually-dovish Boston Federal Reserve branch president Eric Rosengren indicated it is plausible that normalization in monetary policy is coming much sooner rather than later. Financial markets reacted quickly and in typical knee-jerk fashion.

StockCharts.com

The CBOE's volatility index (VIX) jumped nearly five points on Friday, up about 40% on the day. Given how low volatility has been since July, some form of rebound in volatility was expected. I like to think of this aggressive monetary easing as the equivalent of feeding the financial markets Xanax, in that it calms the markets, makes everything feel all fine and dandy. But now that there's signs central banks may be backing off, it's quite a sobering reminder and a signal that the 'Xanax effect' in the markets isn't invincible.

Already on this Monday morning, Asian markets took a hint from the American markets on Friday and continued the sell-off. The Nikkei 225 fell by nearly 300 points (1.73%), while Hong Kong's Hang Seng index is currently down about 685 points, or 2.85%. Using stock futures, American and European markets will see the slide continue Monday, and further drops are definitely still on the table, especially if the Fed's Lockhart, a typically-dovish member, turns hawkish. 

The fact of the matter is we're in the ~eighth year of this economic expansion, one of our longest in history. Every peak is followed by a valley, and whether or not the valley is coming sooner rather than later, the reluctance of central banks to continue propping up financial markets may hinder any further expansion, should a halt to easing come to fruition. It's time to start seeing how much central banks are willing to conserve the 'water' in their monetary policy wells, because the well's starting to look a bit dry.

Andrew

Technical Foreshocks

I had the pleasure of being woken up this past Saturday by what was yesterday revealed as the strongest earthquake in recorded history in Oklahoma, a magnitude 5.8 on the Richter scale. My door was going back and forth in the doorframe, some of my drawers were pulled out by an inch or two, but no damage.

It does, however, present yet another reminder of what could be coming if fracking, assumed to be the primary cause of increased tectonic activity in Oklahoma, continues. It's this kind of foreshock that we're starting to see in some technical indicators.

TeleTrader

One tool I took to playing around with is the Fibonacci retracements tool from teletrader.com . In a nutshell, there's a significant amount of mathematics behind the Fibonacci sequence and associated 'golden ratio', to the point where scientists generally agree the Fibonacci sequence is found commonly throughout nature in many forms. One of these forms just happens to be the stock market.

I began this retracement from the valley of the Dow Jones Industrial Average during the 2008-2009 financial crisis. I didn't begin the retracement from the lowest point, as you can see, since there is some apparent support right around where I placed the 100.0% line, and that support stuck around from September 2008 until roughly April 2009. I then placed the 0.0% line around where we are now, again right around an area of resistance that the Dow appears to be encountering, and where we are meandering right now in the upper 18,000's.

The cool thing about TeleTrader is when you decide your bottom and top points, it outlines the Fibonacci retracement levels automatically, a nice bonus for those who may be somewhat math-inclined (I was formerly a meteorology major, after all) but don't have the time to calculate all of those levels, like myself. So, when the retracement levels are all drawn out, it becomes apparent that the Fibonacci retracement concept does actually work. I've annotated areas of resistance and support to show how the Dow stuck around areas between two retracement levels, and it's no coincidence how these areas of support and resistance line up incredibly well with the Fibonacci retracement levels. It's not a perfect correlation, as you can see by the 2013 period where support and resistance levels were a little bit away from the Fibonacci levels, but for the remainder of the graph, the shoe more or less fits.

If we're to trust this Fibonacci retracement set, we should be at or just past the peak of our bull market. I personally believe the peak came a handful of months ago, and we're starting to see a slowdown in momentum in equities, as well as remarkably low volatility signaling a level of investor complacency that could cause big trouble if/when a negative surprise shock hits the markets. But that's a whole other post to write about.

TradingView.com

This meat-and-potatoes graphic comes from tradingview.com , which has a cornucopia of technical analysis indicators and indexes and all that fun stuff. We're taking a look at the Dow Jones Industrial Average since around 2002-2003 until present day at the top, the Dow's Momentum index values in the middle, and the Relative Strength Index on the bottom.

As far as this graphic is concerned, at quick glance, things seem just fine and dandy. We're near record highs, the RSI is in a comfortable range (albeit gradually inching upward), and momentum remains positive. However, this is all a bit deceiving, and to illustrate this, we bring in volatility.

TradingView.com

 In the above image we see the Dow Jones Industrial Average from mid-2011 to present day, with the CBOE's Volatility Index superimposed in blue. The horizontal aqua line illustrates the lowest point that the VIX hit this past summer on a weekly scale, closing the week of August 15th at 11.34. For some perspective, that level was last breached in July 2014, and although the index frequently drops near this line, it's rather uncommon to see it go as low as it did this past August.

That tells us that the markets are complacent, as we briefly discussed earlier. This complacency makes for a significant problem in the RSI, which is defined by Investopedia as an index that "compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security."
The key phrase there is "recent gains and losses over a specified time period". You'll notice that American equities are trading in a pretty narrow slot right now, as confirmed by low volatility. Hence, recent gains and losses are going to be low, likely artificially lowering the RSI and making it appear that equities are not overbought, when in fact they very well may be.

This volatility issue also hurts the momentum indicator to some degree, as the same issue about recent gains and losses pops up. With minimal movements day-to-day in equities, it's no surprise that the momentum index in the last month or so is oscillating around the zero-line.
These oscillations can give some clues, however. Note how we've started to see lower highs and deeper lows in the momentum index from about 2015 onward, especially back in 2015. We've lately seemed to buck that trend, but I'll be darned if there's no concern over the momentum index hitting levels not seen since the financial crisis, back in 2015. That's a foreshock in a nutshell.

TradingView.com

But hope is not lost! We still have the ADX, the Average Directional Index. This index helps identify the strength of a trend. It doesn't identify if the trend is positive or negative, but shows how strong the trend is. While this index is subject to some of the same limitations imposed on the RSI and Momentum indicators, with how equities are overall not too active, the ADX raises a key point in that there really is no clear trend in the current market. ADX values below 25 are seen as the market either exhibiting a weak trend, or no trend at all, and we've been consistently below 20 in this index since late April! Now, since late April the Dow has gained a good 500-600 points, which is nothing to shake a stick at. But it took us close to 5 months to get there, a lot of dawdling, and a clear indication that there is no real trend. The best trend I can think of is stagnation now that we're likely at the peak or just past the peak of our bull market in equities.

To sum all of that up, while the RSI may be flawed due to a lack of movement, the overall picture of the ADX can provide some context. According to that index, we haven't had a clear trend since the first two months of 2016, when the Dow shed a couple thousand points. Since then, it's just been a meandering climb up to where we are now, the upper 18,000's.

This is a foreshock because the longer we continue without a clear trend, the more wary investors will grow, as more questions are asked about the state of the economy, whether we're peaking the bull market or just starting one. It's plausible that this uneasiness will lead to a climb in volatility, which could set off a chain reaction, but that's one of literally hundreds of possibilities in our current market state.

In sum, much like the increasing occurrence of Oklahoma's earthquakes culminating in a record-5.8 magnitude quake this past Saturday, technical indicators are also sending out foreshocks in the form of Fibonacci retracement red flags, the lack of a clear direction in the markets combined with concerningly-low volatility, and possible hints of less positive momentum in the markets, particularly in late 2015/early 2016. There are fundamentals that are also issuing foreshocks, and one day soon we'll discuss those as well, but for now I'll leave you with an all-too-real paraphrased-excerpt I came across while reading Didier Sornette's "Why Stock Markets Crash: Critical Events in Complex Financial Systems":

Much to the contrary of expectations, stock market crashes arise when economists and analysts are the most positive about the economy and the economy's future. That way, everyone's caught even more off-guard when things suddenly turn south.

Andrew