Gold Price in Yen Offers a Thumbs Down on the BOJ's latest Inflationary Moves

• Short-term market indicators are still bullish.
• Stock/bond ratio reaches a critical point.
• Yen completes a 28-year top against the dollar.

US Equities

Throughout 2013 and for most of 2014 every peak in the S&P was confirmed by the NYSE Composite ($NYA) . You can see that from the vertical green lines in Chart 1. However, the September high was not and the sharp October drop followed. Both series violated important up trendlines in the process. The S&P 500 ($SPX)  has been able to move back above its line but the more broadly based NYSE Composite has not. Also, the $NYA has so far failed to confirm the S&P November high, which is setting up the  potential for another negative divergence.

Chart 1

We see a similar situation for the NYSE A/D ($NYAD) and Upside/downside volume ($NYUD) lines in Chart 2. The latter violated a 2-year up trendline in October and has now rallied back to the line’s extension, which is a potential resistance area.

Chart 2

Chart 3 compares the S&P 500 ($SPX) with the percentage of NYSE stocks above their 200-day MA’s ($NYA200R). The dashed red arrows point up the negative divergence between the two series as the proportion of stocks in a positive trend has, at first, been slowly declining. More recently the divergences have been more blatant as the S&P has moved higher but this has been supported by fewer and fewer stocks in positive trends.  The November high was accompanied by only over 54% of listed stocks above their 200-day MA. That series has now rallied back to the blue line, which was support and now becomes resistance.  At the very least that tells us that the market has become pretty selective. On the other hand, were it to reverse from here that would confirm a serious discrepancy.

Chart 3

Selective markets imply deteriorating confidence and that’s what we see from Chart 4. This one compares the S&P 500 ($SPX)  to the 'ratio between the iBoxx High Yield Bond (HYG) ETF and Barclays 20-year Bond Trust ( TLT) ETF' (HYG/TLT). A falling ratio means that bond investors are losing confidence as the TLT is out-performing the HYG and vice versa. The dashed arrows  show how disagreements between the ratio and the S&P are invariably resolved  in the ratio’s favor. In the last couple of weeks this relationship has rallied along with the market itself. However, it’s now below resistance in the form of the extended red up trendline.

Chart 4

Obviously at this point we do not know whether prices will continue to move up  in the near term thereby offering the possibility that the discrepancies discussed above can be cleared up.  Normally it’s possible to point to the violation of a trendline or pervious low etc. but in the current situation the rally has so far been a straight line up. That’s why I am watching charts 5 and 6 very closely. Chart 5 shows that whenever the 10-day MA of the ARMS Index ($TRIN)  falls to .90 the market typically moves sideways or down, essentially indicating that the prevailing rally is, at least for the time being, over. One exception has been flagged with the blue dashed arrow. The ARMS has dropped a bit but has not yet touched that .90 level. It therefore continues to signal the all clear.

Chart 5

The second thing to watch is the Cumulative Net New High Indicator  ($SUPHLP) calculated from NYSE issues and plotted in the center window of Chart 6. This series remained bullishly above its 15-day EMA for most of 2014 and then crossed below it in early October. Recently the indicator went positive again and, as long as it remains in that position, I believe we should assume that the rally dating from mid-October remains intact..

Chart 6

Another area that needs to be closely monitored is the ratio between stocks and bonds ($SPX:TLT) as shown in Chart 7. That’s because it recently broke down from a top thereby favoring bonds. Since all three KSTs were bearish at the time this looked like a done deal. However, the ratio has since rallied back to a position slightly above the breakdown point and the short-term KST has started to turn up. This raises the possibility that the ratio may challenge the green down trendline at 1.74. If it does break through to the upside that would suggest that stocks would then be the chosen vehicle. At this point though, the declining peaks and troughs in the ratio and the bearish long-term KST say that  a break below the October low has higher odds of developing than a green trendline violation, but only time will tell.

Chart 7

Credit Markets

The  Barclays 20-year Treasury Bond Trust (TLT)  continues to experience fallout from the mid-October exhaustion day as indicated in Chart 8. I am still expecting more sideways activity as the KST works off its overstretched condition. However, if $118 gives way the next support level lies at $115.

Chart 8

I say this because US bonds could be under pressure from weakness abroad. In that respect Chart 9 shows that my World Bond Index (!PRWBI) has just completed a one year head and shoulders top and this means that the Index is likely to test the 2009-2014 up trendline, the violation of which would represent a very serious long-term technical development.

Chart 9

Currencies

We move away from our usual comments on the Dollar Index to show a historic downside break in the Dollar/Yen Cross ($XJY) below a 28-year up trendline on Chart 10. That violation of course, validates a multi-year upside break in the Dollar Index, reported several weeks ago and  suggests that the yen has much further to move on the downside over the next few years.

Chart 10

Precious Metals

I am a structural bull on gold, which means I have an upward bias. That’s different from being a gold bug, which in my view is someone who is perennially bullish. Structural bulls can go bearish from time-to time if the evidence supports such a scenario. Now appears to be one of those times as the gold price ($GOLD) has completed a massive top and this is being supported by gold’s nemesis, a strong US dollar ($USD). Gold does not always move in the opposite direction to the dollar, but the action in Chart 11 seems to be so unequivocal that it would seem that the normal relationship remains in force.

Chart 11

Last Friday’s action by the BOJ has certainly gained the attention of the investment community. The policy quite simply is to create inflation by exporting deflation to  countries with stronger currencies than the yen. Notice the declining prices of oil ($WTIC) and other commodities recently? The great barometer of inflation is the price of gold. Consequently, if the BOJ is going to be successful in raising prices that should mean that gold denominated in yen ($GOLD:$XJY) should be exploding as market participants get off the railroad track before the thundering inflationary train comes rolling by and ruins their portfolios. So far that has not yet happened on Chart 12 as the yen price of gold has actually declined to the lower end of its recent trading range. In other words, the gold market is giving the recent stimulus the thumbs down, at least as far as the inflation objective.

Chart 12

Good luck and good charting,
Martin Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital