Bullish Seasonals and Cycles Should Push Stocks to Significant Highs in 2015..but will they?

• Bullish NYSE percent has likely peaked out. Indicates market will become more selective.
• You can’t keep a good dollar down!
• Emerging market currency fund breaks down. EM are likely to follow.

US Equities

I have always said that trend trumps everything. By that I mean that however bad the market may look in terms of breadth/momentum divergences etc. those divergences can extend just like stretching a piece of elastic. It’s only when or even if the elastic snaps that you know the thing in question is broken. The markets are no different.

As you may have read, equities are about to embark on a very bullish seasonal/cyclical pattern, end of year, third year of the presidential cycle and the start of 2015. What’s so special about that? Well 2015 happens to end in a “5” and we have not seen a “5” year decline since 1865. There are no rational reasons for this phenomenon that I am aware of but it just so happens that “5” years have been pretty bullish. It helps, of course if the” 4” year is an under-performer like 1974, in which case the market started 1975 from a deeply oversold condition. Right now the situation is completely the opposite as the long-term technical condition is overextended (see Chart) 1.

Even so, there are precedents for “5” years beginning with a high reading from indicators such as the Coppock Curve, 1955 and 2005 come to mind. One major difference that separates the current situation from the past is that we have never started a “5” close to the beginning of the sixth year of a primary bull market. My feeling is that if the Coppock starts to re-accelerate to the upside that would be a strong signal that equities had a lot of life left in them and that these very bullish seasonal/cyclical factors had started to kick in.

On the other hand, back to the trend trumps everything theory. In that respect, one of the best testing MA’s for the S&P 500 ($SPX) is the 12-month time span. Downside crossovers do not always work of course. However, in the current situation there are probably enough negative divergences etc. present, that if the average is violated we will see some fireworks on the downside. The average will be around 1945 at the end of the month and is closely intersecting with the bull market trendline.

Chart 1

In the meantime the NYSE Composite ($NYA), the broadest measure by capitalization for the NYSE, has failed to confirm a new peak in the S&P since last July, but it is now  in the process of testing resistance. If it can go through that would be quite constructive for the overall market. However, you can also see that the bullish percentage of NYSE stocks ($BPNYA) has been peaking at a lower and lower level since last July. It could always catch up in the event that the Index itself breaks to a new high. However, the KST for the bullish percent in the bottom window of the chart looks as though it may be in the process of peaking. If so, that would mean that any breakout by the NYSE Composite ($NYA) would take place under the cover of a growingly selective market.

Chart 2

That’s also the same picture we get from the percentage of NYSE issues above their 200-day MA’s ($NYA200R). Again we see the negative divergences as the S&P has been working its way higher. Note that the percentage indicator managed to rally back to resistance in the form of the green trendline, but was unable to punch through. It could always make another attempt. However, the peaking action of the KST of this indicator argues against such a possibility. The red arrows on the chart point up the fact that KST sell signals from a high level, like the current one, have typically been associated with a topping out in the 200-day MA indicator. That is not the same thing as saying that it corresponds with S&P peaks, though that is often the case. However, since a declining indicator flags a progressively selective market it does tell us that the investment and trading environment will likely become more difficult.

Chart 3

The Russell 2000 ($RUT) has not really made any progress since the spring of last year. As a result it has been in a trading range since that time. Not surprisingly its relative Strength 'RS' line has been declining quite steeply in the last few months. A similar setup developed at the end of 2012, when both series broke to the upside, a nice Christmas present! If the IWM gives us a Christmas present this year by breaking above resistance and this is confirmed by the RS line completing its potential base the odds of a general market rise and new up leg in the bull market would be greatly increased.

Chart 4

Finally, the ratio between stocks and bonds (SPY:TLT) in Chart 5 is one that needs to be watched pretty closely as it has reached a critical point in its development. It recently broke down from a top in favor of bonds but has since clawed its way back above the breakdown level. If the ratio can now break decisively above the green trendline at say, 1.8-1.82 the odds would strongly favor the downside break as having been a whipsaw signal.  Remember, whipsaws are typically followed by above average moves in the opposite direction to the whipsaw. On the other hand, the KST of  this ratio has just triggered a sell signal in favor of bonds. We will have to see how this plays out, but if this relationship breaks back below the red trendline.  it would suggest that the 2013-2014 top is once again in play.

Chart 5

US Credit

Chart 6 shows the 1-year Treasury yield ($UST1Y). In actual fact it is an 8-day MA because the raw daily closes are unduly volatile. What we see is a breakout above the solid long-term green down trendline with support from a rising intermediate and long-term KST. The MA of the yield has run into resistance at a time when the short-term KST (calculated from the raw data) is overstretched. That suggests that the yield will back off for a while. However, the bullish intermediate and long-term momentum series argue for an ultimate breakout to the upside.

Chart 6

The technical position is exactly the opposite for longer-term maturities as the long-term KST is negative and the yield on the 20-year ($UST20Y) is in an established downtrend. The short-term KST has tentatively rolled over, so an extension to the recent yield decline is likely. One explanation for this dichotomy is that the short-end market forces are discounting fed tightening next year by raising rates now. On the other hand the long end is expecting low inflation as a result of the tightening and raising prices in advance of this.

Chart 7

US Dollar Index

Remarkably my dollar diffusion indicator (!PRDIFCUR), which monitors a basket of cross dollar relationships in a positive trend, has so far failed to trigger a sell signal by crossing below its 20-day MA. This indicates substantial broad dollar strength. Since the dollar is in a long-term bull market it may continue to shrug off its overbought condition.

Chart 8

Chart 9 shows the immediate challenge as the currency, in the bottom panel, is attempting to break through formidable resistance. The ratio (AGG:BWX) between US bonds in the form of the Barclays Aggregate US ETF, the AGG and the Barclays International Treasury ETF, the BWX, tracks the Dollar Index extremely closely. This series has already experienced a decisive upside breakout and is forecasting that the Dollar Index will follow its leadership.

Chart 9

Finally, Chart 10 shows the close connection between the WisdomTree Emerging Market Currency ETF (CEW) and the MSCI Emerging Markets Index ETF (EEM). In the last few days the CEW has decisively broken down and it seems like the EEM will soon follow with a breakdown of its own.

Chart 10

Chart 11 takes it a step further by showing some rolling over action in the KST for the Emerging Market ETF (EEM) as well as my emerging market diffusion indicator (!PRDIFEM).

Chart 11

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 Group or its affiliates.