MSCI World ETF and NYSE Composite Violate their 12-month Moving Averages. Is This the Start of a Primary Bear Market?

• Much expected Santa Rally did not happen and that’s bearish.
• MSCI Europe Australia Far East ETF right on the brink of a major breakdown.
• Small caps may have experienced a false upside breakout.
• Chinese ETF breaks out big time on both an absolute and relative basis.

In my mid-December roundup I pointed out that December is the most bullish month of the year for equities and also stated that failure to do well in the year-end period is often a sign of trouble. I quoted one of my heroes, the late Edson Gould, who observed that “ If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger, and that when the seasonal period ends those forces will really have their say”. For starters the S&P closed on November 28 at 2067 and closed December at a 2058 reading, for a loss of 11 points.

Also, the period surrounding Christmas marked by the last five trading days of the old year and embracing the first two of the new year is the so-called Santa Claus rally. According to Jeffrey Hirsch in Stock Market Cycles, the Santa Rally has averaged 1.5% since 1953. Like the Edson Gould failed bullish seasonal, Yale Hirsch, Jeffrey’s father, coined the expression “If Santa Claus should fail to call, bears may come to Broad and Wall”. Examples include 1968, 1981, 2000 and 2008, all of which were followed by bear markets. Well guess what? During this year’s “Santa” period the S&P went from 2082 on December 23 to 2020 today for a loss of 62 points, thereby providing a double seasonal warning of trouble. The problem, is that this is coming as the longer-term indicators are extending their bearish trajectories outlined in previous Market Roundups. In my book that's likely to spell trouble in the first quarter of 2015. Take Chart 1 for instance, which shows the MSCI World Stock ETF (ACWI) violating its bull market trendline in October. This has now been followed by a negative 12-month MA crossover. That cross, at the end of December was, I grant you, a statistical quirk. However, the very fact that the price was able to fall close to the average was in itself a sign of potential weakness. We will have to see where it closes at the end of January, but I suspect that it will be much lower.  Note also that the KST, which indicated a slowing in momentum some time ago, continues to drop.

Chart 1

Chart 2 brings us to the US, where the NYSE Composite (NYA) can also be seen to have crossed below its 12-month MA. Note that the data have been plotted on an end of the month basis. Since the price was above the average in December, we can’t say officially that it has crossed at this point. The arrows show that when the NYSE Composite crosses below its MA and this is confirmed by the KST it's often a sign of a bear trend.  The 2012 was a failed signal, which points up the fact there are no guarantees on this one.

Chart 2

Chart 3 compares the NYSE Composite (NYA) to its Special K. Normally this momentum indicator peaks and troughs with the price series it is monitoring, but in truncated cycles it lags and in extended ones it leads. The dashed arrow in 2012 indicates a truncated cycle in which the indicator lagged. In the current situation we see a trendline violation, a negative Special K MA crossover and a series of declining short-term Special K peaks and troughs. All this suggests that this momentum indicator has topped out for the current cycle. Since the NYA has also violated its bull market trendline this one piece of technical evidence is pointing to a primary bear market for NYSE stocks in general.

Chart 3

Some weeks ago I suggested there were three benchmarks to look for that would likely signal the direction of the next important market move. The first was a break by the NYSE Composite above its 2014 trading range. As you can see from Chart 3 that did not happen.  However, a breakout by small caps in the form of the IWM, my second benchmark, was achieved, but at a price. That price can be seen in Chart 4 to have been a false or whipsaw break above its resistance trendline. It’s possible that the price can recover and go on to achieve new highs since its relative action has improved recently (Chart 5). However, there are two things I do not want to see. First a violation of the short-term up trendline in Chart 4, since that would confirm the whipsaw beyond a reasonable doubt. The second would be a sell signal from the McClellan Volume oscillator in the bottom window of Chart 4. That would occur if the (black) 10-day EMA of the raw indicator crosses below its (red) 20-day EMA counterpart. The red arrows show that this has been quite an effective indicator in the recent past.

Chart 4

Chart 5

Our third benchmark was the neckline of a potential head and shoulders pattern for the MSCI World Stock ETF, the ACWI. The red arrows point up the fact that the Global A/D line, in an unusual act of divergence, experienced a lower low in December compared to the price, which traced out a higher low above the October nadir. That’s not a good sign and suggests that our third benchmark will be achieved i.e. a decisive daily close below the neckline, say at $55.

Chart 6

International Equities

The rest of the world, as monitored by the MSCI Europe Asia Far East ETF, the EFA, is also treading above key support in the form of a head and shoulders neckline. Note that the RS line against the S&P Composite is at a secular low and both KSTs are in a negative mode.  Not much to shout about here.

Chart 7

On the other hand, Chart 8 shows that the iShares China ETF, the FXI, has broken out from a long-term trading range and this has been supported by KST action, which is by no means overextended. Chart 9 indicates that it has also broken out on a relative basis where a small reverse head and shoulders has just been completed. The KST is also rising, all of which suggests that the FXI is going to experience a possible long-term trend on both an absolute and relative basis.

Chart 8

Chart 9

Commodities

Energy has hit the headlines recently due to its sharp drop. However, copper until recently, had managed to hold up quite well. Now the price has completed a somewhat large head and shoulders top and its KST has begun to erode away to the downside.  You can see that price pattern breakouts in the past have represented reliable signals, so there are no reasons for suspecting that the current breakout will not “work”. The downside objective suggested by the pattern is for prices to slip to the $2.00 range. On the other hand, a break above the green trendline at $3.25 would turn the situation into a bullish one... but I wouldn’t count on it!

Chart 10

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.