November Should Tell Us Whether US Equities Are In A Bull Or Bear Market

Market pullback likely in November

• Rates rising across the yield maturity spectrum
• Dollar Index close to an upside breakout
• Commodities look weaker

The short-term condition of the market is very overstretched, to say the least. Even if we are still in a bull market some form of November correction appears likely. I’ll get to that later, but first I wanted to draw your attention to a long-term indicator that I featured at Tuesday’s webinar. It’s called Winter Momentum and has been very accurate in bull markets by consistently calling major rallies. Winter Momentum is currently bearish but could easily turn positive given a bit more market strength in the period ahead.

Winter Momentum is not available on StockCharts, so I have imported it from my own database. It monitors the percentage of a basket of S&P industry groups whose long-term KSTs  are in what I call the winter position. This occurs when the KST is below zero and declining. It’s represented in Chart 1 by the green highlight of the theoretical momentum schematic in the top left-hand corner. Good buying opportunities present themselves when the number of industry groups in ”winter”  rises to the green horizontal line and then reverses. I have flagged such points with the green arrows. The idea behind this approach rests on the assumption that the technical situation is deteriorating as long as the number of industry groups in the winter position continues to grow. When it reverses to the upside, this signals that the KSTs for some leading industry groups have begun to rise. Usually, the rest of the pack follows this leadership, which is indicative of the early stages of an important rally. The red arrows indicate when bullish signals have failed and this invariably takes place in a bear market. Note that no signals developed when the S&P was above its 12-month MA, which is a second condition for a positive outcome.

In S&P terms only, the 2000 signal could be interpreted as a failure as it developed at the top of the bull market. However, it is important to remember that this was a period when the tech bubble was bursting and weakness was concentrated in this heavily weighted sector. Many other sectors had been in a declining phase since 1998 and subsequently experienced some strength in the ensuing two “bear” years. Thus, in S&P terms prices came down but the overall environment until mid-2002 was actually quite good for the average stock.

Since the S&P is currently about 45 points above its 12-month MA at 2055 a downside reversal in Winter Momentum would likely represent a valid signal of a new bull market leg higher. On the other hand, a large November correction could push the Composite back below its MA and extend the 2015 advance in the number of groups stuck in winter.

Chart 1

Equities overstretched short-term

Charts 2 and 3 show that two momentum indicators have started to roll over from a very overextended level. Chart 2, for instance, features the 10-day versus the 20-day EMA for the McClellan Volume Oscillator. The arrows show sell signals when the 10-day series crosses below its 20-day counterpart. The latest sell signal was triggered last week.  Chart 3 shows the PPO using the parameters of 8 and 16. This indicator has also started to turn down.

Chart 2

Chart 3

The daily $NYSE A/D Line for stocks included in the S&P Composite (Not shown) has moved to a new bull market high. However, the A/D line constructed from all NYSE issues ($NYAD) has been sadly lacking as we can see from Chart 4. Moreover, the upside/downside volume ($NYUD) line has hardly moved during the last week or so, which is a definite cause for concern. It’s always more comforting to see stocks advances accompanied by rising volume.

Chart 4

The NASDAQ 100 ETF (QQQ) has been one of the strongest areas of the market as it has registered a new bull market high. However the Percentage Volume Oscillator (PVO), shown in the lower panel of Chart 5, has not managed to move above zero for some time. Indeed, during the most recent advance this series has been declining sharply and is now oversold. If the volume indicator is oversold, that means that it is likely to expand in the period ahead. The problem is that the higher levels of activity are probably going to take place during a correction as the price is very overbought at present. Rising volume and falling prices are usually a nasty combination.

Chart 5

Yields are headed higher

Chart 6 shows a bond spread, specifically,  comparing the 2-year to the 10-year as a ratio. This section of the yield curve has just broken to the upside, indicating that short-term rates are moving up at a faster clip than their longer-term counterparts. Since all three KSTs are in a rising mode this is likely to signal a higher (steepening) curve. Normally the curve moves in this direction because the economy is improving. However, in the current situation it seems that the market is moving in anticipation of the Fed.

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Chart 6

Chart 7 shows that the Barclays 7-10-year Trust, the IEF, recently experienced a false breakout from a reverse head and shoulders pattern. This whipsaw has now been confirmed with a price break below the red up trendline. Momentum, though is mixed, with a negative short-term and bullish intermediate KST. The long-term series is sitting on the fence, but since false upside breaks are usually followed by above average price moves, this misleading action may well be sufficient to turn the situation into a more bearish one.

Chart 7

The normal chronological business cycle sequence is for commodity prices to rally, the inflationary pressures from which, lead to higher short-term interest rates. You can see this from the rightward sloping green arrows in Chart 8. The current cycle though, is different because rates have already started to move up, but in the face of declining commodity prices. This again suggests that rates are rising independently of what the economy is doing and more in sympathy of Fed actions. Commodities have reached a very critical level in the form of the red trendline. Bearing in mind the sharp 1972-3 rally if the red trendline is violated, there is not much support until the 100 level i.e. almost a 50% drop!

Chart 8

The US dollar is close to an upside breakout

Chart 9 shows that the US Dollar Index is right at its resistance trendline and therefore extremely close to an upside breakout. The same can be said for the more broadly based Wisdom Tree Bullish Dollar ETF, the USDU.

Chart 9

Commodities look weaker

The dollar and commodities usually move in opposite directions, so if the Dollar Index breaks to the upside this should translate to weaker commodities. Chart 10 shows that the Bloomberg Commodity ETN, the DJP, has just broken down from a head and shoulders pattern. Since its KST has just gone bearish that break is likely to hold.

Chart 10

Finally, the Goldman Sachs Natural Resource ETF, the IGE, has completed a reverse head and shoulders pattern. Recent activity has started to threaten the integrity of this move and the KST is bearish and overbought. False breakouts typically develop during bear markets, so the ability of the price to maintain last week’s breakout will provide a valuable clue as to whether commodity influenced equities are in a primary bull or bear trend.

Chart 11

Good luck and good charting,
Martin J. 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.