Trolling For Bottom Fishing Indicators
- Dow Jones Utility Average just above its secular up trendline
- 2-year yield probably gave a false upside breakout signal
- Three indicators to watch for an intermediate equity bottom
Yesterday at the webinar Greg asked me a question that was posed by one of the attendees relating to a potential reverse head and shoulders appearing on the Dow Jones Utilities and what I thought about it. My answer was pretty sub-par, so I will try and do a better job today, by first offering some long-term perspective and then zeroing in on the current situation. The utilities have been one of the best acting sectors recently, so they are worth considering for that reason alone.
Chart 1 shows the monthly action of the Dow Jones Utility Average back to the 1940’s. Two things stand out. First, the Average lends itself to long-term trendline violations, both on the up- and downside. Second, it is currently very close to the secular up trendline dating to the early part of this century.
Chart 1
Chart 2 shows the last two cycles in greater detail. The secular up trendline dating from 2002 is intact and the price remains above the dashed potential neckline of a possible head and shoulders top. A month-end drop below them at 550, from a current 578, would do some severe technical damage. You can see that the price has already dropped below its (red) 12-month MA, which itself has started to roll over, and that’s never a good sign. Note that the KST is already in a bearish mode. Bottom line is that momentum is bearish and trend evidence is mixed. If the Average now falls below 550 I believe that a major bear market will follow.
Chart 2
Now for the current situation; Chart 3 tells us that the Average is caught between two important trend lines, one at 550 and the other at 610. The relative action is superb with the RS Line having just broken above a 4-year down trendline. The KST for relative action is also doing well since it has recently begun to re-accelerate to the upside.
Chart 3
Chart 4 compares two patterns:
- A potential inverse head and shoulders
- A possible head and shoulders top.
Chart 4
Finally, Chart 5 suggests that a test of the 550 area is likely because the intermediate and short-term KSTs have both begun to roll over.
Chart 5
Fed up
Now I’ll continue the discussion we had last week of whether the Fed made a mistake by raising rates, and if they are likely to hike some more. In this respect, Chart 6 compares the CRB Spot Raw Industrials to the yield on 3-month commercial paper. The green arrows slant to the right because they reflect the fact that commodity bottoms consistently lead interest rate lows. That is, until the current cycle, when rates started to move higher before commodities bottomed. That suggests to me that the economy is too weak to withstand higher rates and we are about to find out whether that will turn out to be the case.
Chart 6
For example, Chart 7 shows the 2-year yield, a maturity that is very sensitive to expected Fed actions. Note that it has been in an uptrend since 2011 in anticipation of a central bank hike in rates. Last fall saw a decisive breakout above the green resistance trendline, but now it looks as though that breakout will turn out to be a false one. We won’t know for sure until the yield confirms by breaking below the red support trendline. That line is currently around .65. The bearish KST, in the bottom window, suggests that it will.
Chart 7
Things are more deflationary at the long end because the 30-year yield has been falling since 2011 as the 2-year was rising. Chart 8 catches the end of that period. Here we can see that the 30-year yield has recently completed an upward sloping head and shoulders pattern. In fact, the right shoulder is a small upward sloping pattern in its own right. Note that the KST is only slightly below zero, suggesting that further softness in rates lies ahead.
Chart 8
Picking a bottom in stocks
A sharply falling market is like an extremely angry person. Both are out of control and are emotionally unbalanced. That’s why picking a low in the equity market is a virtually impossible task. There are three observations I would make. First, that several indicators such as those featured in Charts 9 and 10 are at the kind of levels that have been consistent with a market bottom of some kind. Chart 9 shows us that the number of net new highs has shrunk to a level rarely seen in the last few years. When it reverses that would be its way of signaling a bottom. Chart 10 compares the number of NASDAQ stocks above their 200-day MA’s to those above their 50-day MA. It too is at a bottom heralding position, once it reverses. Remember, you can update both charts by clicking on them as well as my Bottom Fisher in Chart 12 at the end of this article.
Chart 9
Chart 10
Chart 11
My second observation is that it is normal to experience a period of volatility at a market bottom. This is where the low is tested two or three times before prices experience a more durable rally. V-type bottoms are very much the exception. Third, since the vast majority of my long-term indicators are screaming the words “primary bear”, any bottom that we are looking at is more likely to be a temporary one, along the lines of the intermediate lows in the 2007-8 bear market (see Chart 11) rather than the low established in 2011 (Chart 12).
Chart 12
Chart 13
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.
