Intermediate Indicators Still Signal A Rally But Remember, It's A Bear Market
- Monday may have been a successful test of the January low
- Five inter-market relationships break out
- The 5-year yield breaks down
For the last two weeks I have been pointing out that several intermediate type indicators that have traditionally signaled rallies were in a bullish mode. The problem is that during bear markets prices do not generally behave in the way we would normally expect so such rallies are notably deceptive. Since prices are in the process of testing their 2016 lows, it raises the question of whether these indicators are going to work this time around. The short answer is that it doesn’t matter because one should never trade in the opposite direction to the main trend, in the same way, it is foolhardy to paddle upstream in the face of rapids.
A more nuanced answer might be that the action of the last few days is really the market’s way of hammering out a bottom of some kind. In that respect, it would be perfectly normal to see some marginal new lows develop as part of a bottoming process. An example is shown in Chart 1 featuring the low in October 2011, in the gray circle. It undercut its predecessors then re-grouped, subsequently surpassing the summer peaks. Such action defies prediction except for the fact that the market eventually responded to an intermediate oversold condition, where many indicators were in the same kind of position they are in today. The main difference as I see it is that then we were in a mini-bear market but now the long-term indicators are positioned more in line with a major bear trend. In any event, the bullish vibes from indicators such as the number of net new highs in Chart 2 and the ratio between the number of NASDAQ stocks above their 200 and 50-day MA’s are still in effect. That means that once the volatility is out of the way, a retracement of lost ground may well get underway.
Chart 1
Chart 2
Chart 3
A gap was left Monday on the NYSE Composite Index ($NYA), and gaps are usually filled. Also, Chart 4 shows that Monday’s action formed a hammer, along the lines of the previous low. Bearing in mind my caveats about a bear market, Monday looks like it may have been a successful test of the January lows.
The challenge facing the equity market is that apart from interest-sensitive sectors such as utilities and other safe haven areas such as gold stocks, there is not much that looks technically poised to do anything other than bounce from oversold levels.
Chart 4
Several inter-market relationships have recently signaled a change in course. I’ll try and cover five of them here.
Growth versus Value
Arguably one of the strongest trends in the last few years has been the superior performance of growth over value, featured here in Chart 5. In the last few days, this relationship has reversed with a bang, as the ratio has experienced a sharp drop below its 2014-16 up trendline. The short- and intermediate KSTs have only just gone bearish. This fact, combined with the decisive trendline break, suggests that the long-term KST will soon go bearish as well. The push to value also underscores the move towards defensive stocks and a growing sense of concern amongst investors.
Chart 5
Technology versus Staples
Another confidence relationship can be obtained from the technology/staples ratio, specifically the IYW to the XLP. When the ratio is rising it means traders are growing in confidence since they are favoring speculative technology stocks over their more conservative staples counterpart. That relationship has also broken down pretty severely in recent days, as technology stocks have tumbled and staples eroded slightly. We do not need a short-term momentum indicator to tell us that it is currently oversold and due for a retracement of recent losses. However, the 3-year top tells us that something important has just happened and that it will probably be some time until tech stocks in general, regain favor.
Chart 6
Financials versus Bonds
Financials versus bonds, Chart 7, is another kind of confidence relationship. When the ratio between, say the Dow Jones Financial ETF with that of the Barclays 20-year Trust, the IYF to the TLT, is rising, stock market investors are growing in confidence. That’s because they are willing to bid up interest sensitive financials against the lower yielding but safer treasuries and vice versa. Occasionally this shows up as a discrepancy, where the ratio refuses to confirm what the S&P is doing, as happened in 2015. In the last few days, though, the ratio it has completed the 2013-2016 top and thereby confirmed the negative divergence and bearish long-term KST trajectory. Though the ratio is somewhat oversold and due for some kind of bounce the breakdown suggests lower prices lie ahead.
Chart 7
Stocks versus Commodities
Chart 8 compares the S&P 500 ($SPX) to the Bloomberg Commodity ETN (DJP). For the most part, of the 2014-16 period, the ratio has been in a strong rally phase, favoring stocks over commodities. That trend appears to be in the process of reversing as it has just broken down from a top. It’s currently just above the 2014-16 up trendline, which represents an enormous barrier due to the number of times it has turned back advances in the past. There have been at least eight occasions. This relationship obviously faces an important technical test in the days ahead since the violation of the line would be very serious for equities. It looks at first glance as if the KST is very oversold but that is due to the fact that it has not generated a true minus 70 oversold condition during the history of the chart.
Chart 8
Credit Spreads
I have been suggesting for some time, that following some of the relationships between poor and good quality bonds offers a sense of whether bond market players are becoming more or less optimistic. These sentiment swings are not only important from a bond market investing point, but such sentiment often leads what’s going on in the stock market. In that respect, Chart 10 shows that the ratio between the iBoxx High Yield and Barclays 20-year Trust ETF’s (HYG/TLT) has recently broken down from a giant consolidation pattern. Since the breakdown has been supported by the three KSTs, it gains added credibility. We do not know how far sentiment will swing away from the junk bond area but the ratio should find some support at the April 2009 low. In the meantime, were it to break above the small green down trendline, that would change things for the better. Until then, I am assuming treasuries will continue to win the battle of quality.
Chart 9
The five-year yield breaks out
Finally, Chart 10 shows that the five-year yield, which had been locked in a major trading range for quite a while, has now broken to the downside. That adds further fuel to the idea I put out in my previous article concerning a global retreat in yields.
Chart 10
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.
