More Evidence Of An Intermediate Bear Market Rally Falls Into Place

• World breadth series signal that global equities are ready to advance
• Dollar faces an  important technical test

Sometimes when the market declines, things actually improve, and that’s what may have been happening this week. In my most recent article, Intermediate Indicators Signal a Rally but Remember It’s a Bear Market, I pointed out that several indicators had reached the kind of levels from which rallies, even in the worst of bear markets had consistently been launched. In the intervening days most of the averages touched new bear market lows, but more broadly based net-new-high data failed to agree. For example, take a look at Chart 1 featuring the S&P 1500($SPSUPX) together with its net-new-high data ($SUPHLP). The pattern of behavior is very similar to that of last fall, when the Index, in September, fell back to successfully test its August 24th low. However, the majority of stocks forming the Index did not as the net-new-high indicator stopped well short of its August bottom. Now take a look at the current situation, which so far appears to be repeating this positive setup. It gets better.

Chart 1

Chart 2 compares the S&P Composite ($SPX) to the net-new-high data for the NYSE ($NYHL) itself. That’s a much broader measure of breadth than just the S&P 1500. In this instance the Index actually registers a new low in February over that of January, but look at the net number of stocks registering new lows, it’s nowhere near the level set in January. In other words the S&P 500 was moving lower but far fewer stocks followed suite. That positive divergence marks the first big positive break in these numbers in the last year or so.

Chart 2

Global equity prices as a group have been worse performers than the US, but even here we are beginning to see some green shoots.  Chart 3 compares the MSCI World Stock ETF, the ACWI, with my Global A/D Line ($PRGLAD). The line is still declining, so there is not much encouragement there, which reminds us that the bear market is alive and well.

Chart 3

Global equities looking up

However, Chart 4 shows that my Global Net-New-High (!PRNNHGL) indicator has just triggered a buy signal by reversing from a deeply oversold level. The last time that happened prices experienced an intermediate bear market rally lasting about two months. I wouldn’t expect any more in this case.

Chart 4

Charts 5 and 6 display the Global Diffusion Indicator (!PRDIFGLO), a series that monitors a basket of individual country ETF’s that are in a positive trend. This indicator has also reversed from an oversold level. The green arrows tell us that such instances have typically been followed by some form of rally. Note that resistance exists in the form of the green down trendline and 200-day MA, in the $56.5-57 area. Those benchmarks are falling and will soon be in the $55 area. That’s important because that’s where a gap opened up around year-end. An advance to that zone would also represent a 61.8% Fibonacci retracement of the November/February drop, as shown in Chart 6, which is a zoomed in version of Chart 5.  I am not forecasting that that is what will happen, merely pointing out that its an area to keep a close eye on in the event that a rally does develop. In any event the vast majority of the long-term evidence points to a bear market. Until that evidence starts to reverse, a cautious stance is the wisest course of action as surprises usually come in the direction of the main trend.

Chart 5

Chart 6

What about that dollar?

The Dollar Index ($USD) has been selling off during the course of the last two weeks. Chart 7 shows that the possibility of a consolidation trading range still exists since the Index could still mount a rally through the green trendline above 100. However, the recent decline has taken the price below its 2014-16 up trendline and the 200-day MA. That, together with the bearish action of the KST in the lower window, suggests that a challenge of the lower end of the trading range is a distinct possibility.  A decisive break below that 93 area would place the balance of the technical odds in favor of a primary bear market for the dollar.

Chart 7

Charts 8 and 9 are offering subtle arguments in favor of the bull market. Chart 8, for instance, features three of what I call “dollar sympathy indicators”. These are intermarket relationships and prices that have a strong tendency to move in the same direction as the Dollar Index Tracking ETF (UUP) itself. The idea being, that when one or more of these series show weakness in the face of dollar strength a warning is triggered. As you can see, a cautionary flag of this nature was given last January as the ratio between the S&P 500 ($SPX) and the rest of the world (EFA) peaked. The ratio also bottomed ahead of the dollar, as flagged by the green arrow. Right now that series, the ratio between USA Bonds (TLT) and international bonds (BWX), as well as the inverted DB Commodity ETF (DBC), are all close to or registering new highs. They are therefore giving no warning of impending dollar weakness.

Chart 8

We can also see this by comparing the Dollar Index (UUP) to a credit spread ratio, that between the Barclays 20-year Trust and the iBoxx High Yield ETF’s (TLT versus the HYG). A rising ratio means that bond investors are becoming worried by potential defaults as they bid up quality against high-yield bonds. It tends to move in sympathy with the dollar because the currency is considered to be a safe haven in troubled times. The two series do not move tick for tick of course, but there does appear to be a tendency for the bond relationship to lead the currency. These examples have been flagged by the arrows. In the last couple of weeks the dollar has fallen and the ratio has risen, both quite sharply. The implication is that someone is lying. Given the leading characteristics of the ratio that would point the finger at the dollar. However, I should also point out that this relationship has not always worked as well as it has in the last few years, so it is also possible that it may have started to break down again. That’s why that 93 area is so important on the $USD chart (see Chart 7). Even if our dollar sympathy indicators fail to break down, trend trumps everything. In this case that’s the dollar’s trend, so a break below 93, will, in my opinion, signal a primary bear market in the dollar.

Chart 9

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.