Three Indicators You Should Watch To Signal A New Bull Market

• Credit spreads about to turn?
• A PPO that calls primary trends
• Record High Indicator

The market is now starting to respond positively to several bullish intermediate indicators. I still believe the main trend is down, but it seems like a good idea to look at three currently bearish indicators and see what it would take to move them into the bullish camp from a primary trend aspect.

Credit spreads

My first choice is one that has been discussed quite a bit recently and it’s bond spreads. There are many types of spread, but Chart 1 compares the S&P 500 to a ratio between high-yield and government bonds, junk against quality or the HYG versus the TLT. A rising line means investors are confident because they favor junk over high-quality treasuries. This is usually good news for equities because they rally as well. Recently the ratio fell below the red support trendline and looked as if it were heading lower. It has now rallied back above the line again, thereby suggesting the break was false. That would be confirmed if it can now move back above the 65-week EMA and the green down trendline, say above the .73 level. Such action would achieve two things. First it would suggest a basic reversal in bond market confidence. Second, since equities usually follow this ratio or move in concert with it, such action would be bullish for equities.

Chart 1

A PPO that calls primary trends

Our second indicator is a percent price oscillator (PPO), using the 6 and 180-week parameters.  It is shown in Chart 2 for the DOW. The red vertical lines indicate when it crosses below the red line plotted at the -6% level. Invariably this signals a bear market that is in some form of development. Sometimes it’s relatively early as in 1929. Alternatively, it comes more towards the end such as 1982. It’s not the greatest indicator for early bird timing unless it triggers a signal close to the peak, but confirming you are in a bear market is a pretty nice piece of information to have.

Chart 2

The reason for featuring this indicator is to watch out for a bull signal, as featured in Chart 3.

Chart 3

However, that’s not possible for the Dow because it has not yet triggered a sell signal. That’s where Chart 4 featuring the NYSE Composite comes in, as this market average already has. In this instance, the green vertical lines show that when the indicator has re-crossed its bear triggering line, which this time is at zero a good rally has usually followed. Right now the PPO is at -3%, so it will be worth watching to see whether it can turn positive.

Chart 4

Record Highs

My third indicator to watch is a recent discovery. You may not know this, but StockCharts has a huge library of very useful market indicators that most people never use. That’s a shame because there are some really helpful ones in the database. I, like most other StockCharts users, have a habit of going back to the same old tried and trusted indicators. However, From time-to-time, I like to delve into the library of indicators included in the platform to see if there is a holy grail out there. I know full well there isn’t, but that doesn’t’ stop me looking for indicators with an above average record of calling tops or bottoms.  Bearing that in mind, I recently came across a group of indicators  that are listed under the Record High Percent label. You can read about this concept here, but basically, these indicators are calculated by dividing the number of 52-week highs in a given universe, say the NYSE, by new 52-week highs plus 52-week new lows. When the indicator is above, 50 new highs outnumber new lows. New highs are expanding when it is above 50 and rising. I like it because the nature of the calculation means that it fluctuates in a specific band between 0 and 100. This is different from the normal net-new-high plot, which has no theoretical limits to its high or low point, other than the total of listed issues on the exchange. Their symbols begin with $RH and StockCharts calculates them for a number of averages like the $NDX, $INDU, and S&P etc. However, I am focusing on the ones calculated for the NYSE ($RHNYA) and NASDAQ ($RHCOMPQ). Finally, I do not plot the raw series, because that returns a pretty jagged indicator, but a 10-day simple MA instead.

The Record High for the NYSE is shown in Chart 5. The first thing I noticed was that we have seen a nice rally develop in the last couple of weeks, but that the indicator did not follow suit. Apparently this is normal behavior during severe bear markets. It’s when it rallies to the 60 area that we get some interesting buy signals. I was really happy to discover that the history of the Record High series goes all the way back to the 1960’s, so it’s possible to follow it under numerous market conditions. As a consequence, I came up with the following rules for signaling a new bull market. First, wait for an oversold reading. In this case, I chose the green dashed line at the 20 level.  By that time prices have obviously fallen quite a bit. The second requirement is for the indicator to then rally above the 60 level, which indicates that the number of highs has begun to expand. Such periods have been flagged with the green vertical lines. Thirteen successful signals have been triggered since 1966. There was only one false positive and that developed as a bear market rally in the fall of 1973. Right now, the indicator has fulfilled the first condition, that of reaching an oversold condition. It now needs to rally above the blue line at 60 and a new bull market will be signaled.

Chart 5

The Record High series for the NASDAQ has been plotted in Chart 6. Again the actual plot is a 10-day MA of the raw data but the oversold zone seems to work better if raised to 25. In this instance, the history only goes back to the early 1980’s but this still left time for eight valid buy signals. Unfortunately, a false positive was triggered in 2001, during the unraveling of the tech bubble. However, it seems to me that that was a small price to pay for the numerous valid signals. Just like the NYSE, the NASDAQ Record High has reached and oversold condition and now needs to rally above the 60 level. Obviously, it’s got some way to go.

Chart 6

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.