All Sectors Experiencing Short-term Momentum Sell Signals. Does This Mean The February Lows Will Be Taken Out?

• Long-term picture still mixed
• Analyzing the Short-term Picture
• Global equities are still vulnerable
• Confidence looking questionable again
• Spot the bullish sector

Long-term picture still mixed

A couple of weeks ago I pointed out that several long-term indicators had tentatively turned bullish and that others were not far behind. The problem lay in the fact that equities were very overstretched on a short-term basis  and were therefore in need of digesting recent gains. That corrective process is now underway, so now we have to wait and see whether these tentatively bullish long-term indicators can stay positive or whether short-term downward pressures result in post-February lows and an extension of the bear market. In simple terms, will it be "Sell in May and go away"? or Sell in May and come back in June?

If it’s the former then Chart 1, which features the 2007 top, may be the example to follow. If so, the 2016 rally would turn out to be false and the 2014-16 trading range a top rather than a consolidation. One argument against that is that the 2006-7 period was not associated with the kind of broad internal correction we have seen in the last two years. That internal correction was the principal reason why some of the longer-term indicators have been able to turn positive and further complicates the task of anyone who feels a bearish posture is appropriate.

Chart 1

Analyzing the Short-term Picture

Chart 2 shows two NYSE breadth indicators, the Daily A/D Line for all issues and one for common stocks only. The former, in the third panel, is at a new all-time high, largely due to its inclusion of numerous interest sensitive issues such as preferred stocks and so forth. Not surprisingly, is has a bullish bias because of the trend of declining interest rates at the long-end. However, the common stock-based series has not touched a new high and remains overbought on a 30-day ratio basis. Note that the NYSE itself, is just below resistance in the form of the trendline connecting recent highs with that of last November. A decline from here, followed by a move above the line would complete a reverse head and shoulders pattern. On the other hand a drop below the February low would re-affirm the bear market.

Chart 2

Chart 3 shows that the broadest market measure by capitalization, the Wilshire 5000 ($WLSH) has been experiencing a series of declining peaks and troughs for about a year. In order to break that pattern it needs to retrace between 1/3 and 2/3 of the February advance and then break above its April high.  The various Fibonacci possibilities have been flagged on the chart, where you can see that a drop to the mid-February mini rally would represent slightly under a 61.8% retracement and a move to the thick support/resistance line slightly more. That’s not a prediction but merely a statement of a probable retracement possibility. Note that the McClellan summation  is quite overbought and signaling a decline. That’s the bad news. The good news is that it recovered to a post-2014 high, which is more akin to a bull market characteristic.

Chart 3

Global equities are still vulnerable

When we turn to the global scene, overbought is certainly a word that comes to mind. Before we get to that please consider Chart 4, where the MSCI World ETF, the ACWI, experienced a sharp rally but the Global A/D line, while violating its down trendline, has fallen far short of the advance in the price itself. Indeed, the price has violated its up trendline and the A/D Line has fallen back below its green down trendline. Support for the price lies at the 200-day MA and extended green down trendline, the lower of which lies at just under $55.

Chart 4

Charts 5 and 6 both feature global breadth oscillators, one constructed from new high data and the other from a diffusion indicator monitoring a basket of individual country ETF’s in a positive trend. Both are very overbought and declining. Those two charts alone suggest that a test of that $55 area is quite likely.

Chart 5

Chart 6

Confidence looking questionable again

Charts 7, 8 and 9 feature three indicators that in one way or another measure investor confidence. Chart 7 for example, compares the performance of (relatively) risky financials with super safe treasuries  (IYF/TLT). This ratio completed a top earlier in the year favoring bonds, subsequently dropped and has now returned to resistance in the form of its previous breakdown line and its 200-day MA. Since the long-term KST is bearish, the odds of a renewed decline would seem to be higher that the possibility of an upside break above the green trend line.

Chart 7

Chart 8 compares the more speculative technology ETF, the IYW, with that of the defensive consumer staple sector, the XLP.  This relationship, which usually moves in tandem with the S&P, experienced a similar trading pattern to the IYF/TLT relationship, except for the fact that it has been selling off sharply in recent sessions and may well be on its way to a post-breakdown low.

Chart 8

The third relationship between the iBoxx High Yield and Barclays 20-year Trust (HYG/TLT) monitors confidence in the bond market, which eventually influences equities. It’s really in a fine state of flux since it recently broke back above the red breakdown trendline and has fallen marginally below it. At this point things have begun to get quite complicated as the short-term KST is bullish. That suggests that the breakout will re-assert itself. On the other hand, this indicator has started to hesitate, which could mean it’s about to roll over. The bullish intermediate and bearish long-term KST’s just add to the  confusion. That’s why we need to look more closely at the ratio itself, as a drop below the red dashed trendline, say below .625, would signal a test of the February low. On the other hand, a break above the 200-day MA at .6630 would re-affirm  last week’s move above the solid breakdown trendline.

Chart 9

Spot the bullish sector

Charts 10, 11 and 12, feature the short-term KST for several different averages as well as those for the key sectors and selected industry groups. With the exception of gold shares, in the bottom window of Chart 11, all series are experiencing a declining KST. That does not mean that the market is going to experience a massive decline, but it does suggest that it will suffer some form of downside pressure in the weeks ahead.

Chart 10

Chart 11

Chart 12

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.