The Quiet Before The Storm?

• Major stock averages are at major support
• Stocks or bonds?
• What about the rest of the world?
• Inflation/deflation inter-asset relationships

The media seems to be fixated with potential central bank action this week but the markets are barely able to keep their eyes open. This is becoming one-big-yawn! I am seeing a lot of charts in widely diffuse areas, just poised to break out from trading ranges or through important trendlines. That suggests that something big might be about to happen. In that respect, I am not that concerned about what the BOJ and the Fed do, but more focused on how the markets react to their actions or lack thereof. Sometimes the first knee jerk reaction to events points us in the wrong direction, which means that if things start to move we may want to give it a little time.

Major stock averages are at major support

The first thing to notice is that pretty well all the important stock indexes are at support. You can see this in Chart 1, where the S&P 500 ($SPX), NYSE Composite ($NYA), and MSCI World Stock ETF (ACWI) have all fallen back to their breakout levels. In addition, these averages are also just above the up trendlines joining the February with the July Brexit lows. A further drop from here would not be, how shall we put it, helpful.

Chart 1

Chart 2 tells us that the Dow Tracking ETF (DIA) is in a similar position. My Dow Diffusion indicator continues to drop but is some distance from generating an oversold condition. Were it to begin to reverse from current levels, that would suggest that the support will hold.

Chart 2

Chart 3 features one of the stronger areas, the NASDAQ Composite ($COMPQ). It is just below resistance in the form of the green trendline. The indicator in the lower window is still bearish because the 10-day EMA of the McClellan Volume Oscillator ($VMCOSINAS) is still below its 20-day counterpart. However, it is moderately oversold, and given a push to new highs is in the kind of position where it could support a strong advance. This is one area I would watch carefully, for if the market does break to the upside this is one of the places likely to provide leadership.

Chart 3

Stocks or bonds?

The relationship between stocks and bonds looks as though it’s about to move in favor of equities. Chart 4 tells us that a small breakout above the down trendline and the 200-day MA favoring equities has recently taken place. However, even though the Special K has broken above its down trendline, it has yet to clear its red signal line and complete the 2016 base, which is flagged by the solid green trendline. Since the KST has just gone bullish there is a better than even chance that a  breakout may be imminent.

Chart 4

What about the rest of the world?

Another relationship that is at a critical level is the ratio between the US and world equities, the S&P 500 ($SPX) to the Dow Jones Global Index ($DJW). It has a history of signaling important reversals with trendline breaks. Right now the ratio is resting on a 5-year up trendline and has a slightly bearish long-term KST. That suggests that a downside breakout is possible. If you look carefully you will see previous trendline violations, in both directions, were simultaneously accompanied with a 200-day MA crossover. The current situation is no different except for the important point that a penetration has not yet taken place. A lot will depend on the US Dollar Index in the top window of the chart. That’s because it too is resting on an up trendline. Most of the time the two series move in tandem, but the blue shaded areas tell us that it is possible for their paths to diverge for a limited time. Since the line for the US/World relationship is longer and has been touched or approached on more occasions, it’s violation would be more serious. However, if, and this is not a forecast, they are both penetrated, a lower dollar and underperforming US market would be very likely.

Chart 5

Inflation/deflation inter-asset relationships

The ratio between the CRB Composite ($CRB) and the price of the 30-year bond ($USB) shown on Chart 6 could be described as the ultimate inflation/deflation relationship. It’s currently in a very tight trading range and very close to an upside (inflationary) breakout. Special K price action suggests that the breakout will materialize, because the indicator is above its (red) signal line and has recently completed a base of its own. Moreover, the KST has also started to turn up.

Chart 6

Chart 7 shows that the Bloomberg Commodity ETN, the DJP, is also caught in a tight trading range bounded by the red and green trendlines.  The August low was accompanied by a far greater number of commodities hitting new 50-day lows than the two September bottoms. That suggests a substantial dissipation of sellers and a good possibility that the price will move above the green down trendline, which is currently around $23.30.

Chart 7

The ratio between the SPDR Gold Shares Trust and the Barclays 20-year Trust (GDX/TLT) represents a battle between two other proxies for inflation and deflation. It’s been range-bound for about two years but the ratio has already broken above a 5-year down trendline. The Special K has completed a base and the short-term KST has gone bullish. Those events suggest that an upside breakout favoring inflation, i.e. the GLD outperforming, will materialize. The confirming point on the chart would be a daily close that can take the ratio decisively above the potential neckline of the inverse head and shoulders, say to .97. You can follow the progress of this, and any other chart in the article, by just clicking on it. To save it as a permanent fixture, save the new chart in an appropriate chart list.

Chart 8

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.