Are We At The End Of The Trump Rally?

• A different way of looking at the VIX
• What about global equities?
• Sectors are largely pointing north
• Are commodities about to break out?

The market has been rising in an uninterrupted fashion since early November, on the back of a Trump election victory. The question naturally arises as to whether it’s time to fold ‘em, or should we continue to hold on. The short answer is that this is the start of a bull market or continuation of the previous bull and that since few short-term indicators are reversing from overbought levels we should expect to see additional strength going into the seasonally bullish December period and beyond.

Chart 1 for instance, shows that the daily KST for the $INDU is moderately overstretched but still pointing firmly in a northerly direction.

Chart 1

Chart 2 looks at the market from a breadth point of view, through the lens of a 30-day ratio of advances to declines. This series is certainly not overbought and is showing no signs of peaking. Having said that, it is also evident that should it reverse from current levels it will have set up a very negative divergence with the SPX, since the indicator is only just above zero as the S&P is registering a new high. That’s definitely a worry, but until this potential weakness is confirmed by some form of trend reversal in the S&P, a positive stance is appropriate. The reason why breadth has lagged probably lies in the recent rise in rates, which has adversely affected interest sensitive stocks and other early leaders.

Chart 2

A different way of looking at the VIX

A lot of people follow the $VIX, or fear indicator. Because this series is so volatile I prefer to monitor its KST, rather than the raw data. Chart 3 compares the KST of the $VIX to the $SPX. In order to mimic price movements in this stock average, I have plotted the $VIX KST inversely. Note that when it reverses and drops below its MA, some kind of a correction typically develops. Some are quite impressive, but others are followed by limited downside or even a sideways correction for a couple of weeks. Right now the KST is moderately overextended, but is continuing to rally. That could change at any time of course, but right now it’s in a bullish trend for the market.

Chart 3

Often market tops are signaled by negative divergences between the S&P and various confidence ratios. Chart 4 features such a relationship in the form of the S&P High Beta/High Quality relationship. This confidence indicator has been in a persistent rise since July, unlike the S&P, which declined between July and early November. No sign of weakness here, just a relentless advance to new recovery highs, as investors continue to grow in confidence by bidding up stocks with a high beta against defensive issues. More strength is expected because the long-term KST for the ratio has only just turned bullish.

Chart 4

What about global equities?

Chart 5 features the MSCI World Stock ETF, the ACWI, together with our Global Advance/Decline (A/D)Line. The ACWI remains in its trading range but has been edging up since November. On the other hand, the performance of the A/D Line has been less than impressive as it continues to trade below its 50- and 200-day MA’s. Some hope is being offered by the PPO calculated from the A/D Line, as it has recently bottomed from an oversold reading. The reason for the failure to rally is that strength in some Asian countries has been offset by weaker emerging markets and mixed results from Europe.

Chart 5

Chart 6 says that may be about to change. The arrows indicate that the Global A/D Oscillator (!PRGLADO) often leads the smoother and more deliberate Global Diffusion indicator(!PRDIFGLO). The oscillator has just reversed to the upside. The three orange ellipses warn us that it sometimes experiences false reversals. While the odds favor a valid signal there are certainly no guarantees.

Chart 6

Sectors are largely pointing north

Charts 7, 8, and 9 show the various daily KSTs for key market sectors and averages. At this point all are rallying with the exception of gold, which has begun to stabilize. Until some of them start to reverse this universal strength should be viewed as a positive factor.

Chart 7

Chart 8

Chart 9

Are commodities about to break out?

I mentioned the High Beta/High Quality confidence ratio earlier. Chart 10 shows the relationship between high yield and treasury securities (HYG/IEF), which is the bond markets way of signaling confidence in the economy and vice versa. The chart clearly demonstrates the close relationship between commodity prices and this bond confidence indicator. Recent strength in the ratio, with a reverse head and shoulders breakout argues strongly that the DBC will also move above the dashed potential neckline of a similar formation.

Chart 10

That’s very important because a worthwhile rally from current levels would confirm that the $CRB Composite long-term breakdown, in Chart 11, was a whipsaw. It would also mean that commodities are in the unusual position of being able to rally in the face of a strong dollar, and that would probably mean a widespread global advance in commodity prices.

Chart 11

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 of Walnut Creek or its affiliates.