Are Post Election Market Trends Starting To Reverse In 2017?

• The long-term equity trend is bullish, but watch carefully
• Short-term technicals for equities
• Short-term technicals for yields and bond prices
• Short-term technicals for the Dollar Index, Gold and Commodities

The post-election trends I am referring to in the title refer but are not limited to, the five series plotted in Chart 1. With the exception of gold, displayed inversely in the Chart, all these trends reflect a risk-on inflationary sentiment. They have two common characteristics. Each series is trading well above its 200-day MA, which means that based on this one technical test, they are experiencing primary bull markets (bear for gold). In fact, they are similarly supported by their 12-month MA and long-term KST trends as well. Second, each is overstretched on a short-term basis, and therefore likely to experience some form of counter-cyclical corrective activity. If that expected price action were to result in some major moving average crossovers, and long-term momentum reversals, that would indicate that these primary trends had reversed. However, with the evidence we have right now, these long-term trends are positive, which means that short-term reactions should be treated as counter-cyclical corrections.

Chart 1

Bullish long-term equity trend but watch carefully

I reviewed Chart 2 in my webinar with Greg Schnell earlier in the week. It indicates the relationship between the S&P Composite and NYSE margin debt. It is fairly evident that bull markets are not concerned with the level of margin debt but by the direction of its trend. In other words, as long as that trend is rising, it reflects confidence as investors and traders are willing to take on more debt. A good benchmark is the 12-month MA, which the latest (November) data is above. Timely signals are also provided by reversals in the long-term KST in the bottom panel. The green arrows show previous instances were all followed by some kind of a rally. Last month, the KST for margin debt went bullish again as it crossed above its 9-month MA.  As long it is improving and margin debt itself remains above its 12-month MA, this indicator is rated as bullish.  Because it is so close to the equilibrium point, not much in the way of downside action would be required  to reverse its current trajectory. Consequently, the one thing that needs to be closely monitored, is the possibility that it now reverses from a relatively low level as it did in early 1990 (see the red arrow). Were that to happen it would suggest that the expected short-term correction would be the first down leg in a new bear market. That’s a really low probability outcome at this point, but one must always be on the lookout for such possibilities.

Chart 2

Short-term technicals for equities

Chart 3 shows that the Percentage Volume Oscillator (PVO) for the $NYA recently fell to a very low level and now looks as if it has bottomed. That tells us that the current technical position is very finely balanced as there is no enthusiasm from either buyers or sellers. However, that balance is likely to be tipped as volume subsequently expands. Unfortunately, this indicator does not tell us whether this will be on the upside or downside. Since the market has been rallying in the last couple of months though, a downside resolution, like those indicated with the red arrows, seems to be the most likely outcome.

Chart 3

Chart 4 features the KST for the $VIX. This series has been plotted inversely to correspond to price movements in the S&P Composite. The red arrows show that when this momentum indicator peaks out, the S&P invariably experiences a short-term correction. This is sometimes brief and at other times more protracted. Right now it looks as if the indicator is in the process of rolling over. If that proves to be correct, the very fine technical balance being indicated by the oversold PVO in the previous chart, suggests a January correction of some kind.

Chart 4

Short-term technicals for yields and bond prices

Chart 5 shows that my Net New High Bond Indicator (!PRNNHBND), which monitors a universe of bond market ETF’s registering net new highs, is extremely oversold. The green arrows show that reversals from at or below the zero line have typically associated with some kind of rally. We have to remember that these signals all developed during the course of a bull market and that the long-term indicators are now pointing in the opposite direction. This means that an upside correction is likely, but that it will probably be sub-par, taking the form of a small advance or sideways trading range, as opposed to the relatively firm advances experienced during the bull market.

Chart 5

Chart 6 points out the fact that gaps are usually filled, the only unknown being – When? It also shows an unfilled gap for the TLT starting at $127. Given the recent upside reversal in the short-term KST, there is no reason why the current bear market rally cannot reach that level.

Chart 6

Short-term technicals for the Dollar Index, Gold and Commodities

Charts 7, 8 and 9 all feature these interlinked markets. First, the Dollar Index ($USD) has broken its 3-month up trendline and this has been confirmed by a KST sell signal. Note that the KST may be in the terminal phase of completing a price pattern in a similar but much smaller way than developed in mid-2015 and 2016.

Chart 7

Gold, which usually moves inversely to the dollar, has experienced a KST buy signal and is still oversold. The good news for the bulls is that a gap appears on the chart in the $114-115 area for the Gold Trust ETF (GLD). The bad news, is that Thursday’s action left an unfulfilled gap slightly to the downside.

Chart 8

Finally, commodities, as represented by the PowerShares DB Commodity ETF, the DBC, has also experienced a short-term KST sell signal as a result of its stalled rally. You can also see a very wide trading day that took place on Tuesday. This is a bearish outside bar that opened close to its high and closed near its low and embraced the trading of the four previous days. It also represented a failed upside breakout, all of which indicated seller dominance. The last two trading days mark a kind of retracement move. It seems likely, given the red up trendline violation and KST sell signal, that commodities will join the equity market, Dollar Index, gold and bond ETF’s in a counter-cyclical correction of some kind.

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 of Walnut Creek or its affiliates.