World Equities Surging to New Highs

• Global A/D Line breaks to the upside
• Post-election trends
• US equities
• The 10-year Yield
• Gold
• The Dollar Index
• Commodities

Global A/D Line breaks to the upside

This week has seen an important breakout for equities. I am not referring to Dow 20,000 but to my Global A/D Line (!PRGLAD), featured in the lower panel of chart 1. This indicator is calculated from a universe of individual dollar based country funds. It's true that this breadth series is some way below its all-time high set in 2014. However, the important point from an intermediate aspect, is that it has been in gear with the Dow Jones World Index since last fall. Consequently, this week's breakout has the potential to be as significant as the one that developed in the early summer of 2015.

Chart 1

We have to be a bit careful though, because our Global Net New High indicator (!PRNNHGL) , in Chart 2, is getting close to an overstretched reading. The red arrows indicate that this series has had a reasonably good track record at calling corrections when it reverses direction.

Chart 2

Since Chart 3 indicates that the main trend is definitely a positive one. Surprises usually move in the direction of the main trend, so I am going to continue to look up, rather than focusing on a near-term counter-cyclical move that may or may not take place.

Chart 3

Post-election trends

In an article earlier in the month I posed the question "Are Post Election Market Trends Starting to Reverse in 2017?" The markets in question are shown in Chart 4, where the green arrows point out the rising post-election trend for stocks, bond yields, the dollar, gold and commodities. Note that gold has been plotted inversely since the price of the yellow metal has recently been moving inversely with the other markets. I pointed out that, with the exception of gold, all these markets reflected a risk-on inflationary sentiment. You may think that the stock market is neutral in regard to the inflationary aspects since it contains both inflationary and deflationary elements. However, the "Trump" rally was driven far more by earnings driven and inflation sensitives than defensive areas. I was not questioning the direction of the main trend for these markets as all were positioned above their 200-day MA’s, which is still the case today, However, it did seem likely that all would correct. In the case of gold, the correction was expected to take the form of a rally. The red arrows indicate that corrections for the stock market and commodities have been sideways, whereas those for yields, the dollar and (inverted gold) have been down. With the stock market at a new high the question could reasonably be asked whether the primary trends for these markets are about to re-assert themselves, so let's take a look at their short-term technical pictures.

Chart 4

US equities

Like the global market the consensus of the long-term indicators for the US continues to offer bullish vibrations. When it comes to the short-term trends things are more mixed. When it comes to market breadth both the A/D Line based on common stocks ($NETADNYC) and that for total issues ($NYAD) are both at new highs, which is obviously positive.

Chart 5

Chart 6 features a 10 and 15-day MA for the VIX, which have been plotted inversely to correspond with price movements. As long as they continue to advance this indicator is interpreted as positive. However, it is currently at an extended level, which indicates vulnerability.

Chart 6

On the other hand, Chart 7 shows that the two MAs for the McClellan volume oscillator (!VMCOSINYC) are both at oversold readings and look as if they are in the process of bottoming. Given these conflicting signals, which are also present in other indicators, the benefit of the doubt is best given to the main (upward) trend.

Chart 7

The 10-year Yield

The KST for the 10-year yield is very close to a buy signal and the 15-day ROC has violated its December-January down trendline. The yield itself has also broken out from a small reverse head and shoulders, the neckline of which appears as the red dashed line. As long as the yield can remain above the 4-month red up trendline there is a sporting chance that the correction is over. My concern about being overly bullish on yields is that just about everyone else is as well. From a contrarian point of view that's not good.

Chart 8

Gold

The RSI reached an overbought level and sold off. Sensitivity to an overbought reading is a bear market characteristic and that suggests that the rally may be over. However, the market abhors a vacuum, and we see a small gap slightly above present prices. That means that a test of this week's high is in the wind as an attempt is likely made to close the gap. If so and if a new recovery high is registered, that would be positive. That’s because since it would suggest a lack of sensitivity to the overstretched reading. On the other hand, a failure to register new highs and a drop below Thursday's low would indicate more of a bear market environment. Remember Gold is below its long-term MAs and that hints that the more bearish scenario is more likely.

Chart 9

The Dollar Index

The Dollar Index (UUP) usually, but not always, moves in the opposite direction to gold. Right now the Index is above its long-term MA’s indicating a bull market. Chart 10 shows that it has just completed a small head and shoulders top, but the validity of the break is being questioned. That means that if the Index can rally above the two converging trendlines, thereby confirming the RSI trendline break, the breakdown would turn out to be a whipsaw. This would then set the scene for a strong rally. To appreciate the effect that whipsaws often have, just return to Chart 2 and see what followed the two highlighted examples.

Chart 10

Commodities

The commodity correction has been pretty benign, being limited to a sideways move with a slight upward bias. The odds favor this ranging activity to be followed by higher prices as the bull market grinds on. One observation worth noting, is that prices were not particularly sensitive to oversold conditions prior the start of the bull market in January 2016. Since then, the green arrows show that it has, and that's another reason to be bullish commodities (DBC).

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.