Dow 22,000 Mission Accomplished. Oh Yeah?

• Bullish percent indicators are starting to deteriorate
• Short-term confidence may be turning
• Small caps getting smaller?
• Oversold Dollar Index bounces from support

Bullish Percent Index indicators are starting to deteriorate

This week we saw the financial media and President Trump glorify the fact that the DJIA had exceeded 22,000 for the first time. It’s as if 22,000 meant something. Problem is it doesn’t, except for the fact that it attracted widespread media hype. It reminds me of a previous President toting victory with a “Mission Accomplished” sign behind his back. That one didn’t turn out too well.  Since my longer-term indicators remain, for the most part, fully in the bullish camp, I am not saying we are just about to begin a new bear market. What I am saying though, is that it would not be surprising from a contrary viewpoint, to see some kind of a correction develop in the weeks ahead. That’s always a difficult call in a strong bull market, so my warning is more for leveraged short-term traders than longer-term investors.

Chart 1 features the New York Composite ($NYA) together with the NYSE Bullish Percent ($BPNYA) indicator. Most folks interpret this indicator from the point of view of its level. A high level is as good as it gets, and tends to be bearish, whereas a low level typically represents a buying opportunity. I certainly buy that approach, but I also think that trend is equally as important. In other words, when you see a trendline violation on a Bullish Percent Index (BPI), and this is confirmed by the price, it typically results in a worthwhile move for the $NYA. We see several successful signals using this approach and an obvious failure last June.  On Friday, this series dropped below its November-August up trendline. That break is not quite decisive yet, but any additional weakness will make it so. Note also that the bullish percent has been tracing out a series of declining peaks, unlike the average which has been moving higher.  That tells us that fewer and fewer issues have been participating in the rally. The breaking of the trendline indicates that this trend of fewer stocks in bullish trends is likely to extend. I would expect that trendline break to adversely affect the NYA, but the actual signal requires a drop below its November-August up trendline, say with a daily close under 11,800. Until that happens all bets for a correction in the Index are off.

Chart 1

Chart 2 shows the same exercise, but this time for the S&P Composite ($SPX). Here we see what looked to be a perfectly good breakout to the upside a few days ago. Since then, the BPI has slipped back below its February 2016-August 2017 up trendline. I address the subject of false breakouts in the August Market Round up webinar. That red trendline break confirms the false upside breakout and suggests that the BPI will move lower. Throughout this whole period, the S&P itself has managed to remain above its 2016-17 up trendline. If it drops below the trendline, this would confirm this week’s breakdown in the Bullish Percent Index. We look to a break below 2430 to confirm this, as such a break would also mean a violation of the 50-day MA.

Chart 2

Short-term confidence may be turning

Two indicators that measure confidence are also throwing out some tentatively bearish vibes. The first is the 10- and 15-day MA’s of the inversely plotted $VIX, as shown in Chart 3. I have plotted it inversely, so that its ups and down correspond to those in the S&P. The red arrows show when the two MA’s peak out from a reading in excess of the blue horizontal line. The dashed arrows indicate obvious failures. Each of the other signals were followed by a meaningful short-term correction, defined as a trading range or 3+ week decline in the Index. The indicator has clearly been useful from the point of view of calling a corrections, but the problem is we never know their duration and magnitude. Last week the $VIX reversed to the downside again, which suggests that another correction will soon be upon us.

Chart 3

Credit spread ratios can  be useful in pointing up subtle  changes in confidence that spill over to the equity market. One popular relationship is calculated by dividing high yield corporate bonds by good quality government ones, the IBoxx High Yield divided by the Barclays 20-year Trust (HYG/TLT).  A rising relationship indicates growing confidence, as it means that risky high yield is out performing good quality governments. Stocks tend to rise under such circumstances. However, when the ratio starts to decline it is often an early bird warning for equity investors. The ratio peaked last March and violated its dashed up trendline. It subsequently tried to rally but experienced a false upside break above the two converging trendlines. That’s not a good sign, as the KST has just gone bearish. However, I am watching that 200-day MA to see whether it, and its converging 50-day MA are violated on the downside. If so, that would be a negative for the stock market.

Chart 4

Small caps getting smaller?

A few weeks ago I pointed out that the Russell 2000 ETF, the IWM, has broken to the upside, along with its RS line. That looked to be pretty positive at the time, but Chart 5 shows not only that this was a false breakout, but that it has also been confirmed by the violation of the red up trendline and a KST sell signal.

Chart 5

Moreover, Chart 6 indicates that the upside Relative Strength (RS) breakout was a failure, and that the RS line has now dropped below a key red support trendline. Not a good sign for small caps!

Chart 6

Oversold Dollar Index bounces from support

The Dollar Index may be in a bear market, but Chart 7 indicates that it has reached support, at a time when my cross dollar diffusion indicator (!PRDIFCUR) is really oversold. That suggests that some form of counter-cyclical correction is in the cards.

Chart 7

This view is also supported by the fact that the Dollar Index has violated a steep down trendline and the short-term KST has gone bullish.

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 of Walnut Creek or its affiliates.