Short-term Indicators Signaling Trouble Ahead?

• Global short-term indicators start to go bearish near-term
• VIX and other US oscillators showing signs of vulnerability

Global short-term indicators start to go bearish near-term

A couple of weeks ago I suggested that several short-term indicators were hinting at a near-term downside or range bound correction. Usually, I put in the caveat that calling corrections in a bull market is a mugs game, and that we are usually better served by focusing on the main event. That, of course, is the bull market. In this case I did not put in the caveat, and the market obliged by extending its advance. Now that I have cleared the egg from my face, I can see that the indicators are even more negative than before. Bearing in mind the caveat, it looks to me as if things could be a bit softer going into early December, when the year-end bullish seasonal often kicks in. I should note though, that pretty well all of the longer-term indicators I follow continue to point north, so we are only talking short-term correction, not the end of the world.

Chart 1 shows things from a global perspective. The MSCI World Stock ETF, the ACWI, has just marginally dropped below the August/October up trendline. That has been sufficient to trigger a sell signal in the short-term KST, a fact that is likely to act as a drag going forwards.

Chart 1

One of the factors underpinning its strength, has been firmness in my Global A/D Line (!PRGLAD). It is featured in Chart 2. Its trend, along with that for the ACWI, remains positive. However, you can see that the PPO, calculated from the line, has been noticeably diverging from it for almost three months. This action is not dissimilar to the August/September divergence of last year, which preceded a modest decline.

Chart 2

Chart 3 features another oscillator, this time it is a Global Net New High Oscillator (!PRNNHGL). This one, is calculated  from a moving average of a universe of individual country ETF’s that are registering net new highs over a specified time period. The red arrows point up previous peaks, each of which was followed by some kind of a correction. Right now, it’s still rising but has started to stabilize at a relatively extended reading. It does not include negative data from October 25, so it may have already turned. Given the weakness, already described above for the KST and PPO indicators, it seems very likely that this series will also reverse to the downside.

Chart 3

Finally. On the global scene, Chart 4 displays the short-term KSTs  for several regions around the world. Each one, except the Asian series, has started to roll over. Even that looks to be very over extended. All of this suggests that prices are vulnerable over the short-term, but what of the US?

Chart 4

VIX and other US oscillators showing signs of vulnerability

One sign of trouble appeared yesterday, when the DJIA (DIA) touched a new high but precious few of the major averages confirmed. This is a small, but subtle point, that under the surface things may not be as strong as they look on it.

Chart 5

One sign comes from Chart 6, where the 30-day NYSE A/D Line ratio has been falling for some time. It is now decisively below the red overbought zone. The arrows show that previous decisive crossovers have typically been followed by a correction of some kind, though often shallow in nature.

Chart 6

Chart 7 compares the VIX ($VIX) to the S&P Composite. It is evident, that since late 2015 volatility peaks have been in a down trend in a similar way to the October 2014-August 2015 trend. That one was followed by two sell-offs, which eventually became a solid platform for the current phase of the bull market. The indicator, which is itself volatile, would probably signal an acceleration of any forthcoming decline should it break above the trendline, which is around the 14-level. The horizontal line at 16 could also be used as a benchmark.

Chart 8

An alternative way of interpreting the VIX is to study its trend, as in Chart 8. Here, we plot two EMA’s, one with a 10-day span and the other with a 15-day one. Note that this time the indicator has been plotted inversely in order to correspond with swings in the S&P Composite. The arrows flag negative  EMA crossovers that took place above the red horizontal line. The November 2015 signal was an exception. It has been highlighted to show that the magnitude of subsequent declines does not necessarily depend on the level from which it begins. This version of the VIX will remain bearish until we see an EMA crossover to the upside.

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.