US Equities Emerging from The February Shakeout As A Global Leader Again

• US is breaking out relative to the world
• Growth breaks decisively against value
• Blue Tuesday

US is breaking out relative to the world

Chart 1 shows that the ratio between the US stock market, in the form of the S&P Composite ($SPX), and the World Index (ACWI) often swings in sympathy with the US Dollar ETF (UUP).  As you can see from Tuesday’s action, this ratio is starting to edge above its 2017 down trend line, which is bullish both for US equities and their currency. The Dollar Index should be considered as being in a primary bear market because it is trading below all of its long-term MA’s and has completed and fallen down from its 2015-18 top. However, for the bulls, there is a glint of hope. First, is the tentative breakout by the SPX/ACWI ratio. Second, if this is a bear market, I would have expected to see the Index break below its early February low as it was testing that chart point at the end of the month. The fact that it did not, offers a thin reed indicator that the currency may be in the process of turning. More evidence is needed, and the first likely event would be a penetration of the green down trendline, as that would go a long way to confirming that the downside break was a whipsaw. If it does go positive, that would be a whole lot of bad news for bullish gold and commodity traders!

Chart 1

Chart 2 takes the relative action of the US to a finer level as the SPX is being compared to the FTSE All-World Ex US ETF, the VEU. Here the breakout, favoring the US, is much more distinct. That’s because the double counting effect of comparing the US to a world ETF, which includes the US, is eliminated. Note also, that the breakout is being supported by a rising short-term KST.

Chart 2

Chart 3 informs us that the KST monitoring intermediate price moves is not only bullish, but has also violated its 2014-2018 down trendline. This latter event should be sufficient to indicate an important reversal in momentum , sufficient to result in the lagging long-term KST to eventually go positive as well.

Chart 3

Growth breaks decisively against value

I wrote some time ago that growth, in the form of the S&P Growth ETF, the IVW, had just broken out against value, as represented by the S&P Value ETF, the IVE. That view was justified because the ratio had crossed above the green resistance trend line in a series of rising peaks and troughs for the second time. That strength was short-lived, as the ratio again temporarily dropped below the line a couple of times. In the last couple of months though, growth has been predominating as this relationship has now experienced a decisive upside breakout.

Chart 4

Chart 5 shows the real importance of this IVW:IVE breakout as it turns out to be one of an 18-year duration, as flagged by the thick green trend line. You can also see that the Special K has received a breakout of its own as well as a positive signal line crossover.

Chart 5

Another way of looking at the growth/value relationship is to compare the performance of speculative technology to that of the defensive consumer staples. Chart 6 achieves this with the XLK/XLP relationship. The green shaded areas show that when this relationship is rising, which we can ascertain with the benefit of hindsight, the S&P usually rallies. That’s not true however for the IVW/IVE relationship we were previously studying, as its movements appear to have little bearing on the direction of the overall market.

Chart 6

The recent breakout of the XLK/XLP ratio was therefore very bullish generally for the market and specifically for technology stocks. As is evident from the chart, this relationship has come out of the February market decline with flying colors, by registering a post tech bubble high. It has yet to achieve the minimum upside objective, indicated by the breakout from the 2001-2017 base, which argues for a much stronger S&P Composite powered by technology stocks.

Blue Tuesday

Last week I wrote that it seemed likely that a test of the early February low was a likely possibility prior to the registering of new bull market highs. The market responded to my short-term negative prognostication with a sharp rally, always a humbling experience. However, Tuesdays action was quite bearish as it represented an outside day for the NYSE Composite, as you can see from Chart 7. An outside bar is one in which the daily trading exceeds the high and low of its predecessor. It is normally expected to have a negative effect for between 5-10 days. The chart also shows that for the DJIA Tuesday’s action was the second day of a two bar reversal. These formations develop when, following a rally, the first day opens near its low and closes near the high. This indicates optimism. The second day however, is the opposite. It opens near the high and closes near the low, clearly ending in pessimism. In the current situation that means that pretty well every trader who bought this week and still holds a position is taking home a paper loss on Tuesday night.

Chart 7

I don’t want to make a big deal of this, as some of the short-term indicators have already started to turn to the upside. Take a look at Chart 8 for instance, where my Dow Diffusion indicator that monitors the Dow stocks in a positive trend, has just started to turn up again. That type of action typically results in a nice buy signal for the market. These instances have been flagged by the green arrows. I also don’t want to get overly negative as it’s my interpretation of the long-term indicators that we are still in a primary bull market, where the surprises typically unfold on the upside. If things do slide off a bit from here, let’s be on the lookout for a positive outside bar or bullish two bar reversal or something else of that nature.

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.