Steady As She Goes: Several Indicators Say The Market Is Headed Higher

Volume is offering a mixed picture

Last week I pointed out that several short-term indicators, including breadth and net new high indicators, were still pointing north. One area that was not showing any strength of note was volume, in the form of the PVO for the NYSE. Chart 1 shows that this indicator, had broken to the upside, but is struggling to maintain that position. That does not mean that the rally is dead, but it would be much nicer if we could see rising prices accompanied with expanding activity. What we do not want, is a decline in prices under a background of rising volume. Remember, you can click on this chart to update it going forwards.

Chart 1

One area in the volume department that is looking stronger, is the Upside/Downside volume line, as featured in Chart 2. It initially showed strength by bottoming out at a higher level in March. This differed from the NYA, which recorded a slightly lower level then. Now, this series, like the NYSE A/D Line itself, has broken out to a new high and is leading the market higher. Note that the PPO for the Upside/downside line, is also in a positive trend.

Chart 2

Chart 3 tells us that the Bullish Percentage indicator for the S&P Composite is not only in a rising trend above its 20-day SMA, but has violated its green correction down trend line. The red and green trend lines show that previous such violations have resulted in important trend reversals for the Bullish Percentage. This not only translates into a broader or narrower participation as flagged by the indicator, but the S&P itself. Also worth noting, is the fact that the indicator has begun to trace out a series of rising peaks and troughs, as flagged by the small dashed blue arrows.

Chart 3

Confidence ratios mostly looking stronger

It’s often a good idea to take a look at relationships that reflect swings in confidence, as they show where investors are putting their money, rather than what they say about the market. One such series is the relationship between poor quality and high quality bonds. In this case between the IBoxx High Yield ETF, the HYG and the Barclays 7-10-year Treasury ETF, the IEF.  When it is rising it tells us that bond investors prefer relatively higher yield of Junk Bonds. Were they concerned about a weaker economy and defaults, they would choose the safety of the IEF. That credit market confidence, or lack thereof, often translates into the stock market. Chart 4, shows that the ratio recently experienced an upside breakout by successfully penetrating its 2014-18 down trend line. That indicates a major move in growing confidence is underway. That should translate into higher stock prices as demonstrated by the green shaded areas.

Chart 4

Improving confidence can also be appreciated from Chart 5, which reflects the relationship between the Fidelity Capital and Income Fund (FAGIX), with that for the Vanguard Treasury(VUSTX). The former, consisting of stocks, represents higher risk, whereas the Vanguard Treasury offers greater safety. Once again, we can see that a rising ratio reflects growing confidence, which in turn, is associated with higher stock prices. The green shaded areas, reflect an advancing ratio. These periods have been selected using the benefit of hindsight. Once again, an upside breakout in confidence has taken place. This time though the ratio has moved above a massive 18-year resistance trend line. If the breakout fails, all bets will be off, of course. However, since the current one is supported by the HYG/IEF relationship discussed earlier, there is a definite pattern forming.

Chart 5

Rounding out this trio of indicators is the ratio between the S&P High Beta (SPHB) and Low Beta (SPHQ) ETF’s.  It’s fairly evident that an advancing ratio implies that investors are favoring high risk beta to low risk high quality. Such action, as we can again see from the green shading, is associated with rising equity prices. Here again, confidence has broken to the upside and has achieved a post 2016 high. This compares to the SPX, which has not. At this time things look positive. Only if the uptrend is violated with a break below the red up trendline will this favorable background no longer cease to exist.

Chart 6

Stocks versus Gold

Another encouraging relationship favoring equities is that between the $SPX and $Gold. In this respect, the shaded areas of Chart 7 flag periods when stocks have out-performed gold. Note that stocks have also risen in their own right during such periods. When stocks under-perform this is usually bearish for the SPX. That’s not always the case though, as we can see from the 1994 and 2009-2011 periods.  Late last year, the ratio broke above that thick green trend line, which marked the neckline of an inverse head and shoulders formation. In recent weeks it has re-asserted that advance and bounced off the 12-month MA. Since the long-term KST, in the bottom window, is also in a bullish mode it seems likely that the ratio will continue to move higher.

Chart 7

That view is also supported by Chart 8, which indicates that the short-term KST is positive for an equity rally relative to gold. It also looks as though the ratio is in the terminal process of completing a bullish right angled broadening formation. That has not happened yet, so we should not jump the gun. However, if this pattern is completed, a very strong move favoring equities would be signalled.

Chart 8

Chart 9 provides an example of such a pattern in action for the Value Line Arithmetic Index. In this instance, the breakout was followed by an above average advance, which is typical of these patterns. Note the recent breakout in the Value Line, which also supports the idea of a broadening market advance.

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.