Comparing The Differences Between The February And October Declines

• Key moving averages violated in October
• The world peaked in January
• What happened to sectors and breadth?
• February versus October conclusion
• Those pesky bonds

Key Moving Averages Violated in October

So far, 2018 has seen two sharp shakeouts in the market, specifically the ten-day special in early February and the 20-day October surprise. Chart 1 shows that they both took the S&P Composite down by about 11%. The two sell-offs may have been similar in magnitude, but the technical damage they unleashed is a very different story. For example, the February decline did not rupture the 200-day or 12-month MA, two key components for helping to identify primary trend reversals.

Chart 1

Chart 2 tells us that both the 12-month MA and the long-term KST went bearish in October. Neither of these benchmarks were violated in the February sell-off. Moreover, Chart 2 also informs us that the bull market trend line was violated, unlike the earlier decline where it remained intact. The point is that October has done some serious long-term damage to the technical picture, unlike the severe February action. One missing piece of bear market evidence for the S&P, NASDAQ and Dow is the existence of a series of declining intermediate peaks and troughs. That’s because each of those averages sold off from their high point of the cycle.

Chart 2

Not so for the more broadly-based NYSE Composite, shown in Chart 3. This Index peaked in January, then experienced a rally into October, which registered a lower peak. Finally, it broke to a new low in October, thereby setting up a downward peak-trough progression.

Chart 3

The World Peaked in January

That’s true for both the world as a whole as well as the world ex the US. These two series are featured in Chart 4, where the MSCI World Stock ETF has been plotted in the upper window and the Vanguard World Ex the US in the lower one. Both ETFs peaked in January and subsequently proceeded to trace out a series of declining intermediate peaks and troughs. For the VEU, the all-time-high September S&P peak was celebrated with a lower high than achieved in the April/May period, let alone the January top.

Chart 4

What Happened to Sectors and Breadth?

In terms of sectors, most peaked in September, though a few, such as materials, financial and staples led the market lower with a January peak. The A/D line, shown in Chart 5, also topped out in the fall.

Chart 5

However, when it comes to net new highs, the fall peak in the S&P Composite was only accompanied by a 10-day MA reading close to 100 compared to January when it touched 200, a rather stark contrast.

Chart 6

February Versus October Conclusion

In conclusion, most of the major US averages peaked out in the fall and were supported by market breadth. However, net new high data, negative long-term MA violations and KST action, plus widespread global weakness, suggest that substantial long-term damage developed as a consequence of the most recent decline. This is in contrast to the February sell-off, which left most of these indicators and market averages relatively unscathed.

If the post-early February price action is a guide, we should expect to see wide price swings in both directions as recent sharp declines are digested and oversold conditions are worked off. This time, though, it seems more likely that, instead of subsequently registering new all-time-highs, prices will zig zag in a more bearish outcome.

Those Pesky Bonds

Last week, I wrote about the possibility of yield falling and bond prices rising. In the ensuing few days, things have gone very differently from my expectations. Not to flog a dead horse, but some small green shoots are now appearing. We are likely to find out pretty soon, as Chart 7  shows that the price of the Barclays 20-year Trust, the TLT, has fallen back to its September low. Since this follows the completion of a large top, it would be normal to expect the price to give way and to immediately register a new low for the move. If it does not, that would put bonds in play for a possible false downside break. I never like to jump the gun on whipsaws, but there are two reasons why it may be a reality. First, the daily KST is rising and is at a fairly subdued reading. This suggests it has momentum support for a rally. If this does result in an upside violation of the red breakdown trend line at $115.5, that would strongly suggest the recent break was false.

Chart 7

The second reason can be seen from Chart 8, which features the 30-year yield. Thursday’s intraday high took it above the previous one set in early October, but it was unable to hold, thereby resulting in a small false breakout. By the end of the day, the yield formed a turnaround price bar, which qualified as a small bearish engulfing candlestick. Small stuff I grant you, but with resistance holding and a positive PPO, I think there is a reasonable chance that bonds may be bottoming in price and peaking in terms of yield. For the time being though, we have to assume that yields are moving higher and prices lower. That would change with a move below 3.26% on the $TYX and above $116 for the TLT.

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.