Seven Reasons For Being Bullish

• Financial Velocity Indicator Poised to Go Bullish
• Oversold NASDAQ Volume in a Position to Support a Rally
• Rapid Expansion of Net New Highs is Bullish
• Global Breadth Turning?
• When Stock Exchanges Break to the Upside, That’s Usually Bullish for Stocks

Financial Velocity Indicator Poised to Go Bullish

One of my favorite indicators for identifying major buying opportunities is calculated by combining the momentum of bonds, stocks and commodities. I call it “Financial Velocity” and you can see it in Chart 1. The concept is very simple: when the momentum for the three financial markets is positive, that shows that sufficient liquidity is being pumped into the system to be consistent with rising stock prices. If bond momentum is rising, but stock and commodity velocity is not, that’s usually insufficient to power rising equities, as it reflects a weakening economy. It’s when bond price momentum picks up as equity momentum dissipates on the downside - or actually reverses to the upside - that the indicator comes into its own.

The reason I bring it up is because this series has started to go bullish again. However, it has not quite crossed above the 6-month MA required for a legitimate buy. Such a crossover would trigger the twenty-fifth buy signal since 1920. That’s important information, as 21 of those previous 24 signals were followed by  a nice rally. The question now is whether last week’s robust advance has the ingredients to extend over the next few weeks, thereby guaranteeing a bullish Financial Velocity signal. There are several reasons why this might happen.

First, money markets are rapidly discounting the probability that the Fed will lower short-term rates. Coming on top of an economic growth slowdown, conditions are ripe for a meaningful extension to the recovery. A bullish signal by the Financial Velocity indicator would confirm that.

Chart 1

Second, Chart 2 shows that the head-and-shoulders top, which I talked about in an earlier article, experienced a false break to the downside in May. This whipsaw action was initially confirmed when the Index crossed back above the neckline and subsequently re-confirmed as it cleared the green downtrend line connecting the head with the right shoulder.

Chart 2

Third, an examination of the weekly bar charts reveals last week as a bullish outside one. You can see this in Chart 3, where the trading action totally encompassed that of the last week in May and closed pretty close to its high. Outside bars are expected to reflect a change in sentiment; this very wide one certainly did.

Chart 3

Chart 4 features the NASDAQ, which experienced a bullish engulfing pattern. It was also an outside week. These formations, along with outside weeks, are only expected to have an effect on prices for between five to ten bars, which, in this case, would be five to ten weeks, more than enough to cause that Financial Velocity series to move into bullish territory. Two other things to note: first, the expansion in volume, which supports the bullish case; second, the outside bars and near misses, which can be observed in virtually all the sectors and which underpin the broad nature of last week’s advance.

Chart 4

Oversold NASDAQ Volume in a Position to Support a Rally

Fourth, Chart 5 features a volume oscillator in the form of the 10-day EMA of the McClellan Volume Oscillator. The oscillator was recently at an extreme oversold reading, but has since bounced. The green arrows show that upside reversals from the -45 level have been consistently followed by a nice rally in the NASDAQ itself. Sometimes, it has taken two attempts to reverse, as was the case in April 2014. Since the current attempt is the second this year, chances are that the signal will be valid.

Chart 5

Rapid Expansion of Net New Highs is Bullish

Fifth, Chart 6 shows that the NYSE Composite, even after a good rally last week, is still well below the levels of its three previous peaks. However, the number of stocks registering new highs has equaled the January 2018 high and beaten the previous two. This series has also crossed decisively above its green resistance trend line in a similar manner to early 2016. That’s a very positive statement, since it suggests that lots of stocks are breaking to the upside.

Chart 6

Global Breadth Turning?

Sixth, globally, things also look overdone on the downside, as my diffusion indicator monitoring a basket of individual country funds in a positive trend is deeply oversold again. On Friday, we saw a tentative reversal to the upside. We need a bit more than that before turning fully bullish on this indicator, but it’s a good start. Note also the possibility that the May decline could well turn out to be the right shoulder of a large consolidation reverse head-and-shoulders. A rally above $75.50 would do the trick.

Chart 7

When Stock Exchanges Break to the Upside, That’s Usually Bullish for Stocks

Finally, seventh, Chart 8 compares the MSCI World ETF (ACWI) to the Dow Jones Global Exchange Index. That’s an index comprising publicly traded stock exchanges around the world. If investors did not like the outlook for exchanges, they would be selling this Index. Instead, the index recently broke out in a very convincing way that seems destined to lead the ACWI higher. Additionally, its Special K has just violated a 1-year downtrend line, which also supports the idea of higher prices. This situation reminds me of the 1995 breakout by US brokers. The market had stalled for about a year in 1994, until the Brokerage Index suddenly exploded to the upside and the 1995-2000 part of the secular bull market followed. I am not suggesting that the rally from current levels would turn out to be so durable, but a breakout by the Index is certainly an unusual and positive factor.

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.