• Breadth Acting Positively
• Four Short-Term Indicators Turn Bullish
• Stocks Could Be Breaking Against Gold

The mood on Wall Street is turning ever more cautious as the economic numbers continue to soften. We need to remember, though, that the stock market is a forward-looking indicator, as it looks through the foggy view ahead. In this respect, the currently bullish position of several short-term indicators I respect are indicating that the market likes what it sees. The talk of inverted yield curves and recession may have been doing the rounds, but the S&P (Chart 1), instead of responding with a decline, has chosen to form a trading range instead. The top has been flagged with the green line and 50-day MA. The thin red line at around 2850 marks the lower end of the range. That is an important support area, but a more significant one lies at the thicker line at 2,750. In the event of its violation, the whole price action since last March would be interpreted as a top of some kind.

Chart 1

Breadth Acting Positively

I think that's unlikely to happen, as the major averages continue to trade above their 12-month MAs and the daily NYSE A/D Line (Chart 2) has moved back to challenge its all-time high. One could argue that this breadth indicator is strong because interest rates have been falling sharply, thereby powering the plethora of interest-sensitive vehicles listed on the NYSE. That's certainly true, but eventually lower interest rates act as a stimulus for the economy, which is also bullish for the equity market. The late great Marty Zweig used to say "don't fight the Fed," meaning that a loose monetary policy eventually becomes rocket fuel for the stock market. Fighting such a trend is therefore futile.

Moreover, while the Common Stock A/D Line (in the middle window) has not yet touched a new all-time high, it has, unlike the S&P, broken above the August trading range. That's an encouraging sign as well.

Chart 2

Four Short-Term Indicators Turn Bullish

What I find interesting is the fact that the A/D line is at a new high, yet several short-term indicators are only just emerging from a short-term oversold condition. First, there is my Dow Diffusion indicator, plotted in Chart 3. This indicator monitors the percentage of Dow stocks in a positive trend. When it falls to an oversold reading and reverses to the upside, the green arrows show that this is usually followed by a rally of some kind. Not all of these signals work, of course, as you can see from the July 2015 signal, which has been flagged by the red dashed arrow. Also, we can never know the magnitude and duration of any forthcoming advance. Nevertheless, based on the four previous signals, the latest buy signal ought to provide sufficient liftoff, enabling the DJIA to reach new all-time highs.

Chart 3

Chart 4 features what I call the "Bottom Fisher," which you can read about here. This indicator gets its name from the fact that it only calls bottoms, not tops. When the indicator reverses from an oversold condition and crosses above its MA, it means that a growing number of Dow stocks are experiencing a short-term KST buy signal. It's not perfect, as you can see from its failure to trigger a rally in November of last year. Moreover, it was also a little premature in the spring of 2018. However, it usually gives us a timely signal that the market is trying to base out.

Chart 4

The third indicator, shown in Chart 5, is a 10-day ROC of the iBoxx High Yield Bond/iShares 7-10-year Trust (_HYG_TLT). Overbought indications signal that bond investors are confident, whereas oversold readings reflect pessimism. The solid vertical lines tell us when an oversold reversal was followed by an equity market rally. The dashed lines draw our attention to their failures. Another buy signal developed at the end of August, which came from the lowest reading since the summer of 2011.

Chart 5

Finally, Chart 6 tells us that the daily KST has gone bullish by crossing above its MA from an oversold condition. Once again, the solid arrows indicate successful signals, while the dashed ones indicate recent failures.

Chart 6

Stocks Could Be Breaking Against Gold

Chart 7 monitors the ratio between stocks and gold. The ratio has recently broken down from a head-and-shoulders top, arguing in favor of stocks underperforming the price of the yellow metal. A small retracement move has taken place, but, with both KSTs in a negative mode, it looks like a done deal.

Chart 7

On the other hand, Chart 8 shows this relationship in greater perspective, where we can see that it has fallen to long-term support (as flagged by the small red and green arrows) in the area of the extended thick green breakout trend line. Using the benefit of hindsight, the green-shaded areas represent periods when the equity market outperformed the price of gold. The white areas, by default, indicate periods when the ratio was declining. Stock performance on an absolute basis was mixed during these white areas. Sometimes the market rallied (as flagged by the green arrows), while other times it fell. What we can say is that if equities are vulnerable to a primary bear market, then it's likely to happen when they are underperforming gold. The ratio topped out last year and has been zig-zagging down ever since. As the ratio's KST is in a gentle decline, we are tentatively classifying it as bearish. The probabilities would greatly increase should it violate that thick green extended breakout trend line. A declining ratio is not necessarily bearish for equities in their own right, but it certainly provides a headwind.

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 Groupof Walnut Creek or its affiliates.