Safe Havens Look Like They are Reversing; Stock Market Still Searching for a Low

• Bonds and Yen Starting to Lose Safety Appeal?
• One Indicator That Has Returned to Financial Crisis Levels

Bonds and Yen Starting to Lose Safety Appeal?

The stock market has got the majority of the attention in the last couple of weeks because of its exceptional volatility. On the other hand, investors have also been putting their money into safe havens, such as good-quality bonds and another traditional safe haven, the Japanese yen. Both look as if they have exhausted their upside potential, at least for the short-term. Could that be a sign that fear may be peaking?

Chart 1 features the iShares 7-10-year treasury ETF, the IEF. On Monday, it formed an exhaustion bar on heavy volume. The high level of activity is quite bearish, because it indicates that a lot of traders have been trapped at higher prices. The exhaustion part refers to the fact that prices opened with a huge gap to the upside and, by the end of the session, closed on their lows. Coming into the bar, it was the buyers who were very much in control. By the end of the session, though, things had reversed, as sellers had the upper hand. This is a short-term pattern and is not expected to have an effect for more than 5-10 days. However, with the Bollinger Bandwidth indicator is at a level not surpassed since the financial crisis, the implication being that something extraordinary has just happened. Whilst the exhaustion day in and of itself does not signal an end to the bull market in bonds, other indicators suggest that an important reversal may be underway.

Chart 1

The yen has also experienced a one-day balance change, here in the form of a doji. A doji is a candlestick where the open and close are extremely close to each other or are identical. Such action reflects indecision, or the kind of characteristic you don't want to see in a strong market. The long upper shadow adds to the negativity, as it means both the open and close developed well within the lower part of the range. The bearish nature of the  pattern was confirmed on the next day as prices gapped to the downside.

Chart 2

Chart 3 shows some longer-term perspective, as the 10-day ROC can be seen to have reached an extreme overbought reading, seen only once before in the 10-year history of the chart. Three oversold reversals were all followed by an important reversal in trend. Note also that the yen has reached resistance in the form of the two converging trendlines. That, plus the overbought reading, will make it difficult for the current rally to extend much beyond the upper gap in Chart 2.

However, if it does manage to clear those trendlines, the extreme reading in the ROC would mean that the yen is experiencing the early stage of a vibrant primary bull market.

Chart 3

One Indicator That Has Returned to Financial Crisis Levels

When a smoothed oscillator is below zero and falling but then subsequently reverses to the upside, that's often a sign of a bottom in that specific security. Some years back, I developed an indicator that to monitored transitions of this nature for a universe of key stocks. By doing so, I hoped that it would track important lows in the market itself. I called it the "Bottom Fisher" because that's all it was designed to do - pick bottoms. It can be plotted in StockCharts with the symbol !PRBFISH. Overlaying a 10-day MA on the !PRBFISH returns a signal line. These signals are generated when the !PRBFISH falls below its oversold green line. Reversals that take place from such a deeply oversold level tend to be reliable, so it's not always necessary to wait for an actual MA crossover.

Chart 4 shows that the indicator has already fallen to the "bottom fishing" area. The green vertical lines indicate that previous reversals have typically been followed by a nice rally. The timing hasn't always been perfect, as it has occasionally gone bullish at the top of a minor rally, which we can see in 2015 and 2016. In a bull market, that hasn't mattered that much, as a rising tide lifts all boats, so to speak.

Chart 4

Chart 5 shows that, during the course of the 2007-2009 bear market, we did see a couple of signals that were followed by a weak rally. They were clearly not what we might term successful. The indicator is still in a state of decline. When it reverses, it will suggest that prices have stopped going down. That could mean an immediate move to the upside. Alternatively, if it follows the 2015 and 2016 scenario, the market may be in need of some range-bound action prior to a more meaningful rally.

Chart 5

That's important because the S&P is already well below its 12-month MA, at around 3,000. The longer its stays in this position, the greater will be the odds that a bear market began in February. Here's to the Bottom Fisher generating a rally of sufficient magnitude that will trigger a positive 12-month MA crossover. Don't forget, you can update the Bottom Fisher by clicking on either of the charts.

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.