Short-Term Indicators Argue for an Extension to the Recent Rally
Last week, I pointed out that the long-term KST for the ratio between stocks and bonds was close to a buy signal, and that all such signals in the last 30-years had been followed by substantial advances in equity prices (Chart 1). We still don't have a signal yet, nor can we until the end-of-month data is in. However, a lot of short-term indicators monitoring sentiment breadth and volume have started to turn, which suggests a firm market going into the year-end period and the increased likelihood of a signal.
First, Charts 2 and 3 show that the rally is being fully supported by the NYSE and my Global A/D Lines, both of which have rallied to new all-time highs. If we were looking for trouble, the A/D department would be one of the first places to look. Note that the Common stocks and Global A/D line do not include Monday's advance.
Another place to look for potential trouble would be in the new high/low department. Here, Chart 4 tells us that this latest post-August high in the NYA has been confirmed with an expansion of net new high data as well.
Transitioning to sentiment, the CBOE Options Put/Call Ratio ($CPC) or, more specifically, its daily short-term KST has gone bullish (see Chart 5). The green arrows point up periods when this momentum indicator has peaked from a position indicating pessimism at or above the horizontal green line. Typically, such action has been followed by a nice rally. We have already seen a spirited advance after the most recent signal, so it could be argued that the indicator has already fulfilled its potential. However, it remains in a (bullish) downtrend and has not yet reached the kind of level from which a reversal might signal a rally peak. As long as it continues to decline, this indicator should be classified as positive.
Moreover, Chart 6 shows that the number of bearish AAII Investors remains at a high level, although this shows up as a low number in the chart because the data have been plotted inversely to correspond with swings in the S&P itself. The green shadings flag previous periods of pessimism, when the indicator dropped below the horizontal green line. During the 2007-09 bear market, a large amount of pessimism was unable to trigger a rally, but during that whole period, the S&P traded below its 12-month MA. Currently, it is above it. These low readings, reflecting an unusually high number of bears, suggest to me that individual investors are currently climbing a wall of worry built on election and pandemic uncertainty, which is bullish.
Finally, in the sentiment department, Chart 7 shows that the inverted 10-day MA of the VIX has just started to edge through its 15-day counterpart, almost qualifying for another green arrow. It's also important to note that the indicator is currently trading around the level of the red horizontal line. Note that the two 2018 declines also bottomed at a similar reading. Point being, the VIX, like the AAII numbers, is indicating that the market has yet to climb that wall of worry so necessary for the achievement of a market peak.
My Bottom Fisherindicator (!PRBFISH) is an internal measure that effectively monitors individual Dow stocks emerging from oversold conditions. Once again, the arrows flag periods when it reverses from at or below the oversold zone. Last week, it reversed to the upside. This was not a full-fledged buy signal because the Bottom Fisher did not quite reach the oversold zone. However, it did sink to an unusually low reading and is likely to be followed by an advance.
Another measure of Dow breadth is our Dow Diffusion indicator in Chart 9. This one monitors Dow stocks in a positive trend. It recently triggered another buy signal and remains at a somewhat subdued reading, which suggests that the rally has much further to run.
That's also the impression one gets from our final two charts. First, the NYSE McClellan Volume Oscillator in Chart 10 has just started to reverse to the upside. There were a couple of false positives in late 2018. By and large, though, this indicator has been pretty spot-on.
Finally, Chart 11 features the NYSE stocks which have a favorable silver cross. A silver crossis a condition in which the 20-day EMA of a security is above its 50-day counterpart. When all of the listed NYSE stocks are in this position, the indicator in Chart 9 is at a high level and vice versa. In reality, it rarely moves above 80% or below 10%. Right now, the indicator is in a rising trend and trading at a relatively subdued 60%, all of which suggest higher prices. Note that the latest plot for the indicator does not include Monday's action.
Putting all these indicators together suggests that the market will continue to power its way higher.
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.
