Forget the Speculation and Uncertainty as these Short-Term Indicators are Bullish

A few weeks ago I wrote an article entitled "Only a Fool Tries to Call a Correction in a Bull Market, So Here Goes!" Okay, so we did get a 4% drop in the Dow over a seven day period, but hardly anything worth worrying about. It reiterated the thought that calling corrections in a strong bull market is not the greatest of ideas.

Today, things have turned around, and several short-term indicators have begun flashing the all-clear going into March. As I see it, the wall of worry, currently being climbed by equities, is epitomized by rampant speculation being experienced in peripheral areas, such as options IPOs and day trading chat rooms. Stratospheric levels are being experienced by virtually all measures of valuation, which certainly adds to the mix. I call it a wall of worry because market participants are generally aware of these phenomena, which makes them gun shy about buying stocks. The market though, in its wisdom, has brushed off this speculative uncertainty by bidding prices higher and higher.

Indeed, market participants have chosen to ignore quite a bit of bad news in the last couple of months. That news ranges from weaker economic numbers, such as initial claims, political problems such as impeachment, as well as the possibility that the pandemic could get worse thanks to the UK and South African mutations. All could have been used as an excuse to sell, but that did not happen. A market that chooses not respond to bad news is usually a very strong one. That's also a view currently being supported by a cadre of short-term technical indicators. Make no mistake, the kind of speculative activity that we are seeing now can only end in tears. However, as long as the Fed continues to provide the drinks, why not enjoy the party?

Market Breadth

Let's start with the NYSE A/D line. Whether we use the common stock version or the line constructed from all NYSE issues, Chart 1 demonstrates that everything is in gear on the upside, unlike the most recent peak in September of last year, where a two-month correction was preceded by a lengthy negative divergence.

A Smoothed 12-Day ROC

One very simple but effective indicator that works consistently well over many markets is a ten-day MA of a 12-day ROC. It's featured in Chart 2 for the Dow. The green vertical lines tell us when this indicator reverses to the upside from a position below or close to its equilibrium point. The two dashed-red lines remind us that this approach is not perfect. However, if you look to the right-hand side of the green lines, some form of short-term rally typically follows.

Late last week, we saw another upside reversal. This one, though, is a bit special. That's because the Dow itself recently experienced a whipsaw break below its post-March up trendline. Whipsaws are often followed by above-average moves in the opposite direction. In this case, that's an upward one, as those bearish traders who sold on the downside break are forced to get back on the right side of the market.

VIX Turning Bullish

Chart 3 shows the daily KST calculated from VIX data. The green-shaded areas point up when this momentum measurement of volatility is trading below zero. In virtually every instance, when market participants are playing down their fear in this way, prices rally. Right now, the indicator stands on the cusp of a negative zero crossover, so we cannot quite place it in the bullish camp.

Another approach utilizing the VIX, however, looks to be in great shape. It's featured in Chart 4. This time, I have calculated a 10-(black) and 15-(red) day MA and have plotted them inversely so that the indicator moves in more or less the same direction as the SPX. The green arrows show approximate periods when the 10-day series bottoms out from a position at or below the blue line and crosses its 15-day counterpart. This kind of action, with the notable exception of last February, has usually been followed by a nice rally. The numbers 1-3 represent special signals as the bottoming-out process is also accompanied with a trendline break. The latest plot shows another example of this MA/trendline combination, tentatively labelled "4?", so a nice rally should follow. Tom Bowley, in an excellent article which you can read here, tackles the VIX from a different perspective, but comes to a similar bullish conclusion.

The Pring Bottom Fisher

Another indicator that has just flashed a buy signal is my Bottom Fisher. This one, which you can read about here, essentially compares the number of Dow stocks with a declining KST below zero to those that are also below zero, but rising. It has been specifically designed to "fish" for bottoms rather that trying to identify tops.

Chart 5 compares the indicator to the SPX since 2016. The green arrows approximate the instances when the oscillator reverses to the upside from a position at or below the oversold green horizontal line. Except for two examples, flagged in red, all signals resulted in higher prices.

Finally, Chart 6 shows recent action in greater detail. Now we can see that the Bottom Fisher has just triggered a decisive buy signal. Based on its consistent track record, that's a bullish sign.

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.