The Correction May Not Be as Bad as You Think
The bad news is that a correction is underway and that many indicators and market averages have started to break through key support. The good news is that, internally, corrective activity has been underway for several months. Provided the bull market is still in existence (and there are few grounds at this point for suspecting otherwise), we are probably near the end of this corrective process, at least in terms of time. Ironically, the steeper and quicker the price loss, the more likely it's a contra-trend price move. That's not to ignore the fact that speculation is rampant and many levels of valuation are at extremes. That was also true of the last few years of the 1982-2000 bull market. However, until long-term measures of momentum and sentiment start to reverse, I am nervously assuming that the main trend is up and what we are witnessing will turn out to be a buying rather than a selling opportunity.
One Long-Term Indicator that Has Just Turned Bullish
Chart 1 offers an example of why the market is ultimately likely to move higher. It features the University of Michigan Consumer Sentiment. The raw data correlate in a rough way with swings in the S&P. However, the month-to-month volatility of this data does not lend it to moving average crossovers and other traditional trend identification techniques. When it is expressed in momentum format, though, useful bullish signals for the market are generated from KST reversals. They have consistently called important rallies since the 1970s, as indicated by the green arrows. There was one notable exception, which took place in 2001. It happened as the economy emerged from a recession, but the market was still focusing on the unwinding of the tech bubble.
The KSTwent bullish a couple of months ago and remains at a subdued level. That suggests consumer confidence and the market will eventually move higher.
Market Breaking Support
Chart 2 shows that a number of major averages are either at or have decisively penetrated key trendlines.
Chart 3 indicates that both the NYSE Common Stock and regular A/D Lines have violated important up trendlines and completed small tops. That action in itself argues in favor of further price erosion before the correction has run its course. However, it is also important to note that none of these series have yet come close to challenging their 200-day MAs, an event that could represent the first sign of a bear market.
Correction is Quite Mature
Looking at the S&P Composite gives the impression that the decline is less than a week old. However, it's been going on since February or March, depending on which average or internal indicator being monitored. Chart 4 offers a great example, as it pits the NYSE Composite against the percentage of stocks above their 50-day moving averages. That indicator peaked way back in June of last year. It has since diverged three times with the Index itself. I presented this chart earlier in the year to demonstrate the three double trendline setups that had taken place since 2018. A fourth seemed to be developing at the time, hence the question mark. It took some sideways action in the Index combined with a June/July free fall in the oscillator to finally confirm this setup.
I never like to see a market move sideways whilst a substantial number of its components are deteriorating. That could certainly lead to some serious trouble. However, the good news is that the indicator is not that far from its green oversold line at 35. The arrows show that reversals from such a level have usually been followed by a worthwhile advance.
The 10-day MA of the NYSE Common Stock McClellan Volume Oscillator is even more oversold. The green arrows tell us that most times reversals from such a level are good bull market buying opportunities. It also offers an example of my worst nightmare at point X. In that situation, the indicator triggered a buy signal by reversing from an oversold condition, but the rally was sub-par and subsequently followed by a 35% decline. Once the initial low was taken out at X, it warned that the technical structure was unexpectedly weak. Note that we got a milder version of this red flag setup at point Y. Even though it seems likely that the bull market is alive and well, if that kind of action is spotted again, it will warn us that it probably is not.
Chart 6 presents an intermediate version of my Bottom Fisher, which you can read about here. This intermediate format is a user-defined index (UDI), so it cannot be updated. The arrows show when oversold reversals take place. Usually, this is followed by a worthwhile rally, as oversold conditions reflect a washed-out market. The indicator is still in a declining mode, so a signal has not yet been given. However, it seems likely that it soon will as it is already below the March 2020 low.
Conclusion
The long-term indicators monitoring the primary trend, whilst overextended, are still bullish. Since many averages have broken important support, the decline has probably got further to run. However, as the late Richard Russell used to say, and here I paraphrase, "surprises usually develop in the direction of the main trend." With "Dow Watch'' boxes regularly appearing on cable news today, the big surprise could be a smaller correction than expected because most of it has already taken place..... internally.
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.
