The Indicators are Mixed. What Does this Contradiction Mean for the Market?

This morning, an interesting chart of the S&P Composite authored by Ed Clissold of NDR Research crossed my desk. It can be seen at @NDR_Research. It is a composite of 3 historic cycles: 1-year, 4-year (post-election) and 10-year decennial cycle with an average of years ending in a 1. Also included in the chart was this year's overlay, which has so far tracked the idealized cycle reasonably well. What caught my eye was the fact that the composite called for a peak in late July/early August, to be followed by a sharp drop into October. Ed was quick to point out that it isnota predictive model. It is really meant to give one a sense of direction more than magnitude.

Even though my experience tells me that these kinds of relationships work well until they don't, the chart did send me to the StockCharts workbench for an examination of the indicators, in order to see if there was any justification for a drop into October. My findings, as suggested by the title of this article, were quite mixed, as some were bearish, while others were projecting further upside potential.

Bearish Indicators

One negative characteristic that had been lacking during the post-March 2020 rally was been the setting up of a negative divergence between the S&P Composite and the NYSE A/D Line. That was resolved in the early summer, as neither NYSE A/D or its common stock counterpart have confirmed new highs in the Index. This discrepancy could certainly be cleared up with relatively little effort, but the fact that both series have broken important up trendlines and completed tops makes that task a lot more difficult over the near-term.

Weakness is even more pronounced in the volume department, as the 20-day MA of NYSE downside volume has been trading above that for upside activity since the beginning of July. The pink shadings tell us that this type of condition offers potential vulnerability for stocks.

The percentage of NYSE stocks above their 200-day MAs recently crossed below the 80% level. The solid red arrows indicate that this has often been a threshold point to be later followed by some kind of decline. The one dashed arrow in 2013 reminds us that, though unlikely, it is possible for the Index to barrel ahead even as the number of stocks in positive trends continues to drop. In other words, the Index may rally, but the shrinking number of stocks trading above their 200-day MAs means that the market is getting progressively more selective and, therefore, more of a challenge to turn in a trading profit.

Chart 4 plots the 10-day MA of the VIX inversely. That way, it corresponds to swings in the S&P Composite. Occasionally, it is possible to construct trendlines. When those lines are violated and this is confirmed by a trendline break in the S&P, prices typically reverse to the downside. Two previous setups of this nature developed in 2010 and 2018. A third seems to be developing currently, as the (inverse) VIX recently dropped below its bull market trendline. What we have not yet seen is confirmation by the S&P Composite in the form of a decisive break below its secondary bull market up trendline at, say 4,300.

Bullish Indicators

The KST for the CBOE total option put/call ratio is featured in the lower window of Chart 5. A rising momentum indicator means that investors are getting progressively more negative as they place more bets on the bearish puts over the bullish calls. The green arrows show that peaks in the KST, which develop at or above the green horizontal line, are bullish for equities, as they reflects a shift in investor sentiment away from puts. The indicator peaked last week and looks set to head (bullishly) lower.

An oscillator constructed from my Global A/D Line is featured in Chart 6. The arrows indicate when the indicator drops below zero and then crosses above its 10-day MA. Typically, the MSCI World Stock ETF (ACWI) experiences a short-term rally. About 25% of the time, that does not happen. These instances have been flagged by the red dashed arrows. In the last couple of sessions, the indicator has again begun to reverse, which suggests that prices will continue to move higher.

Finally, the NYSE McClellan Volume Summation Index has fallen back to its oversold zone. However, it is not yet bullish because it remains below its 15-day MA. It's certainly a development worth monitoring, because the vertical lines, which flag previous oversold reversals, show that such action is typically followed by a very worthwhile advance.

Something Worth Monitoring

I am not going to break it down and say there is one indicator that will be the arbiter of the current contradictions. However, Chart 8 does seem to capture the mixed nature of the technical picture. It features a ratio between the VIX and the yield on the 10-year bond. When rising, the ratio reflects investor's growing level of fear because it implies that the VIX is rising and the yield falling.

Since 2009, there have been three instances where up trendlines in the ratio have been violated, meaning the trend of improving confidence is likely to extend. All were confirmed by the price breaking to the upside and followed by rising prices. Right now, this series is caught between two converging trendlines.  Both have been touched on numerous occasions and are fairly lengthy. That could well mean that the ultimate breakout will signal the direction of the next important market move. Please remember that this chart is live, which means that, as new data is available, it can be updated with a simple click.

Conclusion

The long-term indicators continue to point north, so we should assume that the contradictory evidence laid out above will be resolved in a positive way. However, when the evidence is narrowly mixed, so are the probabilities, which means that a trimmed-back trading position is not a bad idea until the smoke clears.

Finally, it recently came to my attention (thanks Grayson) that StockCharts carries 150 cryptocurrencies. If you are interested, please go hereto see the list.

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.