These Five Long-Term Indicators Are Signaling a Bull Market
I have been negative on the market for some time. I believe that it's a wiser policy to wait for the long-term indicators to turn bullish, rather than trying to capture every twist and turn of those bear market rallies, pregnant as they are, with false breakouts and other deceptive ploys. In that vein, January saw enough primary trend indicators turn bullish to conclude that we have a bull market on our hands. I'm not looking for a huge run, because a lot of my secular or very long-term indicators are either overextended or pointing south, but, for now, things are looking a lot more constructive.
The 1978 Lesson
The current setup reminds me very much of the spring of 1978, when the Fed raised the discount rate, as part of a chain of multiple. The market responded not by breaking down, but by completing a small base on record volume and exploding higher into the fall. There are many differences between now and then, of course, but the key takeaway from that period is to believe what the market is trying to tell you, rather than focusing on the future course of interest rates if there is a discrepancy between them.
Five Bullish Charts
A favorite indicator amongst technicians is the Coppock Curve. It is beloved because it has been consistently correct in calling major turns in US equities since the 1930s. The plotted series in Chart 1 is a 10-month weighted moving average, calculated from the sum of an 11- and 14-month ROC. Coppock used 11 and 14 periods because he was told by a priest they represented the average mourning period for relatives grieving the loss of a loved one. Coppock theorized that the recovery period for stock market losses would follow a similar time frame.
Officially, it moves into bullish territory when its slope turns positive, after having previously dropped below zero. The vertical lines in the chart approximate such turning points for the NYSE Composite since 1974. February's number will not be known until the end of the month, but that does not really matter, because the January plot ticked up slightly, thereby indicating another buy signal is already in the bag.
Another approach is to calculate a PPO using the 6- and 15-month parameters. It's featured in Chart 2 along with the S&P Composite. In this instance, the vertical lines indicate when the indicator drops below the blue horizontal dashed line and then reverses to the upside. There have been 24 instances since 1949, only two of which could be regarded as a failure. It looks very much as if this accurate indicator has once again bottomed.
Chart 3 features the ICE BofA US High Yield Option Adjusted Spread Index ($$HYIOAS), which reflects the premium being paid as insurance against a high yield debt default. The higher the Index, the more elevated the cost of this insurance and the greater the implied fear of market participants. The arrows flag previous "fear" peaks in the $$HYIOAS. They have, with the exception of the early 2001 reversal, all been associated with an important market bottom. The indicator peaked out last summer and has been zig-zagging downwards ever since. It has now crossed below its 12-month MA, which suggests that this bullish decline is likely to extend.
Chart 4 looks at the market through the lens of net new 52-week high data. The indicator is derived by dividing the number of new highs by the number of new highs plus new lows. The actual plot in Chart 4 is a 65-week EMA of the weekly ratio. Major buy signals are triggered when the oscillator drops below the green-dashed horizontal line and then crosses back above it. It has only failed once since the mid-1960's, which occurred at the 2000 peak. In that instance, the broad market declined between 1998-2000, but the S&P moved to new highs because of its heavy weighting in tech stocks. Consequently, the 1998-2000 period looked good on the surface, but in reality was broadly weaker. Alternatively, the 2000-2001 period was tolerable for the broad list, but not so positive for the S&P.
Fast forward to the current situation and we see that another Net New High buy signal has just been triggered, as the oscillator is slightly above that green line again.
Finally, stocks are a leading indicator of the economy, while commodities are more of a coincident one. It is not surprising, therefore, that, when the ratio between them reverses to the upside, it often signals a new bull market. In this respect, Chart 5 compares the S&P Composite to a long-term KST of the Stock/Commodity ratio. This series has just begun to rally above its 9-month MA, thereby triggering its seventeenth buy signal since the 1960s.
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.
