Several Intermarket Relationships Precariously Positioned for Stocks
Chart 1 compares the S&P Composite with the NYSE A/D Line and its Common Stock counterpart. These, of course, are not intermarket relationships, but the chart does show that some near-term weakness would violate their bull market trendlines. Violating a trendline is not necessarily the end of the world, as such penetrations are often followed by a trading range and can even be false. However, the point I am trying to make is that both series are precariously balanced, and this potential vulnerability is also being matched by several intermarket relationships reflecting underlying swings in confidence.
I want to stress that none are yet fully bearish, but could be tipped in that direction with relative ease.
The second window in Chart 2 features the ratio between the S&P Composite and the SPDR Consumer Staples ($SPX/XLP). When it is rising, it shows that the more speculative $SPX is outperforming the defensive XLP, thereby reflecting growing confidence and vice versa. The bottom window features the long-term KST for this relationship. The pink shadings show when it is in a falling trend. A declining KST does not tell us that the $SPX itself will decline, as there are plenty of periods when a bearish KST is associated with an advance in the Index; however, it does warn us that the market is at its most vulnerable when the KST is in a declining trend.
Right now, this momentum indicator is in a positive mode, but is not that far from a negative EMA crossover. It's also worth noting the ratio itself is very close to its green resistance trendline and only slightly above its red secondary bull market trendline. Nothing has broken yet, but things are starting to look shaky.
Another confidence relationship is obtained from the ratio between technology and consumer staples (XLK/XLP). In this instance, KST sell signals have been flagged by the red arrows. All were followed by important declines in the Index, with the exception of the weak 2004 signal.
The last several weeks have caused this momentum indicator to drop marginally below its EMA for the seventh potential sell signal since the beginning of the century. Once again, the technical picture is still bullish, but looking a bit vulnerable.
When stocks outperform gold, it also tends to be bullish for equities in an absolute sense and vice versa. I say "tends" because there have been exceptions. Chart 4 communicates this relationship in momentum format. When the KST is rising, it indicates stocks are in the driver's seat and traders are downplaying risks of inflation and geopolitical uncertainty. When in a declining phase, these fears come to the forefront, as market participants become more risk averse. The arrows approximate KST peaks.
Sometimes, as in 1986 and 2019, a rally precedes weakness in the inflation-adjusted S&P Index. At other times, the signal completely fails, as was the case in 1982 and 2005. By and large, though, the sell signals are usually valid.
The Stock/Gold KST started to firm up in the middle of last year, but has since reversed and experienced a negative MA crossover. It's not decisive enough to come to an outright bearish conclusion, as the actual ratio is currently rangebound (Chart 5), but definitely should be closely monitored once that short-term KST reverses to the downside.
Chart 6 extends this approach to a global one by comparing the Dow Jones World Index to an international credit spread, in the form of the International High Yield to the iShares International Treasury (_HYXU/_BWX). A rising ratio means that investors are growing in confidence, as they prefer the higher yield from the _HYXU to that from the lower but safer treasuries included in the _BWX portfolio. The pink shading reflects periods when the long-term KST of the ratio is in a declining mode. Usually, this is negative for the ratio itself. However, it is not necessarily negative for the $DJW, but, if a bear market is going to evolve, it invariably occurs when long-term momentum has peaked and is selling off.
We need to watch for two things currently. First would be a more decisive drop in the KST. Second, and arguably more important, would be a violation of the ratio's secondary bull market up trendline and 200-day MA, which it is currently very close to. Please remember you can update this or any other chart in this article simply by clicking on it as new data populates.
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.
