Health of the Market
The charts will be updated by
every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or go to
Charlottesville's The Center Investors' Forum.
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The S&P 500 hit an all-time high again on Friday 1/17 as did the Nasdaq and Dow Jones Industrial Index. The
indicators for the equity market show an up
market within a bull cycle in a bull
trend and in a bull market. (see definitions on Longer
Term page). The criteria for an up market is now 6 of 6.
The S&P 500 index closed +1.97% for
the week. The Nasdaq index was +2.29%. The small caps were +2.54%. The market is very overbought. It can stay that way, as it has been, in a very strong market. However, an exponential rise cannot be sustained forever.
86.0% of S&P
500 stocks were above their 200-day exponential moving averages, up from 82.6% the week before. 87.0% of these stocks were
above their 50-day EMAs, up from 75.8% the week before. 75.3% of
Nasdaq stocks were above their 50-day EMA, up from 66.1% the week
A Health Buy Alert
occurred on Wednesday 10/23 (see chart below). This is based
on small-cap action. A VIX Buy Alert, based on
large-cap action, occurred on Friday 12/13 (see Status page).
The percent moves by some primary
funds (based on Friday's close) are shown ranked by their 5-day gain.
(Chart from FundBuster.com.)
A measure to
determine if the price is too high relative to the underlying
earnings is the Shiller price to earning ratio. This is the current
price divided by the 10-year average of "real" (inflation-adjusted)
earnings. This ratio corresponds quite well to the peaks of price
as shown by charts on this site. [NC]
John Murphy of StockCharts.com asks "Why do
look at charts? - They provide the most up-do-date information on
state of the stock market. They may also be telling us something about
the fundamental reports we won't be getting until early next year.
Charts track forward-looking markets, while fundamental data is
backward looking. It's always safer to look out of the front window of
your car while driving to see where you're going. Not the back window
that shows you where you've already been."
A chart from 1870 that shows the
relationship between the market and its long-term regression line can be seen here. It is way
above the line, which means it may at some time revert back to that
A chart showing the relationship
between the stock and bond markets is on the Market Cycles
page. The stock market is favored over the bond market. The
charts for the fourth year
of the presidential cycle are shown on the Cycles page. January
is typically a good month in the fourth year, and good in general -- after a fairy flat start.
The Power Zone,
the favorable time of the year, began
with the Health Buy Alert
that occurred Wednesday 10/23. It typically starts sometime in October
ends sometime in May. See the Market Cycles page for more. A Bull Cycle began with the signal on 2/15/2019. The
long-term BullHeal System
went to a buy on
The driving force between currencies
is the relationship between global interest rates. The 10-Year Treasury
yield remains higher than other developed-country yields. The
rising dollar has a negative influence on the U.S. market, especially
large cap multinationals as business overseas is more expensive.
late March 2018, with a few dips, the dollar ($USD) increased in value
with respect to a basket of other currencies. The 10-year Treasury rate
($TNX /10) rose to a peak on 10/5/2018 and again on 11/8 closing at
times. Now it has dropped significantly as the dollar gets stronger.
The 10-year Treasury rate and the dollar are shown in a 6-year
chart with weekly closing prices.
Ed Yardeni in the 2/9/19 Barron's
stated that, based on his 40 years of experience, he has never found
that supply-versus-demand analysis helped much in forecasting bond
yields. It's always been about actual inflation, expected
inflation, and how the Fed was likely to respond to both.
10-year Treasury rate dipped below the 3-month T bill rate for six days
at the end of April. It is inverted again as shown on the Income
dropped below the 1-month T bill rate during the week ending 7/26.
Also shown is the CRB Commodities
Index, which is a measure of inflation. This index is an unweighted
geometric average of prices across 17 commodities including energy,
grains, industrials, livestock, precious metals, and agriculturals. A
rising dollar hurts commodity prices.
[NC] The international bond market is provided
by the WSJ. See the Income tab for a chart of U.S.
stock markets in other countries are quite well correlated to
the U.S. market. To participate in these markets, the U.S. dollar
can be hedged out. Click to check out the country hedged ETFs and the un-hedged ETFs. Note that BSE SENSEX is an
India index, CAC 40 is France, FTSE 100 is a UK index, Nikkei 225 is
Japan, Hang Seng is Hong Kong, DAXK is Germany, and Shanghai is, of
Sector investing via
exchange traded funds (ETFs) is popular. The traders rotate
between sectors. To see how some popular sector ETFs are
doing, click here for the Candle Glance of two-month
charts. The charts include the StockCharts
Technical Ranking (SCTR). The sector ETFs used in the Candle Glance
The theory is that if small-cap stocks do
better than the large-caps, it indicates that the traders are
willing to take on more risk and the market will go up. The chart shows
the relative strength of the Russell 2000 IWM with respect
to the S&P 500 SPY. The 10/30-day EMA crossovers are marked by
a pole. The U.S. Dollar is also shown. Large-cap companies are more sensitive to the dollar as a large percentage of sales are made in other countries.
[NC] The S&P 500 index is shown with its Bollinger
Bands below. The
bands are two standard deviations above & below a 20-day simple
moving average. When the price goes above or
near the upper Bollinger Band a downswing in price
is likely as the market is overbought. Similarly, when the
price goes below the lower band, the market is oversold, and an
upswing is likely.
S&P 500 large-cap index made a new all-time high on Friday
1/17. It is overbought as it has been, indicating a very strong market.
Now it is above the Bollinger Band, and that is an extreme.
Russell 2000 small-cap index (shown by IWM) hit an all-time high of 170
August 31, 2018, and is now only 0.55% below that. The recovery from
the bear-market down swing that followed went into a nine-month
channel, which was
strong resistance to a move higher. The index (ETF) broke
this resistance level and hit a 52-week high last Friday.
technology-heavy Nasdaq composite index made a new all-time high on Friday 1/17. It is upf 12.8% from the breakout of 11/1/2019. The move is at an extreme now as it is above the Bollinger Band.
[NC] Below is the Russell 2000 small-cap
index that tends to lead the overall market both up and down -- as the
small-cap stocks are generally more risky than large cap stocks. This
index is shown with high-low-close bars. It's 50 and 200-day simple
moving averages are included. The 200-day moving average often
acts as support or resistance to price movement as many traders
[NC] The Health Alert is based on the
momentum of the small-cap Russell 2000, the Nasdaq
breadth data, and the Nasdaq 52-week new highs and new lows.
The thresholds are described below. The green buy and
red sell 'alert' poles on the chart show when these
alerts have occurred.
[NC] A Health Buy Alert
occurred on Wednesday 10/23 when the NewHigh-NewLow index 3-day MA went
positive for three days, with
the other indicators showing agreement. The
small cap stock ETF is used here as small-caps have tended to
lead the market both down and up.
[NC] The second pane is the Relative Strength Indicator
(RSI) for the Russell index, a measure of momentum of
the market. This is the relative strength of the Russell 2000 itself --
it's not relative to any other index. Above 50 shows positive momentum
over the last 21 days. The latest plot can be seen by clicking here. The
green arrows indicate a positive change in momentum as the RSI crosses
above 50; red arrows indicate downward momentum when the RSI
crosses 49. The threshold of 49 is used to give a more definite
indication of the start of a down-swing.
[NC] The third pane
has two plots. The first is the Nasdaq
McClellan Summation Index, $NASI, (red) and it's 5-day exponential
MA (blue). This is a running sum of the difference of two moving
averages of the number of advancing issues minus the
number of declining issues. A 19-day and a 39-day
exponential moving average (EMA) are used. This shows whether a market
move is broad based.
second plot in the third pane is
McClellan Oscillator, $NAMO. When it is above zero, the Summation Index
is moving up. When below zero the index is moving down. The zero
crossovers give an indication that the trend has changed. A green arrow
indicates a positive zero crossing. In April and May there were many
oscillator crossovers as
the market was not decisive.
Alexander Elder in his book Trading
for a Living says that the 52-week New Highs
minus New Lows Index is "probably the best leading
indicator of the stock market". This display for the Nasdaq market shows the this index
in pink. The 3-day MA of the NH-NL index is shown in blue. A green
arrow is placed if the 3-day MA of the NH-NL index goes positive for
three consecutive days, or a red arrow is placed if the MA goes
negative for three consecutive days. To see a
summation of the NH-NL numbers, click here. When a green
buy arrow is put on the price chart, it indicates a Health
'buy alert', if the other indicators concur. The red sell arrows
here are not used in the determination to place a sell pole on
the price chart, due to the lag.
[NC] The Health Alert acts as a
confirmation and does not do well as a stand-alone signal for
buying and selling. After a long trend, it works well to signal the end
of the trend.
chart gives an overview of the
situation. The market had done well since the termination of the QE3
Fed bond buying, until the last half of 2015. The 10-year
Treasury rates moved down as the Fed raised the over-night Federal
Funds Rate in December 2015. There have been a total of nine 1/4 point
rate increases, the last one in December of 2018. The Fed cut the rate
at its July 2019 meeting, and two more cuts followed that. A chart of various Treasury yields
since 1962 are shown on the Income tab.
[NC] The Fed had been continuously
reducing their inventory of bonds, which is quantitative tightening
(not shown on chart), but terminated this. On October 9, 2019, the
Federal Reserve announced a resumption of quantitative easing (QE). Fed
Chairman Jerome Powell went to great lengths to make sure he
characterized the new operation as something different than QE. Like QE
1, 2, and 3, this new action involves a series of large asset purchases
of Treasury securities conducted by the Fed. The action is designed to
pump liquidity and reserves into the banking system.
The source of the
charts is located on the upper right of the chart. This page
is for amusement only, and should not be taken as advice to buy or sell