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.
Note: If the latest date does not show, try
reloading the page.
It has been a while since a massive stock market rally has
frightened us this much -- stated Ben Levisohn in Barron's.
The indicators for the equity market show a up
market within a bull cycle in a bear
trend and in a bull market. (see definitions on Longer
The S&P 500 is -2.0% from its all-time high. It is +15.2%
year-to-date; and +0.47% last week. 62.6% of S&P
500 stocks were above their 200-day exponential moving averages,
down from 63.2% the week before. 64.2% of these stocks were
above their 50-day EMAs, up from 61.0% the week before. Only 34.9% of
Nasdaq stocks were above their 50-day EMA, up from 31.5% the week
The economy seems to be slowing
slightly as indicated by the
weak jobs report on Friday 6/7. "May saw US manufacturers endure
toughest month in nearly ten years, with the headline PMI down to its
lowest since the height of the global financial crisis. New orders are
falling at a rate not seen since 2009, causing increasing numbers of
firms to cut production and employment." as stated by Chris Williamson,
Chief Business Economist at IHS Markit.
John Murphy of StockCharts.com asks "Why do we
look at charts? - They provide the most up-do-date information on the
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 Health Sell Alert occurred on Monday
5/13 (see chart below). A solid up day will change this. This is based
on small-cap action. A VIX Sell Alert, based on
large-cap action, occurred on Tuesday 5/7 (see Status page).
This is likely to change on Monday 6/17.
[NC] 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] A new chart showing the relationship
between the stock and bond markets is on the Market Cycles
page. The bond market is favored. The market in the typical June is fairly good. The
charts for the third year
of the presidential cycle compared to all years show that the third
year of a rational president is the best year of the four year cycle.
The Power Zone,
the favorable time of the year, ended
with the Health Sell Alert
that occurred Monday 5/13. It typically starts sometime in October and
ends sometime in May. See the Market Cycles page for more. A Bull Cycle began with the signal on 2/15/2019, and it is close to
indicating that a bear cycle has begun. The long-term BullHeal System went to a sell on 5/13/2019.
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 ($USD) increased in value
with respect to a basket of other currencies. The 10-year Treasury rate
rose to a peak on 10/5/2018 and again on 11/8 closing at 3.23% both
times. Now it has dropped significantly to an inversion with respect to
the 3-month Treasury bill. The 10-year Treasury rate ($TNX /10) and
$USD are shown in a 5-year chart with weekly closing prices.
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 will hurt commodity prices.
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
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.
[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
[NC] 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. Note that when the
dollar goes up, small cap stocks generally do better than large cap
stocks. This dollar relationship works in bull markets, but not since
late September 2018.
[NC] The S&P 500 exchange-traded
fund closing price 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, an upswing is likely.
S&P 500 large-cap index dropped from the May all-time high to
close below its 200-day moving average on Friday 5/31. The rally from
those lows is a correction of the downswing fueled by
the expectation that the Fed will cut the Federal Funds Rate in July.
The rally pushed above the resistance shown and is now above that level
and the 50-day MA, which are both acting as support.
Russell 2000 small-cap index hit an all-time high on 8/31/18. A bear
market took over with a 27.3% drop from the high. The 28% surge from
the 12/24/2018 low is impressive as is the recent drop. The
support did hold. However, this index is below its 50 and
200-day MAs, and is likely heading further
technology-heavy Nasdaq composite index dropped -10.8% from its
high on April 29 and is now correcting. Friday only 34.9% of Nasdaq stocks
were above their
moving averages (up from 31.5% the Friday before). These
numbers are not encouraging and a further drop may occur as the tariffs
are having a depressing effect, especially on the technology industry.
[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 index, 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.
A Health Sell Alert
occurred on Monday 5/13 when the 21-day RSI dropped below 49. A buy
alert is close, depending on the RSI moving up from 48 to above
small cap stock index 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. As the trend changes, the red index will
cross the blue EMA and an arrow will be drawn.
[NC] The 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 earlier signal then that discussed above. It will be
used in the future. There are many oscillator crossovers recently as
the market has not been 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.
This 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. Now the Fed is being
"patient" about future rate hikes. The Fed has been continuously
reducing their inventory of bonds, which is quantitative tightening
(not shown on chart). The Fed indicated that this too may be adjusted
as time goes on. See more here. A chart of various Treasury yields
since 1962 are shown on the Income tab.
Mauldin, on 12/29/18,
stated "I find it just as plausible that the balance sheet reduction is
as responsible for the market volatility as the increased rates. If QE
made the markets go up, especially in concert with the ECB, the Bank of
England, and the Bank of Japan, then it’s no surprise if ending it
makes the markets fall."
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