Health of the Market  (6/15/2019)

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 Termpage). 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 before.

[NC]  The economy seems to be slowing slightly as indicated by the weak jobs report on Friday 6/7.  "May saw US manufacturers endure the 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.

[NC]  John Murphy of 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.

[NC]  Since 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.

[NC]  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. 

[NC]  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.

[NC]  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 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 page.

[NC]  The international bond market is provided by the WSJ. See the Income tab for a chart of U.S. Treasury yields.

[NC]  The 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 course, Shanghai.

[NC]  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 are these.

[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.

Cap vs USD

[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.

The 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.

[NC]  The 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 down.

The technology-heavy Nasdaq composite index dropped -10.8% from its all-time high on April 29 and is now correcting. Friday only 34.9% of Nasdaq stocks were above their 50-day 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.

Health Alert

[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 watch it.   

[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.

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 50.  The 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 the Nasdaq 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.

[NC]  Dr. 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.

Long-Term Overview

[NC]  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.

[NC]  John 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."

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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 anything.