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Martin Pring's InterMarket Review - U.S. Stock Market (Mar 2013)

The primary trend for equities remains positive as our Stock Barometer has now moved to a 100% reading. The Total Return Model, one of its components, is shown in Chart 14. This series measures the total return of stocks against cash and goes bearish when it crosses below zero. Currently it is in a positive mode but it would not take much downside action to push it into negative territory, and there lies the rub. That's because the market is in a vulnerable intermediate position and it's possible that if the implied correction were to get out of hand, it is not inconceivable that the primary trend could reverse to the downside. In that respect, let's not forget that the rally dating from 2009 is long in the tooth for a countersecular primary trend advance, whether measured from the aspect of either magnitude or duration.

The counter-argument to the magnitude/duration reality is that the period dating from 2009 really encompasses two mini cycles. That would mean that the 20% equity decline represented a mini-bear market; the 2011-mid-2012 economic slowed down the event it was discounting. Under that scenario, the current equity cycle began in October 2012 and the economy turned around last summer; nine months or so later. By that measure, the bull market is 16-months old as we move into the month of March.

The lower panel of Chart 15 shows that the S&P, when deflated by M2, remains below its 96-month MA and secular down trendline. In the past, trendline violations and a move above the MA have combined to signal a secular trend reversal. Note also that the CPI defl ated S&P, in the upper panel, is right at its secular down trendline. If these two series break to the upside, it would not necessarily signal the start of a new secular uptrend, but it would certainly argue for a robust extension of the current primary trend. Precedent for such action developed in 1945 by the small brown arrow, which flagged an upward penetration of the dashed secular down trendline.

The critical nature of the current situation can also be seen through the stock/commodity ratio in Chart 16. First, the nominal S&P is also just below a key trendline. Second, the KST for the ratio is still bullish, but has recently flattened out; at a time when the ratio itself is right at its secular down rendline. Weekly data in Chart 17 shows the ratio to be marginally above resistance in the form of a horizontal trendline. The short-term KST has gone bullish, indicating a more decisive upside breakout is likely. However, if that does not happen and it slips, only slightly the finely balanced intermediate KST will fail to go bullish, thereby replicating a similar situation last seen in 2006.

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