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International Market by Martin Pring’s InterMarket Review (August 2013)

U.S. Stock Market

Our long-term indicators continue to indicate a favorable environment for equities. For example, the Stock Barometer remains at its maximum bullish reading of 100% and the KST for the ECRI Weekly Leading Economic Indicator continues to rise. Chart 10 shows that every major stock market decline has been associated with a peak in this momentum series. Sometimes a KST peak has represented a false negative, as flagged by the dashed arrows, or by an intermediate decline, such as those that developed in 2010 and 2011. However, history shows that as long as this economic momentum indicator is rising, serious trouble in the equity market is avoided.

That’s also true for our 120% Rule, which goes bullish when short-term interest rates fall below their 12-month MA (symbolic of easy money) and the S&P remains above its 12-month MA (shows that stocks are responding to that easy money). Such an environment has been flagged in Chart 11 by the green highlights and it is currently bullish. Incidentally, red highlights show when both conditions reverse and black when there is a conflict between them. At the moment, the S&P is comfortably above its moving average, which will be around 1540 at the end of August. Chart 18 shows that the commercial paper yield touched a cyclical low in July.

Two things we are watching closely for potential problems are the Coppock Raw Index and overhead resistance in general. The former is simply the Coppock Index (a smoothed long term momentum indicator) without its 10-month smoothing. In effect, it is simply the sum of an 11- and 14-month ROC. This returns a fairly jagged indicator that lends itself to trendline construction. Chart 12 shows that the violation of such lines has typically been associated with a bear market of some kind. It is currently possible to construct another line, which is still intact, so no negative signals have been triggered. It is true that this latest line is steep, which reduces its potential significance when violated. However, it’s actually the same angle as that which formed between 1970 and 1973 which involved a 50% decline. In addition, the current cyclical advance dating from 2009 is four years old, fairly lengthy by historical standards, especially in secular bear markets.

The chart also offers some hope since an upside breakout has just developed above a small resistance trendline. This may or may not work, but the overstretched level from which it is developing means that it is a high risk buy indication which, if quickly cancelled with a penetration of the red up trendline, would be quite a serious negative technical development. The overhead resistance, our second cause for concern cited above, is shown by the extended trendline in Chart 12 joining the 2000 and 2007 peaks. The deflated S&P (Chart 13)remains below its 2007 peak. In this case, the secular 2000/13 down trendline has been violated. The S&P Composite when deflated by M2 is also slightly above resistance in the form of a secular down trendline and is right at the 96-month MA. In the past, major joint violations of benchmarks such as this have confirmed the ending of secular bear markets. Previous instances have been flagged with the green arrows. Consequently, if prices can hold these breaks, a significant extension to the primary bull market dating from 2009 will likely follow. On the other hand, the red arrows point to those instances where the 48-month ROC of the S&P/M2 ratio has peaked from, at or above, its overstretched zone, a fairly serious decline has typically followed. We should add that other ROC measures, such as the 18-, 24- and 36-month time spans are not reflecting such overbought conditions and that may detract from the 48-month ROC current signal.

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