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

U.S. Stock Market

The primary trend for the US market is bullish. We base that opinion on the fact that the S&P, currently at 1556, is above its 12-month MA (estimated to be at 1550 at the end of September), the KST is rising, the Stock Barometer is at 100% and our 120% rule is still in force.

The 120%rule, which tests very well, goes bullish when the 3-month commercial paper yield is below its 12-month MA and this is confirmed when the S&P is above its 12-month MA. The green highlights in Chart 9 show when this environment is in force. Red indicates when both are bearish and black when there is a conflict. Our Total Return model (Chart 10) takes the 10-month ROC for the S&P and adds this number to the dividend yield. This resultant calculation is then reduced by the prevailing yield on commercial paper. The indicator goes bearish when it falls below its zero reference line. As you can see, it is currently well above that demarcation point.

So far so good; but we have already seen the vulnerability of the World Stock ETF, the ACWI, so how does this play out in the US? Well,, the US market is also showing signs of fatigue. It’s all likely to depend on how contained the current correction is likely to be. After all, equity markets are entering a very weak seasonal period in a vulnerable first year of the 4-year Presidential Cycle.

Part of the problem can be seen from Chart 11, which compares the CPI adjusted S&P to the S&P deflated by M2. The concept behind the SPC/M2 relationship is that an injection of liquidity into the system should be bullish for stocks as they anticipate a growing economy resulting from this easy money policy. Failure of the ratio to advance indicates that the market is not responding to this expansion in liquidity and is therefore a bearish factor. The three small green arrows show when the S&P/M2 relationship crosses above its 96-month MA a new secular bull market is signaled. The ratio recently moved back to its secular down trendline and the MA. Higher prices from here would represent a strong piece of evidence that the secular bear ran its course in 2009. On the other hand, trendlines and MA’s represent resistance which could be a barrier to further upside movement. More to the point, the 48-month ROC has just reversed from its overbought zone. The arrows show that this has consistently signaled secular or cyclical reversals. Sometimes, such as the 1986 and 1999 instances, the signal has been early, but since the ratio is currently at resistance, the bar has been set much higher in the current situation.

Finally, the "Coppock Raw" indicator is in what we might call the Scary Charts category. The true Coppock is a smoothed version of the oscillator featured in Chart 12 that signals primary trend bull market signals when it reverses direction from below zero. The raw series is a combination of an 11- and 14- month ROC. It lends itself to trendline construction, where violations typically signal important price moves. We must stress that no sell signal has yet been given, but a quick glance shows that the indicator is currently precariously balanced just above the bull market trendline. This setup is certainly food for thought but not yet a clarion call for action.

Chart 13 tackles the problem from the aspect of bond market traders. The lower panel features a 12-month ROC of the ratio between government and Moody’s BAA corporate bond yields. Rising momentum indicates growing confidence as it reflects investors’ preference for the lower quality corporates over those for higher quality governments. The arrows show that most of the time when the ROC reverses from a position close to or above its overstretched zone, this lack of confidence spills into the equity market. Last month this series started to decline from an extreme level. The drop was not sharp enough to conclude that a top has formed, but this series nonetheless deserves careful monitoring.

To read more, please download the PDF here.