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

U.S Stock Market

Our Stock Barometer remains at a 100% maximum bullish reading. The arrows on Chart 7 show that when it has reached 100% it has usually experienced a few months of deterioration prior to the bull market peak in the S&P itself. Since the Barometer continues to trade at 100%, it is currently offering the all-clear signal. Having said that, it is also evident that prices need to keep advancing otherwise several normally reliable long-term momentum series will begin to peak out. For instance, in most cases when the 24-month ROC of the infl ation adjusted S&P (Chart 8) has crossed above the red danger zone and reversed to the downside, so too has the market. The red solid arrows show a reliable record over the last 100 years. The dashed red arrows and two ellipses indicate that this approach has occasionally been unduly early. Currently, the ROCis well into the warning zone but is still movinghigher, so we can’t say that it has triggered asignal. It’s merely providing a warning that the elastic is getting fully stretched and that the party could literally end at any time.

Chart 9 also shows another example of how long-term momentum may be close to snapping. In the past, when it has been possible to construct an up trendline and that line has been violated, prices have typically fallen. The current trendline is at 1600, but once again, until it has been penetrated it should be assumed that the uptrend is intact. Nevertheless, since the oscillator is so close to its trendline, continued upside acceleration will be required if it is to maintain its positive status.

Intermediate Indicators

A rising market requires an underpinning of improving confidence. One of our favorite measures is the ratio between Government and Moody's BAA corporate yields, or rather its 12-month ROC. This series is featured in the bottom panel of Chart 10. When momentum is rising it underscores the fact that bond investors are growing in confidence as they emphasize higher yielding more risky BAA categorized bonds over the safety of governments. The red arrows show when the ROC has peaked from above its overbought (excessive confidence) zone and then fallen below it. Such action has typically meant that caution in the credit markets has also spread to equities. In the last couple of months the ROC has been falling sharply to the point that we can now conclude that this momentum series has peaked, although it has yet to fall below the overbought zone. That does not guarantee that stocks will tumble of course, but it does remove what was previously a favorable factor and replaced it with a questionable one. The actual series using weekly data is featured in the center panel of Chart 11. Right now the uptrend is intact, but it would not take much in the form of downside action to result in a violation of the 2012/13 up trendline. Since both KSTs have started to roll over, it seems likely that this relationship will be further pressured in the weeks ahead.

The Michigan Consumer confidence indicator is shown in Chart 12. Its jagged characteristics make it unsuitable for moving average analysis, but it is occasionally possible to construct trendlines, which when violated, usually signal a major change in sentiment that feeds into the equity market. Three of these signals - 1987, 2005 and 2011, proved to be whipsaws because they were not associated with a business cycle downturn. The indicator is currently above the latest 2011/13 trendline and the KST has started to peak from a high level. That suggests if the indicator falls to the 73-74 area, we could see a reversal in equities and possibly a softening of business activity. We have to be a bit careful on this one though, because the indicator is already at a low level relative to previous sell signals, most of which were generated north of the 90% level.

Our final measure of confidence comes from a differential in the intermediate momentum for the S&P and the relative action of the S&P Food Group. When food stocks are experiencing superior relative strength it means that investors are in a defensive mode and this generally means that equities decline. On the other hand, when food manufacturers are under performing, the S&P investors are more confident. Such action is associated with rising equities. The series in the bottom window of Chart 13 shows the differential between the two momentum series. When it is above zero this means foods are underperforming and that earns a green highlight on the chart and vice versa for the red highlights. In the last two years a negative zero crossover was avoided on two occasions, which means that the model is currently in a bullish mode. We will be monitoring this series closely in the period ahead as it is likely to give a timely sell signal. Until then, we are assuming prices will work their way higher.

Chart 14 shows a longer-term perspective and compares infl ation adjusted equities to the S&P divided by M2. The idea is that if the S&P is able to rise at a faster pace than the money supply, this is a positive factor since it indicates that investors believe M2 is growing at a fast enough pace to result in economic growth and vice versa. Note that positive crossovers of the 96-month MA of the ratio have resulted in three valid confi rmations that a new secular bull market was underway. Negative crossovers signaled secular bear markets, with only two crossovers offering false signals in over 100 years of history. The ratio is currently right at its MA and marginally above the down trendline. Clearly it has reached a critical resistance point at a time when the 48-month ROC has peaked out. This suggests to us that if we were looking for a top in the bull market, this might be as good a place as any, for if the ratio rallies above its MA this particular indicator would move into the secular bull camp.

Finally Chart 15 shows that the Dow ETF, the DIA, violated its bull market trendline some time ago, which means that the extended line will represent future resistance. Note that the 13-week ROC has experienced a series of declining peaks against one of steadily rising ones for the price. These divergences are far more blatant than the one seen in 2007. It's now come to the point where the ROC is resting just above its bull market trendline emanating in 2009. Bottom line: If the DIA breaks the $148 level (14,800 for the Dow itself), it will signal the likelihood of an important decline.

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