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

Not much has changed in the last month as there has been no alteration in status of any of the long-term indicators. The basic environment of steady non-inflationary growth is an ideal one for equity prices and as long as that continues we are likely to see prices edge higher. Our Stock Barometer remains at a bullish 100% reading. As pointed out last month, when it has reached 100% in the past, some deterioration in the Barometer's reading has usually preceded the fi nal market peak. The momentum of the total return of stocks against cash has offered some timely sell signals in the past. Consequently, little harm has faced the S&P until the indicator has fallen below zero. In that respect, the lower window in Chart 9 demonstrates that it is currently well above this warning level.

The center panel of Chart 10 tells us that the ratio between the S&P and M2 is edging through resistance in the form of its 96-month MA and secular down trendline. That's important because previous secular bull markets have been confi rmed by similar upside breaks. A more decisive 96-month MA crossover at this time would not unequivocally signal a new secular bull, but as long as it remains in this positive position an important secular bear market prop would be replaced by a secular bullish one. Since the market is overstretched long-term, we also need to be mindful of the potential for a whipsaw breakout. For if the ratio breaks back below the trendline and MA, that would represent a very bearish sign.

Chart 11 features our Combo Momentum indicator, constructed from the sum of an 11- and 14-month ROC. This series has often lent itself to trendline construction; the violation of these lines signaling an important trend reversal in the S&P. The current bull market up trendline is intact, but in order to remain so we will need to see doses of progressively higher prices in order to maintain this path of upside momentum. It's steady as she goes at the moment, but there is no question that the elastic is defi nitely stretched.

One thing that is not currently overstretched is confi dence as monitored by the University of Michigan, 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 contraction. The indicator is currently above the latest 2011/13 trendline and the KST has started to peak from a high level. That suggests if sentiment falls to the 70 area, we could see a reversal in equities and possibly a softening of business activity. Some caution in being overly pessimistic is called for, because the indicator is already at a low level relative to previous sell signals, most of which were generated north of the 90% level. That in itself brings up an interesting observation, which lies in the fact that the indicator topped out in the year 2000, around the same time as equities were registering their peak. It has been in an overall downtrend since that time, thereby demonstrating that consumer sentiment has been in a secular bear market of its own.

Sentiment for equities is in a far different position. Chart 13, for instance, shows that the number of bulls, as monitored by the American Society of Individual Investors and expressed as an intermediate KST, has peaked. The dashed arrows show when this series has reversed to the downside with no ill effect on equity prices. On the other hand, the more plentiful solid arrows point up reversals which were associated with a meaningful correction of some kind. The number of bearish advisors as calculated by investors intelligence. com and plotted inversely in the bottom panel is also at a negative 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, it refl ects the fact that investors are more confi dent; such action being associated with rising equities. The series in the bottom panel of Chart 14 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. Currently, the model is in a bullish mode, where it has been for a very long time. 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.

The intermediate KST for the S&P (Chart 15) has just hooked to the upside, thereby offering a high risk buy signal. An advance warning of potential trouble is likely to be given when the Intermediate Health indicator in the bottom panel turns down. This series monitors a basket of S&P Groups with a rising intermediate KST. As the arrows show, it has a consistent record of turning ahead of the KST for the S&P itself.

Inter-Asset Relationships

Chart 16 shows the ratio between the CRB Spot Raw Industrials and the S&P. The letters indicate the eight basic movements in the stock market since the mid-1990's. Most have also been associated with changes in the direction of the stock/commodity ratio. In most instances, it has been possible to construct trendlines for both series, the violations of which have reliably signaled major trend reversals. The exceptions where one side or the other failed to form a line, developed at C for the ratio and D and F for the S&P. Wherever it was possible to construct lines for both series, reliable trend change signals were triggered. The most recent turning point developed in October 2011. In retrospect, that was a period following where the environment very much favored equities, both in an absolute sense and relative to industrial commodities. That leads us to the conclusion that as long as the two 2012-201?? uptrends remain intact, so too will the equity bull market.

October 2011 also saw the ratio of stocks to bonds bottom out in favor of equities to the extent that last month, stocks broke their secular down trendline against bonds (Chart 17). The red arrows point out when the KST of the ratio initially touches the 350 level. With the exception of 1997, such action resulted in a pause or reversal in the ratio. Since it has just touched that overstretched reading again, this relationship may well run into problems in the period ahead.

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