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International Market by Martin Pring’s InterMarket Review (July 2014)

Our Stock Barometer, along with all long-term indicators measuring trend, are in a positive mode. For example, the S&P currently at 1960, is comfortably above its 9-month MA, which is currently at 1828 and rising at approximately 15-points each month. The 12-month smoothing is at 1796 and advancing just under 30 points each month. Finally, the bull market trendline, shown in Chart 9, is currently around 1820 and is advancing at approximately 25 points each month.

Leading economic indicators, where the stock market is usually laser focused, are also in a rising trend. An example is shown in Chart 10 for the ECRI Weekly Leading Indicator. This series is above its business cycle recovery up trendline as are the two ROCs. Even so, it is also evident that it would not take much in the form of weakness to rupture these lines. A month-end break below 132 would do the trick. (Latest data can be found at https://www.businesscycle.com/.) Note also that the KST, while still bullish, has already started tofl atten. The solid arrows in the bottom panel referto the primary and secondary peak referred toin the text for Chart 1. The vertical arrows show the relevance of economic weakness to the equity market as they are typically preceded by some form of weakness in the indicator. Note that the 1994 bear market was relatively mild because the economy, as monitored by the ECRI indicator, was basically fl at during this period.

Momentum and some other longer-term indicators are telling us that things are pretty overstretched at the moment and are at the kind of readings that have typically been followed by bear markets. Chart 11, for instance, compares the ratio of the S&P to GDP. The ratio tracks the broad sweeps of the 1929/49, 1966/82 and 2000/200?? secular bear markets. However, it is when the 48-month ROC rallies above its overbought 70% level and the 12-month (red) MA reverses direction that a major sell signal is given. This is probably because momentum refl ects psychology and therefore the popularity of stocks relative to the rest of the economy. This technique is sometimes spot on, as in 1937, but at other times, such as the 1999 signal, leads by several months or more. The fact that the MA started to reverse earlier this year suggests that the market could peak at any time in the next few months.

The same conclusion can be drawn from the ratio between the Shiller P/E and government bond yields, featured in the bottom panel of Chart 12. This relationship compares the relative earnings return on stocks to that of the current yield on bonds. Red shaded rectangles show when the indicator is in overvalued (for equities) territory as do the vertical red lines. Close monitoring of the relationship between the shading and prices indicates that this is not an indicator that can be used for precise timing. Such situations should therefore not interpreted as sell signals, but more as a warning that the risks of owning equities are elevated.

Chart 13, which features the ratio between margin debt and GDP, also underscores the fact that equities are overstretched long-term. Generally speaking, it is the trend rather than the level of margin debt that is important as refl ected by the three vertical lines. In the last couple of months this relationship has started to fall, but a reversal has not yet been confi rmed. That would require a drop below its 12-month MA and for a KST sell signal.

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