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International Market by Martin Pring’s InterMarket Review (January 2015)

Our Stock Barometer continued to fall in December and now stands at 50%. A reading below 50% is required for a bearish signal, which will not likely happen unless the S&P experiences an end of the month closing below its 12-month MA. That average was at 1948 in December. It is projected to advance close to the 1965 area in January. Until the Barometer actually goes bearish, we are giving the benefi t of the doubt to the bull market.

Longer-term Indicators

That does not mean that there are no risks associated with the current equity environment. For example, the ratio between the Shiller P/E and government bond yields, shown in Chart 10, is one way of measuring equity returns against those of fi xed income securities. The vertical lines highlight when this relationship fi rst moves above the .75 (overvalued for stocks) level. As you can see, it pretty consistently signals a risky time to own equities. As with all indicators, it does fail from time-to-time, as was the case in 1998, 2011 and 2012. However, the most recent reading at just above .95 is a record, even surpassing the 1929 high. We are certainly not forecasting that a 1929/32 type bear will follow the current reading, but are pointing out that equities would be extremely vulnerable in the event of a Stock Barometer sell signal.

Another way of comparing the stock/bond current return relationship is to calculate a KST for the Moody's AAA corporate bond yield to that for stocks (Chart 11). Peaks in this momentum series have also consistently signaled tops in the equity market, as shown by the small arrows above the S&P. Nevertheless, there have been several false negatives, most notably those that developed in the 1990's secular bull market, and which are enclosed within the ellipse. The current situation is warning of problems as the indicator has once again crossed below its MA.

Chart 12 compares NYSE margin debt to the infl ation adjusted S&P. This series is currently close to a record. However, it is not the level that offers the best signals of trouble, but a change in trend, since downside reversals indicate when traders are growing more cautious. One way to identify such periods is to observe when the ratio crosses below its 15-month MA, which is indicated on the chart by a sub-zero crossover by the oscillator in the bottom panel. Previous instances have been fl agged by the vertical lines. The dashed ones indicate when such action has taken place after a sharp decline, such as 1987 or 1998. The 1964 signal was the only one that failed completely in the sense that a decline neither preceded nor followed a trend reversal in the ratio. At the moment, the model is still bullish since margin debt at $457 million remains above its MA at $446 million. Clearly, it would not take much in the form of a contracting number to trigger a signal. Note also that the actual level peaked in February and has not kept up with the S&P as is usually the case in a healthy situation.

One positive lies in the fact that Michigan Sentiment, which usually leads the economy, has been improving of late. Several such front running periods have been fl agged by the green and red arrows in Chart 13. Current action is unusual in that the KST for the ECRI Weekly Leading Indicator has been trending down of late as the Michigan Sentiment KST and the raw number itself continue to rally. The three shaded areas point out previous periods of similar divergent action. Each was either followed by an equity market that went sideways for a considerable period, or in the case of the 2000 example, a market top. However, as long as the sentiment numbers continue to improve, we are treating such action in a positive light.

Market Breadth

The Hamilton Bolton Weekly NYSE A/D Line offers a different perspective than the more popular A/D lines constructed from daily data. For example, the dashed arrows on Chart 14 show various divergences, both positive and negative, that have developed over the years. The vast majority of these discrepancies confi rm the leading characteristics of this breadth indicator. During the 2009/14 period, both series moved in gear as the A/D Line either confi rmed or led the S&P to new highs. However, July was the last time the weekly breadth numbers confi rmed a new high in the S&P. Now it looks as though it may be in the process of tracing out the right shoulder of a potential head and shoulders top. If it is completed, that would represent a strong signal of potential market weakness.

Large Cap versus Small Cap

This relationship is shown in Chart 15, where we can see that the 2013/14 up trend favoring large caps has been tentatively ruptured. Since the short- and intermediate KSTs have turned negative, so a test of the extended 2009/13 down trendline is probable.

Stocks versus Bonds

The recent drop and recovery in this ratio has enabled us to construct a more extended trading range. The long- and intermediate KSTs are both bearish, so once the current short-term rally favoring stocks is over, a test of the lower boundary of the trading range is likely.

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