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

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

Our Stock Barometer remains on a buy signal because the S&P Composite remained above its 12-month MA. The MA has now risen to 2002 and is about 4% below the March closing price. We remain bullish on the main trend as a result of this positive backdrop, but are concerned with the action of several indicators that monitor long-term market conditions. The fi rst is the 12-month MA of the 48-month ROC of the S&P/GDP ratio. This is shown as the solid red line in Chart 10. The arrows show that when this series has reversed to the downside from a position above the red horizontal line, a bear move of some kind has usually followed. The dashed arrow indicates the only failed signal. The indicator has recently begun to reverse to the downside but not yet decisively. Its action tells us that in order to avoid a sell signal, prices must continue to advance. Chart 11 compares the earnings yield on stocks to the current return on Moody’s Corporate BAA bond yields. Here again is an indicator which is at a risky level (close to an all-time-high) but its overall trend remains positive. When it begins to experience a protracted downward reversal, history tells us that is the time to become concerned.

Finally, the ratio of NYSE margin debt to GDP, shown in Chart 12, is at a high level. More important though, is the trend of the indicator, a rising one indicating growing confidence and a declining trend greater caution amongst investors. The triggering point seems to be when the KST for the ratio peaks out. This is shown by the vertical red lines. This is not a perfect indicator, but the current high reading combined with the stalling action and the declining KST certainly place it close to the worry wart level.

The US Economy

The trend deviation indicator for the ECRI Weekly Leading Indicator comparing its 3- to the 24- month MA has experienced a slight drop below the equilibrium level. This has happened nine times since 1969 and all but two instances was followed by a recession. All, though, have been associated with an equity bear market or a large intermediate decline. So far, no such weakness has developed. Perhaps it lies ahead?

Not all leading economic indicators are that weak. For instance, our own Pring Turner Leading Economic Indicator (PTLEI) in Chart 14 has pretty consistently called recessions. This occurs when the price oscillator in the bottom panel drops below its equilibrium point. The major exception developed in 2011 when a decisively negative reading failed to trigger a recession. Its latest data point is obviously some way from a recession signal. However, in the last month this series has broken down from a large trading range, which suggests an additional loss of upside momentum is to follow. Unfortunately, there is no way of knowing whether this will take the form of a straight line drop as in the 1973 instance or a decline followed by a holding pattern as was the case in 2007. One thing does seem to be consistent though, and that is the fact that once the indicator begins its downward trajectory, the clock starts to tick for the next recession.

Finally, the Chemical Activity Barometer is published by the American Chemistry Council. Its name is misleading because it has nothing to do with chemicals but is a leading economic indicator that has a consistent record of signaling recessions. They develop when the 12-month ROC in the bottom panel of Chart 15 falls into negative territory. As with the PTLEI, its trajectory is deteriorating but has some way to go before reaching recession territory.

It is worth noting that the ECRI indicator contains commodity prices and a bond market credit spread, both of which have been weak recently. These two components also gave a false sense of weakness in 2011, which caused the ECRI indicator to fall below zero at that time. We also need to be cautious about being overly negative on the Pring and Chemical series because several components may have been affected by poor weather. However, if recent weakness extends into the spring, that could represent a strong sign the overall economy has begun to roll over in a recession threatening or growth slowdown manner.

Market Breadth

Market breadth has been improving of late. For instance, Chart 16 indicates both the NYSE A/D and Upside/Downside Volume lines recently reached new all-time highs. That does not preclude a decline, but as long as both series can remain above their respective red up trendlines, it shows breadth is in gear with the average.

The indicator we are watching closely is the Intermediate Health in the bottom panel of Chart 17. This series flags the percentage of a basket of S&P Industry Groups that are sporting a rising intermediate KST. This series typically leads the intermediate KST for the S&P as you can see from the slanting arrows. It recently has been in an indecisive mode, but has just ticked down again. Given the declining nature of the intermediate KST, this is a definite cause for concern.

Sectors

Chart 18 overlays the long-term KSTs for sixteen market sectors. They have been roughly split between those that generally do well at the start of the stock cycle (so-called liquidity driven) and others that tend to out-perform at the end of the cycle when capacity tightens up and prices rise (earnings driven).

The two bear markets that developed in the period covered by the chart have been shaded to give you a flavor of how these momentum series behave in such an environment. The characteristics of the two bears differ markedly. The 2000/02 drop was characterized by a great deal of cross currents as the momentum of some sectors rallied while others fell. From mid-2002 on, some downside commonality did develop, but gold, materials, diversified metals, industrials, staples and homebuilders all bucked the trend, showing that there were some good places to hide. This 2000/02 bear though was dominated by one sector, namely technology, as its blue KST peaked higher and fell lower than any other sector.

The 2007/09 drop was very different, since pretty well all the early sectors began the bear in a negative mode and by mid-2008 had been joined by pretty well everything else.

Currently, all the lagging sectors, except gold, are in a declining phase as are several leading sectors namely, financials and brokers. Rising sectors include utilities, REITS, cyclicals and homebuilders, with technology, health care staples and telecom on the fence.

Since most of the KSTs are currently in a declining trend, this places the balance of evidence in favor of the bears. However, if the rising and fl at sectors can move up, they could well drag some of the laggards with them. On the other hand, if the flat trending technology, health care and staples begin to weaken, that could spell trouble on the downside.

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