Stock Market - Is Now the Time to Go To Cash?

By: Christopher_Quigley

Many commentators are asking whether this market is showing real signs of exhaustion, suggesting that it is time to get out, go to cash, and wait for a serious correction or collapse to jump back in.

To try to answer this question let us look at the situation from a more distant perspective than the standard one. Accordingly, I am going to adopt a 6 year view using the following charts set out below: 1. The Dow Transports, 2. The Dow Industrials, 3. The S & P 500, 4. The NASDAQ 100, 5. The Russell 2000 (small cap. stocks: weekly), The Russell 2000 (small cap. stocks: daily), 7. The NYSE A/D Line and 8. The index of the percentage of stocks above their 200 DMA.

Observations:
The bull market which commenced in March 2009 shows no sign of abating. On the Dow Transports and the Dow Industrials we see higher highs and higher lows and both indices are congruent.

This strength is confirmed by the S & P 500 and the NASDAQ 100 as both are reaching ever higher highs from ever higher lows.

The NYSE A/D Line shows no sign whatsoever of technical stress. If market breath was seriously weakening we would begin to see compression of the 20, 50, 100 or 200 Daily Moving Average lines. There is no evidence of that happening at the moment. Therefore the 2009 bull trend is in place and firm.

However, there is some indication that the underlying economy may be weakening. The canary in the coal mine is the Russell 2000. Small cap stocks are far more sensitive to economic deterioration that large caps.  Looking to the Russell 2000 daily chart we can see that the 50 DMA has crossed the 100 DMA and prices are struggling around the 200 DMA. Over the last two months the 50 DMA line and the 100 DMA line became points of price resistance instead of points of price support.  Should near future price action experience the same resistance at the 200 DMA, this index will have entered a bear trend and that would be a cause for concern.

When we look at Chart 8; “The % of stocks above the 200 DMA”, we see more signs of deterioration. This market breath indicator is showing us that fewer stocks are breaking above this significant DMA. Thus the market is not getting stronger, it is in fact getting weaker, another cause for pause, but not undue worry.

On balance, filtering all the information from the charts below, I believe the bull market is still intact. Sure there are early signals indicating exhaustion but there has been no serious technical damage in evidence to indicate near term price capitulation. On the contrary, should the European weakness discussed in the news items below become more pronounced it is possible that American GDP numbers going forward will weaken.  However this news is a double edged sword.  Should Janet Yellen react to negative European growth data by slowing QE tapering the market could explode into the latter stages of a hyperbolic bull. This means to me that there is as much risk being out of the market as being in. Thus, I see no easy choices for investors and money managers. The existing “wall of worry” will continue for some time longer.

Chart 1. Dow Transports: Weekly

Chart 2.Dow Industrials: Weekly.

Chart 3. S & P 500: Weekly.

Chart 4. NASDAQ: Weekly.

Chart 5. Russell 2000 Small Cap Stocks: Weekly.

Chart 6. Russell 2000 Small Cap: Daily

Chart 7. NYSE A/D Line: Weekly

Chart 8. % Stocks Above 200 DMA: Weekly.

Spiraling Euroland Crisis:
I have not written with regard the EU for a long time. This is not because her problems have abated but because they have become so pervasive that it is difficult to cover them all. To give readers a feel of what is unfolding I have quoted below 4 short excerpts from blogs and the Irish Times to give a sense of what is actually developing.

The recent lackluster growth figures for the Euro-wide area will have serious political ramifications given that the new European Parliament is so divided. It is my opinion that as the crisis deepens it could seriously affect the American recovery and could possibly convince Janet Yellen to consider putting on hold her plans to phase out Quantitative Easing. Such action would have a major effect on all markets.

1. Economic data puts ECB into unknown:

The Irish Times, Dublin, Ireland, 5th. June 2014.
“Eurostat confirmed that growth was an anemic 0.2 per cent in the first quarter.
Mario Draghi, president of the European Central Bank (ECB), will have been given pause by recent data.
Eurostat yesterday confirmed that growth across the block was an anemic 0.2 per cent in the first quarter – just half the relatively unchallenging 0.4 per cent analysts had expected. Year on year, the growth came to just 0.9 per cent.

2. A divided parliament following May 23rd elections:
Euro News:  “It has been a night of seismic shocks for Europe as the election counts came in from all over the EU. One minor tremor that surprised many was that voter turnout was up by 0.1% defying projections of continued voter apathy.
But, the exit polls indicated that Eurosceptics were scooping up the majority of the votes in some of the biggest member states, yet the head of the largest pro-European party in parliament (EPP), still saw it as a reason for celebration.
“I would like to tell you. We’ve stopped the trend of lowering turnout. This was one of our main goals, in terms of democracy. Obviously, it’s not perfect, sure, we’re not satisfied, but at least it’s the first time we’ve stopped the tide of absenteeism,” said Joseph Daul speaking at the parliament in Brussels.

3. The Ukrainian crisis, an EU one:
STRATFOR, From Hungary, 21st. May 2014.
“The Ukrainian crisis can only be understood in terms of the failure of the European Union. Germany is doing well, but it isn't particularly willing to take risks. The rest of northern Europe has experienced significant unemployment, but it is Mediterranean Europe that has been devastated by unemployment. The European financial crisis has morphed into the European social crisis, and that social crisis has political consequences.
The middle class, and those who thought they would rise to the middle class, have been most affected. The contrast between the euphoric promises of the European Union and the more meager realities has created movements that are challenging not only membership in the European Union but also the principle of the bloc: a shared fate in which a European identity transcends other loyalties and carries with it the benefits of peace and prosperity. If that prosperity is a myth, and if it is every nation for itself, then parties emerge extolling nationalism. Nationalism in a continent of vast disparities carries with it deep mistrust. Thus the principle of open borders, the idea that everyone can work anywhere, and above all, the idea that the nation is not meaningful is challenged.

4.  ‘They are stealing everything, even our homes’:
By Afrodity Giannakis, from Thessaloniki, Greece. 21st. May 2014
 “I wish I could leave Greece. I can’t go on living here. I work very long hours and live more frugally than ever, but I still can’t pay the bills, the income tax or the other taxes like the property poll tax. My tax debt keeps building up. I’ll end up losing my home. They are stealing our homes and they are not communists. And people are getting sadder and madder every day. I can’t go on like this.”
This was the response I got when I greeted a stall holder at an open-air market in my area. Due to my own extremely difficult working and commuting conditions, I hadn’t seen him in months. His anger and despair were much stronger than before, as is the case with most ordinary people in Greece.

By Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web   sites based in California, New York, London and Dublin.

Mr. Quigley is now lives in Dublin, Ireland and Tampa Bay, Florida.

© 2014 Copyright Christopher M. Quigley - All Rights Reserved

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