Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

The Stocks Bear Indicator Never Lies

Stock-Markets / Stock Markets 2015 Nov 05, 2015 - 12:01 PM GMT

By: Clif_Droke

Stock-Markets

In the September 10 column entitled, "The bear makes a welcome return", we discussed the return of the infamous bear image on the front cover of several news magazines and newspapers. The most conspicuous example of the bear could be seen on the front cover of Businessweek magazine, shown below.


Bloomberg Bear Cover

From a contrarian's perspective, this was a most welcome return for it strongly suggested that the bottom would soon be in for the stock market after the August decline. As I observed, "From a contrarian standpoint it doesn't get any more emphatic than this." Since then the major indices have rallied off their lows with some even making token new highs (e.g. the NASDAQ 100). I've never heard of a manifestation of the bear cover indicator failing to mark a decisive market bottom, and this time proved no exception.

Now that the Dow Industrials and the S&P 500 index have rallied back to the February-July resistance zones, should we expect a resumption of the selling pressure that plagued the market this summer? Or should we rather expect a period of consolidation (i.e. backing and filling) and eventually a breakout to new highs? As always, the answer to that question will be answered by the market itself but the current weight of evidence does provide us a meaningful clue as to the most likely outcome.

Before we look at the evidence, it's worth making an observation about the previous sell-off. What happened to the stock market over the three days between August 20-24 qualified as a classic selling panic, as opposed to a fundamentally-driven crash or credit episode. This distinction is important, for if true it will make the difference between entering a bear market in 2016 and continuing with the bull market that began over six years ago.

A market panic is catalyzed by an adverse and extreme reaction to a news event. In the August sell-off it was the currency devaluation in China that panicked investors into selling. One thing that history consistently has shown is that true selling panics are usually retraced in short order once the fear subsides, i.e. usually within a couple of months. The less time it takes for the major indices to recover their losses, the less likely the selling was fundamentally driven. Hence, a true selling panic isn't typically the precursor of an imminent bear market.

It's also worth noting that the market's present internal condition is virtually in complete contrast to what it was earlier this summer heading into the August panic. Prior to the summer swoon, the market's extremely weak breadth could be seen on a daily basis for weeks on end. From June onward the number of NYSE stocks making new 52-week lows each day was extremely elevated and showed that the market wasn't internally healthy. Moreover, this showed up in the NYSE internal momentum indicators (which are based on the new 52-week highs and lows). Most of those indicators were in decline as I mentioned earlier this summer.

Since the August bottom, the situation has reversed. The number of new 52-week lows has been drying up since September and have numbered less than 40 for most days since Oct. 5. The NYSE internal momentum indicators are now mostly in a rising pattern as opposed to the declining pattern before the August crash. Below is a chart showing the six major component of the Hi-Lo Momentum (HILMO) index. Only the longer-term component (orange line) is still in decline; the others are either rising or bottoming, in the case of the dominant interim indicator (blue line at bottom).

NYSE Momentum

These indicators are very important because they show the stock market's near-term path of least resistance. There is at least one fly still in the ointment, namely the longer-term internal momentum indicator which is still declining, as already mentioned. But all the other indicators - short-term and intermediate-term - are rising. This implies that the bulls currently have the advantage and that the heavy internal selling pressure which characterized the stock market this spring and summer is not an issue right now. This doesn't preclude another (potentially sharp) pullback between now and year's end, but the market's main uptrend should remain intact.

Also worth mentioning is that the New Economy Index (NEI), our in-house measure of how strong or weak U.S. retail spending is, hit a new all-time high last Friday, Oct. 30. Although business owners remain worried over growth prospects, mainly because of overseas woes, consumers don't seem the least bit concerned. They just keep spending as the NEI chart suggests (below). What's more, we're about to enter the critical holiday season when retail sales typically hit their highest levels.

New Economy Index

After a major decline in the stock market it always pays to monitor the sectors and industry groups for signs of relative strength. When, for example, the Dow Jones Industrial Average makes a series of lower lows during the final stage of a decline and certain individual stocks make higher lows, that's a tip-off that informed buying is likely taking place. When the market turns up again and these individual stocks continue leading the market, that confirms it. At the bottom of the August panic, the industry groups which showed the greatest resilience to the decline were water, defense, and broadline retail stocks along with toy companies.

Among Dow Jones industries currently showing exceptional relative strength are: Broadline Retailers (DJUSRB), Business Training and Employment (DJUSBE), Consumer Finance (DJUSSF), Defense (DJUSDN), Leisure Goods (DJUSLE), Restaurants and Bars (DJUSRU), Software (DJUSSW), Toys (DJUSTY), and Water (DJUSWU). This group of industry leaders is very much in keeping with the bullish consumer spending patterns we've seen reflected in the New Economy Index lately.

Dow Jones US Restaurants and Bars Index Daily Chart

There are, however, some industries that are conspicuous laggards which are close to their yearly lows. If these industry groups don't improve soon it could pose a problem at some point in 2016. Not surprisingly, most of them are commodity and industry related and were heavily impacted by this year's global economic slowdown. They aren't likely to a pose a problem for the balance of 2015, however, especially if they remain within their 2-month holding patterns. They include: Aluminum (DJUSAL), Coal (DJUSCL), Healthcare Providers (DJUSHP), Mortgage Finance (DJUSMF), Pipelines (DJUSPL), Steel (DJUSST), Railroads (DJUSRR), and Recreational Products (DJUSRP).

If commodities can establish a bottom in the next couple of months, particularly crude oil, then the global economic woes of 2015 are far less likely to be of concern to the U.S. in 2016. Moreover, if the stimulus measures of the ECB and China continue the global economic slide will likely be halted next year.

Mastering Moving Averages

The moving average is one of the most versatile of all trading tools and should be a part of every investor's arsenal. Far more than a simple trend line, it's also a dynamic momentum indicator as well as a means of identifying support and resistance across variable time frames. It can also be used in place of an overbought/oversold oscillator when used in relationship to the price of the stock or ETF you're trading in.

In my latest book, Mastering Moving Averages, I remove the mystique behind stock and ETF trading and reveal a simple and reliable system that allows retail traders to profit from both up and down moves in the market. The trading techniques discussed in the book have been carefully calibrated to match today's fast-moving and sometimes volatile market environment. If you're interested in moving average trading techniques, you'll want to read this book.

Order today and receive an autographed copy along with a copy of the book, The Best Strategies for Momentum Traders. Your order also includes a FREE 1-month trial subscription to the Momentum Strategies Report newsletter: http://www.clifdroke.com/books/masteringma.html

By Clif Droke

www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules