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Category: Chart of the Week

This Important Short-Term Indicator is Warning Investors the Market is Quickly Becoming Overbought

The Investor Intelligence Short-Term Composite Indicator has proven to be a valuable tool for short-term market timing ever since it was developed in the 1960s. A reading of over 70 means the general index has become oversold. Below 30, it has become overbought. Three weeks ago, as shown in the chart below, it was at a very oversold 4, a reading that proved to be very accurate considering the subsequent stock market bounce.  The recent market bounce has rapidly moved the indicator to overbought levels.  This recent chart shows the indicator at 67.5 level, but it is probably above the oversold 70 reading after a subsequent market bounce. The fast-moving pace of this indicator is another clear warning sign that the market continues to be highly volatile, and very risky. We recommend investors lighten their stock portfolios. We expect more and bigger downward corrections than the one that occurred in the fourth quarter before stocks reach oversold levels that would trigger a durable, longer-term rally.

This Important Short-Term Indicator is Warning Investors the Market is Quickly Becoming Overbought
This Important Short-Term Indicator is Warning Investors the Market is Quickly Becoming Overbought

Why Trading in the Financial Sector XLF ETF is Worrisome

The chart below represents trading in the Financial Select Sector SPDR ETF (XLF) with a portfolio of the big-name banks and other financial institutions, a major stock sector for obvious reasons. Looking at the XLF chart over the last two years as a proxy for the financial stocks we can see that a very negative price pattern has developed. These stocks are being sold with very heavy volume and bouncing with very light volume. This is a dangerous trend because it shows that the large institutions are exiting this group. And using rallies to sell. Until the price action improves for the banking sector, I will find it hard to get bullish on the market over the longer term. Typically during times of major selloffs there will be periods when stocks become oversold, resulting in some bounce backs. While bear market bounces can be fast and furious, they also are typically short lived.

Why Trading in the Financial Sector XLF ETF is Worrisome
Why Trading in the Financial Sector XLF ETF is Worrisome

Selling Climax Chart Suggests Broad Stock Bounce Ahead

Selling climaxes occur when a stock makes a 12-month low but then closes the week with a gain. They are a sign that stocks are going from weaker to stronger, more sophisticated hands.  Buying climaxes occur when a stock makes a 12-month high but closes the week with a loss.  They are a sign of a stock going from stronger to weaker, less sophisticated hands.  This chart from Investors Intelligence shows an extraordinary number of stocks with selling climaxes compared to last year when buying climaxes were signaling stock declines. Work by Investors Intelligence shows that sellers into buying climaxes and buyers into selling climaxes are  right about 80% of the time after
4-months’ time.

Selling Climax Chart Suggests Broad Stock Bounce Ahead
Selling Climax Chart Suggests Broad Stock Bounce Ahead

Courtesy of investors-intelligence.com.

The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory

The Ned Davis Research Composite Model for the U.S. Stock Market is based on an equal weighting of 50% of U.S. stock market internal and 50% external indicators. The NDR model has proven to be an important tool for identifying periods of outperformance and underperformance for the stock market. While the top chart plots the S&P 500 Index, the bottom chart plots the NDR composite score, which has moved down below 55. That represents bearish conditions and negative returns for the market. Composite readings above 70 represent bullish conditions and readings between 55 and 70 represent neutral conditions.

AS NDR explains: “By combining multiple indicators which historically have been shown to add value in broad market investment decisions, we can objectively assess the weight of the evidence and generate a summary broad market recommendation.”

It is important to note, as shown in the two boxes below the chart, that historically there have major negative market returns when the NDR Composite has been  below 55. The boxes also illustrate the accuracy of the model in bullish and neutral conditions.

The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory
The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory

Here’s the composition of the internal and external indicators.

Internal Composite Indicators are tape-based (i.e., price-driven) indicators and include:

• Big Mo Multi-Cap Tape (DAVIS250A)
• Moving Average Slope (S61)
• Deviation from Trend Slope (S62)
• Deviation from Trend Reversals (S221)
• Momentum Reversals (S222)
• Net New 30-Day High Reversals (S223)

External Composite Indicators are non-price indicators and include:

• S&P 500 Earnings Yield (S672)
• S&P 500 Earnings Per Share (S673)
• Industrial Production (S1042)
• 2-Year Treasury Note Yield (S877)
• Moody’s Baa Bond Yield (S878)
• NDR Daily Trading Sentiment Composite (DAVIS265)
• AAII Bulls/(Bulls+Bears) (S505)
• Investors Intelligence Bulls/(Bulls+Bears) + Monetary (S502)
• Implied/Historical Volatility (S234)
• Low/High Beta (S591)

A Mesmerizing Chart

By John Del Vecchio

In the spirit of a picture is worth a thousand words, this week we leave you with a fascinating chart showing the changes in the yield curve from 1990-2018.
It’s truly mesmerizing.

Click on the image to view the animated data visualization chart.

A Mesmerizing Chart
A Mesmerizing Chart

Recently, the yield curve has flattened out as interest rates have risen but the curve has shifted more dramatically due to changes in short-term bonds. Of course, rates increased from an artificially low starting point. While an inverted curve has correctly forecasted prior recessions, plenty of fiscal stimulus has been pumped into the economy in the form of tax cuts. Consumer confidence has also surged. But, so have debt levels. Real incomes are stagnant. The Federal Reserve is shrinking its balance sheet.
So, while the circumstances today do not resemble the past, it probably won’t be different this time. Just look at the stock market. Small cap stocks are in a bear market. Hardly anyone noticed. Rougher times are likely ahead.

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