It has been very difficult to trade/predict the market's action this past month. If you've followed my blog, especially the McClellan Oscillator posts, you will notice that I have been noting the influx of liquidity in the US markets. Recently the Advance-Decline of the NYSE has made all-time highs (keeping track of the cumulative Advance-Decline in the market is a tool to measure liquidity); that says a lot, especially with the dire situation our economy is. All that money printing around the world has to be stored somewhere; I guess the US market seems to be everyone's choice.
In this post I am going to do something a bit different. I am going to look at 8 charts that are highly historically-correlated with the US markets; they have been able to correctly foreshadow trouble looming in our markets. I think these charts will help answer the question of whether this rally is justified/sustainable. I will take a look at Euro/Yen, copper, sentiment indicators such as the $VIX and many others, and post my analysis of the McClellan Oscillator. Keep in my mind I am showing some charts that are highly historically-correlated to the US markets; it may just be that these correlations no longer exist. Only time will tell.
Below is the Euro/Yen exchange rate. I have shown this chart frequently in the past. As you can see, the S&P500 has made a higher high, while the Euro/Yen has remained flat. Take note of the high correlation between these two (shown at the bottom of the chart). When a divergent top or bottom has occurred, the overall trend direction of the Euro/Yen tends to be where the S&P500 corrects to. Conclusion from this chart: the Euro/Yen is not confirming this rally, and once they sync back, it should send the US markets down (unless the Euro is fixed) .
Below is Copper vs. S&P500. Usually when they disagree, the S&P500 tends to correct in the overall trend direction of copper. Currently copper has made a a lower low, while the US markets are making higher highs. Conclusion: if this correlation still exists, then this is foreshadowing a correction in the US markets.
Below is the 52-week new highs of the New York Stock Exchange. In the past, when this indicator makes higher lows, and the S&P500 makes higher highs, the S&P500 tends to correct downward. Currently this indicator is making lower highs and is not confirming the higher highs of the US stock market. This chart is also foreshadowing a correction.
Below is General Electric, which tends to foreshadow trouble in the Dow Jones. When a negative divergence occurs between GE and the Dow Jones, the Dow Jones tends to correct in the direction of GE. GE has not made a new high, while the Dow Jones index has made a higher high. This is also foreshadowing a possible correction. This chart was introduced to me by Tom McClellan; he recently posted about it (sign up for the free charts called "Chart In Focus", highly recommended).
Below are my sentiment charts that are telling us that price action is getting toppy in a significant way.
The chart below is a bit complicated; I use Bollinger Bands to show whether the $VIX or $CPC is oversold/overbought. Usually when one or both reach oversold/overbought, it signifies a temporary top (oversold) is put in or a temporary bottom has been put in (overbought). Right now we have the $VIX and $CPC both oversold, and we also have the $VIX rate-of-change greater than 10% from the previous day (10% changes in the $VIX tend to mark important turning points in the market). These are three important signals indicating an important top is about to take place (these signals are good for forecasting a top within 1-3 days). Check out past examples shown in the chart.
Below is $CPCE which takes a look at just equity puts and calls. We are not at complacent levels but when the rate-of-change from day to day is over 20%, it tends signal important points in the market. Friday, the day to day rate-of-change was 20%.
In my opinion, these sentiment indicators are showing a significant top has been placed, since there have been several indicators confirming this, and not just 1 or 2 in the past (i.e. VIX rate of change, Rate of Change of $CPCE, and oversold $VIX and $CPC).
Below is the McClellan Oscillator stock chart with annotations discussing my thoughts. Notice the McClellan Oscillator has continued to make high lows, while the market has made higher highs. These new highs have not been impressive based on the McClellan Oscillator.
Note: My technical analysis style has been greatly influenced by Tom McClellan. He has also introduced me to a lot of the relationships I have shown in this post. Check out his site here, and consider signing up for his Daily Edition Newsletter. I highly recommend it. It comes with a 14-day free trial.