Thursday, July 30, 2015

stock market update

My favorite long term trend indicator for the US stock market uses the 200 day moving averages of the Dow, the S&P 500, and the NYSE advance-decline ratio (top three charts). When two of these three averages are above their respective 200 day averages the long term trend is bullish and when two of three are below their 200 day averages the long term trend is bearish.

At Monday's low you can see that the Dow and the advance-decline ratio were both below their 200 day moving average, in principle a long term bear signal. But I found this mechanical indication unconvincing at the time and still think the longer term trend of the US stock market is upward. Here is my thinking.
First, you can see that the Nasdaq Composite and the Russell 2000 are both above their 200 day averages, the Nasdaq substantially so. Thus the tech and small cap sectors are not following the Dow downward (yet).  This coupled with the oversold status of the 10 day advancing issues oscillator (bottom chart) makes me think a rally is more likely now than the start of a bear market.

The European stock market as represented by the Stoxx 600 is also visibly above its 200 day moving average as is the Japanese Nikkei. This is significant because both the European Central Bank and the Bank of Japan are implementing quantitative easing policies. As long as their respective stock averages remain above their 200 day averages I think we can assume these policies are having their desired effect on asset prices. This increase in liquidity has world-wide effects and in particular is bullish for US stock prices as well.

Consequently I am still a long term bull on the US stock market. I think the surprise lying in wait for traders and investors is an upside breakout from the trading range of the past 7 months. Only if the S&P 500 joins the Dow and the advance-decline ratio below its 200 day moving average will I reconsider my bullish views. 


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