Thursday, June 12, 2014

stock market update - Lindsay update

Here are some charts which show the current position of the market averages and which also suggest that a drop of some consequence is about to develop.

The top two charts show the Dow and the S&P 00 trading well above rising 50 day and 200 day moving averages. Both are substantially above their 50 day moving averages and such a situation is frequently followed by a return at least to these levels if not below. Currently the 50 day moving average of the Dow is at 16,540 while the same moving average in the S&P is at 1888.

Market sentiment is definitely bullish, but I would not say that the public is enamored  with the stock market. There are two definite indications of excessive short term bullish sentiment illustrated in the bottom two charts.

In the bottom chart you can see that the 5 day moving average of the CBOE equity put-call ratio has dropped to its lowest level of the year and is in fact lower than at any time during the past four years. This shows that the rally of the past 6 weeks has turned short term trading sentiment excessively bullish.

In the second chart from the bottom you can see that the percentage of bullish advisors in Investor's Intelligence weekly sentiment poll is at 62 % (blue arrow). This is the highest reading in 5 years and is yet another indication that some sort of correction is likely.

In the chart of the Dow at the top I have delineated three recent examples of George Lindsay's three peaks and a domed house formation which have been evolving in the Dow. The minor formation put in its three peaks during 2013 (first blue line) and its separating decline (point 10 in Lindsay schematic) ended on October 9 (first red arrow). In this formation I think point 23, the top of the domed house, occurred at the December 31 high. From the February 5 low the Dow has been rallying toward point 27 which in this case will be higher than point 23 - an unusual development but one which happens often enough not to be disturbing.

There are two other formations which have developed since the February 5 low. I call them the mini and the micro formations (second and third blue lines). Both have put in the lows of their separating declines (second and third red arrows) and both appear to be forming points 21-25 the top of the domed house. If this is correct then the Dow is soon likely to begin a substantial drop, one which may well carry the average below its October 13 low. This prognosis is underlined by the fact that a Lindsay extended basic advance from the October 2011 low in the Dow is reaching its standard limits. It should be complete by July 4. Moreover the standard 15 year 3 month time interval, extended to 15 years 9 months, is due to expire in July. All in all Lindsay's methods are warning that a significant drop is dead ahead.

1 comment:

Bill said...

Awesome analysis. Thanks Carl. Specially the sentiment numbers are alarming. Also this may sound like coincidence but today in Brazil the soccer world cup started and in every soccer world cup since 1990 there was a black swan that cause a severe market correction or bear market. Today as the world cup started the Iraq situation just popped up, a black swan. You can read it on this CBC article And I have extracted from the article a paragraph below:

"The inaugural competition was in 1930, the first full year of the Great Depression. More recently, it coincided with the U.S. recession in 1990, a bond market crash that started in the U.S. and spread across developed markets in 1994, the Asian Financial Crisis and collapse of Connecticut-based hedge fund Long Term Capital Management (LTCM) in 1998, a U.S. housing market crash in 2006 and the beginning of the euro zone crisis in 2010."