Thursday, August 14, 2014

critical point

I think the US stock market averages are at critical junctures now, and will soon tell us whether they are headed for new bull market highs or instead below their August 8 low points.

As I write this the Dow is still well below its 50 day moving average (green line), the S&P has rallied to within 5 points of its 50 day average, and the NYSE advance-decline line has actually taken a peek above its 50 day average. If two of these three indicators close for three days above their 50 day moving averages I will conclude that the August 8 low ended the drop from the July top and that new bull market highs lie ahead.

One reason for thinking that the August 8 low will hold is the behavior of two technical indicators displayed n the bottom two charts.

The bottom chart shows the 5 day moving average of the CBOE equity put-call ratio. At last week's low this indicator had reached the highest level seen in nearly a year, thus indicating a lot of short term bearish sentiment - a bullish sign going forward.

In the chart above the put-call ratio's you see the 10 day moving average of the number of advancing issues on the New York Stock Exchange. At last week's low this indicator showed the most extreme oversold condition in nearly a year. In a bull market this is generally a precursor to a big rally.

The bull market which started from the March 2009 lows has lasted more than 5 years. This is an unusually long time for the averages to rise without a drop of 20-25%. But it is a statistical certainty that any record will be broken given enough time so one cannot put too much emphasis on such observations.

A more serious danger arises from the fact that the Fed is winding down its quantitative easing program.which should end in October. When it halted such programs in early 2010 and again in early 2011 the market had a steep correction. 

We'll just have to wait to see which way the averages jump from here.

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