Wednesday, August 20, 2014

headed higher

The top three charts of my favorite trend indicators for the US stock market are all bullish, with the Dow finally closing above its 50 day moving average yesterday.

The chart which is second from the bottom shows the 10 day moving average of the number of advancing issues on the New York Stock Exchange. As you can see this indicator has just reached its highest level since mid-February, This identifies the straight-up move from the August 8 low point as a likely "kick-off" for a much longer swing. If the S&P rallies from its August 8 low as much as it rallied from its April 14 low to its July 24 top this average will reach 2085 or so.

The third chart from the bottom shows the 5 day moving average of the CBOE equity put-call ratio. At the August low this indicator had reached its highest level (i.e. showed the most bearish sentiment level) in nearly a year. As you can see it has come down only partway from that high and before this up swing terminates I think this indicator will be hovering near its late June low.

As always there is a fly in this bullish ointment. The bottom chart shows the Stoxx index of widely held European stocks. It peaked in June, a month before the US averages, and subsequently dropped below its 200 day moving average (red line). Its 50 day moving average has turned downward and the Stoxx index is rallying toward this 50 day average.

This is a potentially very bearish situation. Should this rally halt near or a bit above the declining 50 day average I think the Stoxx index will drop substantially below its 200 day moving average and thus announce a new bear market in European stocks. This in turn would exert an irresistible downward pull on the US averages. So I will be watching the US market carefully when the Stoxx gets close to its 50 day average for a potential top in the US.

During the past 4 years the European Central Bank has seriously  mucked up European monetary policy and Europe is now headed for deflation. Once things get bad enough to discredit the Bundesbank's view of monetary policy (which would require a big drop in European stock prices) the ECB will be able to change course and get serious about its promised quantitative easing policies. Such a change would produce a big rally in world stock markets and a big drop in the Euro. But this change still lies months in the future. In the meantime I have a very strong suspicion that European stock markets are sliding into a bear market.

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