-- Weekly Market Summary --

Indicator Gut Check: Big Move Coming in Stocks

By Joe Duarte on November 5, 2017

Wall of Worry Suggests End of Year Rally

It’s foolish to fight the market’s momentum and the Federal Reserve. So even though I’ve got a bad feeling about this market, I see that stocks keep rising. Thus, I own stocks. I worry. And I sweat every tick. Yet, there may be some daylight straight ahead.

Indeed the uncanny predictive power of the New York Stock Exchange Advance Decline line (NYAD) over the last two years is about to be tested. And if the prevailing pattern over that period of time remains intact, investors should prepare for higher stock prices into December.

Background Remains Supportive for Higher Stock Prices

As I’ve said many times, stock prices climb walls of worry. Sure, not every wall is the same. So the wall’s worry list isn’t as important from a pure investing standpoint as that feeling in the gut of investors; that certainty that something bad is about to happen and stock prices are sure to crash at any moment. Of course, you can tell that the wall of worry is doing its job as the more investors worry, the higher stock prices rise.

I want to make sure that readers do not mistake my remarks as being flippant or cynical. I am as concerned as anyone about the current list of worries; thus my comments are purely aimed at the relationship between the wall of worry and stock prices. So flash forward to the present and here we go again. President Trump’s first year is about to wind down, but the politics and the post election dynamic is winding up. You can read about this stuff anywhere, and you can even buy books about it, so I won’t get into it. The geopolitical situation seems ready to burst at any point. Just pick any potential flashpoint and you can see the ripples which can lead to a meaningful global confrontation at any moment. And in the U.S., the potential for violence seems to be rising, making the unthinkable or the forgotten highly plausible.

You get my drift. The wall of worry is high and so are the potential consequences. But for investors, the level of concern for factors outside the market is creating yet another opportunity for stock prices to rise to new highs.

NYSE Advance Decline Line Poised for Big Move

The NYSE AD line is tracing a potentially bullish pattern which has been repeated six times in the past two years. Each time, the pattern has resulted in a major new high for the S & P 500.

In this issue I am featuring a two year chart of the NYAD. Please pay special attention to each instance in which the line has touched the lower Bollinger Band (BB, blue envelope border below prices). Starting with the double bottom in January 2016, the NYAD touched the lower BB in May, September, and November of 2016. Except for the touchdown on September 2016, before the presidential election, NYAD followed the touchdown with a new high. In 2017, the same thing happened in March, May and August. This time each occurrence was followed by a new high in the S & P 500.

This chart has two other important findings. First, the RSI is bouncing around the 50 level, which is a neutral reading. What makes this important is that this neutral reading is following a very overbought reading in RSI. Thus, it is plausible, that given the fact that the B Bands are constricting, which signal that a big move is coming, the NYAD may be oversold enough to move to a new high. Second, the ROC indicator, which measures momentum, is echoing the activity in RSI, which also suggests momentum to the upside may reignite.

S & P 500 Remains under Heavy Accumulation for Now

The S & P 500 (SPX) remains under heavy accumulation. This is clearly illustrated by the two year chart seen below, which is very similar to that of the NYAD. I do want to point out that for the past two weeks, the S & P 500 has made higher highs but the NYAD has not. This may be the beginning of a significant divergence. When the NYAD does not confirm the action in the major indexes, it is usually a signal that the rally is starting to struggle.

Within that context, it makes sense to watch both SPX and the NYAD simultaneously. At this point, it is still early in this developing relationship. In other words, the NYAD could easily catch up to SPX.

Sixty Dollar Oil May be in the Future

I’ve been bullish on crude oil (WTIC) since the summer. And so far, the strategy of owning oil related assets has paid off. Now crude is at a two year high, closing at $55.64 on 11/3/17. This is a critical price point, and there may be some backing and filling here for a few weeks. Yet as long as the price remains above $55, the odds of a move to $60, and perhaps beyond is increasingly likely, especially over the next six to twelve months.

It’s important to compare the action in the oil stocks (XOI) to that of crude oil. And in this case, it’s obvious that crude is ahead of the oil stocks, as XOI is overbought (RSI). But here is where the bullish case for oil comes together. First, note On Balance Volume (OBV) and Accumulation Distribution (ADI) in crude oil. Then compare those indicators to the ROC under XOI. What emerges is a bullish picture of money coming into the sector (OBV and ADI) and momentum (ROC) that has room to rise.

Market Likely to Rally into December The market has some mixed messages. Certainly the wall of worry is still in place and rising. This is bullish, until proven otherwise. The S & P 500 is still a money magnet. This is also comforting. The NYAD is lagging the S & P 500, but is well within reach of confirming new highs on the index. NYAD is also gearing up for a big move. This is hopeful.

Perhaps the biggest surprise in the market is the rally in the energy sector, which still has room to expand. The bullish side of this development is that investors can make money in oil. The dark side is that oil stocks tend to rally toward the end stages of bull markets. And that is something to keep in mind if the S & P 500 keeps making new highs and the NYAD starts heading lower.



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