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
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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