Another Turning Point at hand?
By Frank Barbera CMT. May 26, 2009
For the last two weeks, it has appeared likely that a more important juncture could be at hand for the global capital markets. In our view, we continue to see evidence building in market after market that a trend change event is dead ahead. Take the Copper market for example. Over the years, Dr. Copper has done a better job at economic forecasting then almost any economist, and so again it was in this cycle, as Copper prices turned down well before the equity market. In the chart below, we show the price of Copper in bold along with its 50 day moving average, overlaid against the S&P 500. In this chart the S&P is lagged one week. Invariably, copper prices have broken down ahead of the S&P, in the current climate where the lupen-masses are now once again all looking for a resumption of growth, could it be that once again the Copper price is shining a light on the path directly ahead. To that end, we note that Copper closed back below its 50 day moving average at the end of last week for the first time since late February and has not broken its short to medium term rising trend. A negative harbinger once again for the stock market? -- We’ll soon see.
In addition to the weakening trends in Base Metals, which are very sensitive to the state of global growth, Base Metals stocks also seem to be running into stronger headwinds. Take the GST Base Metals Index for example, which over the last three months has traced out a text-book Elliott, upward A-B-C correction. With five waves up complete now from the March lows, the Base Metal Index has retraced example 50% of the entire preceding Bear Market decline. Typically, the 50% retracement zone is a defining ‘line in the sand’ and in this case could be setting up to render a verdict on the so called, nascent recovery.
Above: GST Base Metals Index with 50% Retracement
In looking at the Base Metal Index, we also note that Rate of Change is weakening sequentially. Over the last two to three weeks, the 20 day Rate of Change has made a steady series of lower highs suggesting that momentum is no longer all that positive. In fact, at this point, a relatively moderate decline over the next few days could rather easily take the 20 day Rate of Change into negative territory, and substantial declines have unfolding in Base Metal land when that has occurred.
Other formerly strong indicators are also now pointing at a potential turning point dead ahead. Take the Retailers for example, which have been the chief beneficiaries of the ‘happy thoughts’ percolating on Wall Street in the weeks just past. Formerly one of the worst performing sectors, retailers are perceived to be a major beneficiary of any recovery and as a result have led the stock market advance over the last few months. In our work, we divide the retailers into two groups, the Discretionary Retailers and the Recession Retailers. Names like CVS Corp, Costco, Big Lots, Dollar Family, TJX, Ross Stores, Payless describe the theme of the Recession Retailers, with the grand-daddy of them all being, of course, Walmart. To date, Walmart shares have sat idly by and observed, but not advanced much during the course of the rally.
Above: Broad Index of Retailers (top clip) versus Walmart (lower clip) Notice that Walmart has sat out the rally virtually unchanged over the last few weeks.
Above: Top clip (Discretionary Retailers) Middle: Recession Retailers Lower: R/S Ratio
As a group, Recession Retailers have lagged behind the broad retail index, with names like Aeropostale, Bebe, Guess, J Crew strongly over-performing in recent days. The under-performance by the recession retailers is shown in the chart above, by the Relative Strength Ratio which has come well off the highs. In our work, we like to watch the 20 day Rate of Change on the Relative Strength Ratio of Recession Retailers versus Discretionary Retailers and whenever this Rate of Change gauge has gone positive, bad things have usually begun to follow in the broad stock market.
In the chart above, we show the Rate of change gauge, with the dashed horizontal line at 100, the delineation point between positive and negative behavior. We have shaded (in our own feeble way) those periods when the rate of change went materially positive. They correlated strongly to periods of great weakness in the S&P. As can be seen on the far right side of the chart, the Rate of Change is once again, just about to move into positive territory. A caution signal? We’ll soon see.
In addition to the action of key stock market sectors, we continue to see strong evidence that sentiment has recently swung to one extreme side of the boat, in this case, back to optimism. In the chart above, we update our Investors Business Daily Call to Put Premium Ratio Oscillator which is coming off near record high values. At the same time, the Investment Advisory Newsletter polls, and other polls of investors ranging from futures traders to individual investors, the summation of that data has continued to move back to neutral values from being previously deeply oversold. In our Sentiment Composite Index, the zero line is often a major resistance point, and this indicator has now moved all the way back up to zero, with a close of +.89 on Friday. Regardless of what happens next, the outcome should be quite the genuine insight as to the real character of the current market with bullish “follow thru” from here representing a ‘hard to fight’ positive message, while a 'failure’ at present levels could reinforce the previous bear market trend.
Above: GST Sentiment Composite
Finally, in addition to the US Stock Market, there is yet another market that presently resides at a critical technical juncture. That market, is the market for trillions and trillions of US Dollars, which last week sank by 3.5%. At present, as measured by the US Dollar Index, Friday’s close of 80.04 resides virtually right on the 100 day lower Bollinger Band ($80.35). On the first try, this is very often very strong support. Dovetailing with the 100 day lower band, is the fact that the Dollar Index is now fully oversold on its 14 day RSI. That indicator closed Friday at a value of +26.80 which is the most oversold daily value seen since December 17th of 2008, a five month low.
Above: the US Dollar Index with the 14 day RSI
Thus, with a number of key markets at potentially important inflection points, the outcome of this weeks and next weeks trading could be especially instructive as to what kind of major trends we should be anticipating in the months ahead.
That’s’ all for now,
© 2009 Frank Barbera