Health of the Market  (6/16/2018)

The charts will be updated by every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or to go to the Charlottesville Senior Center Investors' Forum. Note: To get tabs to other pages, Javascript (not Java) must be enabled for this site.



The indicators for the longer term equity market show an up market within a bull cycle (check the Observations tab for definition of cycle). The S&P 500 closed -3.25% below the record close in January; +3.10% year-to-date. 69.5% of S&P 500 stocks were above their 200-day exponential moving averages, up from 69.0% the week before. 67.5% of these stocks are above their 50-day EMAs, down from 72.0% the week before.

[NC]  Health Buy Alert occurred on Friday 4/13. This is based on small-cap action. A VIX Buy Alert, based on large-cap action, occurred on Friday 4/13 also. The insiders were bullish (data from last Wednesday).   

[NC]  See the Income tab for a discussion of the business cycle and the impact of credit (interest rates). The equity market tends to move on margin debtSee chart here.

[NC]  A measure to determine if the price is too high relative to the underlying earnings is the Shiller price to earning ratio. This is the current price divided by the 10-year average of "real" (inflation-adjusted) earnings. This ratio corresponds quite well to the peaks of price as shown by charts on this site.

The market in the typical June is good in the current year of the presidential cycle. The charts for the second year of the presidential cycle compared to all years show the second presidential year has had big drops in June. The Power Zone, the favorable time of the year, typically ends toward the end of May. This year it has not ended yet. The end will occur when the Health Sell Alert occurs. Access more data on the best six months here. The Bull Cycle continues as the S&P 500 did not drop below its 200-day SMA. The long-term BullHeal System went to a buy on 9/27/2017. It will go to a sell when a Health Sell Alert occurs.



[NC]  Since December of 2016, the dollar ($USD) has decreased in value with respect to a basket of other currencies as long-term interest rates have gone down. Now the rates are going up, and the 10-year Treasury bond hit a peak of 3.12%. This is a level not seen since July 2011. Recently the dollar has grown stronger, which generally happens when interest rates rise. The 10-year Treasury yield ($TNX /10) and the inflation index is shown in this 5-year chart with weekly closing prices.

[NC]  But the most important reason we will see higher yields is simple supply and demand.  The US will need to borrow $400B more in 2018 then it did in 2017 through the sale of more Treasuries.  At the same time, the Fed will curtail its reinvestment in Treasuries and Mortgage Bonds by an increasing and significant amount this year.  They will buy $252B less this year in Treasuries, at the same time that $400B more supply will be issued.  That's about $650B that will need to be absorbed by the open market. --- Barry Habib 2/27/2018 

[NC]  The driving force between currencies is the relationship between global interest rates. The 10-Year Treasury yield remains higher than other developed-country yields. One of the side-effects of a weak dollar is that it tends to drive global funds into foreign markets which has been the case recently. The falling dollar, however, has had positive influences on the U.S. market as well, especially large cap multinationals that derive nearly half of their revenues from foreign markets.

[NC]  The international bond market is provided by the WSJ. See the Income tab for a chart of U.S. Treasury yields.

[NC]  The stock markets in other countries are quite well correlated to the U.S. market. To participate in these markets, the U.S. dollar can be hedged out, however, this has not been productive as the dollar has been dropping. Click to check out the country hedged ETFs and the un-hedged ETFs.

[NC]  Sector investing via exchange traded funds (ETFs) is popular. The traders rotate between sectors. To see how some popular sector ETFs are doing, click here for the Candle Glance.

[NC]  The theory is that if the small-cap stocks do better than the large-caps, it indicates that the traders are willing to take on more risk and the market will go up. The chart shows the relative strength of the Russell 2000 IWM with respect to the S&P 500 SPY. The 20/40-day EMA crossovers are marked by a pole. The U.S. Dollar is also shown. Note that when the dollar goes up, small cap stocks do better than large cap stocks -- and the relative strength chart goes up to indicate this.

Cap vs USD

The S&P 500 large-cap index broke out of a symmetrical compression triangle. Typically the breakout is in the direction of the previous move, which it did. The shaded area is the Bollinger Band. A rise to the top of the band indicates a very overbought market -- and it typically corrects down from here. Volume on Friday was 62% above its 50-day MA, and a hammer candle indicates a possible turn-around to a continuation of the up move. A potential trade war was worrying the market on Friday. Retail sales were up 0.83% (0.62% after inflation) and that was a good sign.

[NC]  The Russell 2000 small-cap index broke out of the symmetrical triangle and has shot through the resistance of the January highs. It has been much stronger than the large-cap S&P 500 index. Small capitalization companies are not dependent on international trade, and thus money is being shifted from the large-cap companies.


The technology-heavy Nasdaq composite index has now made a new high. 69.9% of Nasdaq stocks are above their 50-day moving averages (better than 69.4% last Friday) as shown in the chart on the Status page. The fact that the number of new Nasdaq highs has failed to confirm the index high is concerning.


[NC]  The S&P 500 exchange-traded fund closing price is shown with its Bollinger Bands below. When the price goes above or near the upper Bollinger Band a downswing in price is likely as the market is overbought. Similarly, when the price goes below the lower band, an upswing is likely.

[NC]  Also shown is the 21-day Money Flow Index. This is an oscillator that uses both price and volume to measure buying and selling pressure. It is similar to a volume-weighted version of RSI. A green pole is marked when the MFI moves above 50 indicating a good time to buy. If the MFI hits the oversold level at 20 (green dashed pole not on chart), it might be a better time to buy. A red dashed pole when the MFI comes down from around 80 might be good time to lock in some profit. A solid red pole when MFI goes below 50 indicates selling might protect from a downswing.  

Health Alert

[NC]  Below is the Russell 2000 small-cap index that tends to lead the overall market both up and down -- as the small-cap stocks are generally more risky than large cap stocks. This index is shown with high-low-close bars. It's 50 and 200-day simple moving averages are included. The 200-day moving average often acts as support or resistance to price movement as many traders watch it.   

[NC]  The Health Alert is based on the momentum of the small-cap Russell 2000 index, the Nasdaq breadth data, and the Nasdaq 52-week new highs and new lows. The thresholds are described below.  The green buy and red sell 'alert' poles on the chart show when these alerts have occurred.

[NC]  A Health Buy Alert occurred on Friday 4/13. No sell alert has occurred as the RSI stayed above 49. This buy alert is shown by the green pole. The small cap stock index is used here as small-caps have tended to lead the market both down and up -- but no so much lately! 

[NC]  The second pane is the Relative Strength Indicator (RSI) for the Russell index, a measure of momentum of the market. This is the relative strength of the Russell 2000 itself -- it's not relative to any other index. Above 50 shows positive momentum over the last 21 days. The latest plot can be seen by clicking here. The green arrows indicate a positive change in momentum as the RSI crosses above 50; red arrows indicate downward momentum when the RSI crosses 49. The threshold of 49 is used to give a more definite indication of the start of a down-swing.  

[NC]  The third pane is the Nasdaq McClellan Summation Index, $NASI, (red) and it's 5-day exponential MA (blue). This is a running sum of the difference of two moving averages of the number of advancing issues minus the number of declining issues. A 19-day and a 39-day exponential moving average (EMA) are used. This shows whether a market move is broad based. As the trend changes, the red index will cross the blue EMA and an arrow will be drawn. This indicator must be consistent with the RSI before an alert pole is drawn on the price chart. When this index is below the 5-day EMA, and a 'sell alert' has not occurred, this is a warning not to purchase new positions, but to HOLD those that were bought earlier on the 'buy alert'.

[NC]  Dr. Alexander Elder in his book Trading for a Living says that the 52-week New Highs minus New Lows Index is "probably the best leading indicator of the stock market". This display for the Nasdaq market shows the this index in pink. The 3-day MA of the NH-NL index is shown in blue. A green arrow is placed if the 3-day MA of the NH-NL index goes positive for three consecutive days, or a red arrow is placed if the MA goes negative for three consecutive days. To see a summation of the NH-NL numbers, click here. When a green buy arrow is put on the price chart, it indicates a Health 'buy alert', if the other indicators concur. The red sell arrows here are not used in the determination to place a sell pole on the price chart, due to the lag.

[NC]  The Health Alert acts as a confirmation and does not do well as a stand-alone signal for buying and selling. After a long trend, it works well to signal the end of the trend.

Long-Term Overview

[NC]  This chart gives an overview of the situation. The market had done well since the termination of the QE3 Fed bond buying, until the last half of 2015. The 10-year Treasury rates moved down even when the Fed raised the over-night Federal Funds Rate in December 2015. There have been five 1/4 point rate increases, the last three in March, June and December of 2017. Now there is an expectation of three more in 2018. See more here. A chart of various Treasury yields since 1962 are shown on the Income tab.

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The source of the charts is located on the upper right of the chart. This page is for amusement only, and should not be taken as advice to buy or sell anything.