Author Archive for Decision Point

Stealth Bubble

By Carl Swenlin, Decision Point

A subscriber writes: Hello Carl. As a long-time subscriber (going back more than 10 years), I have a lot of respect for your historical P/E charts. However, when you recently wrote that stocks are high but not in a bubble, I’m wondering if perhaps you are not considering the stealth bubble discussed by John Hussman. (Click here to read Hussman article.)

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This chart shows the S&P 500 Index (black line) in relation to its normal P/E range. A P/E of 10 is undervalue, a P/E of 20 is overvalue, and a P/E of 15 is considered to be fair value.

Carl’s Response: I don’t disagree with those, like John, who have different metrics to define a bubble. Personally, I don’t like what is going on one bit. Strictly speaking, I define a bubble as when prices have been bid up way beyond normal valuations — like what is happening (again!) in the real estate market.

Prices are at an overvalued P/E of 20. That is sufficient reason for a bear market to begin. But I don’t consider it to be a bubble. (You say tomato . . .) Looking again at last week’s chart, we can see that, once prices reach the overvalued level, forward progress is normally halted and sharp corrections are the norm. The idea of a “stealth” bubble is not lost on me. The worst bear market ever (1929 to 1932) began once the market P/E reached 20, but the runup in prices was facilitated by a margin requirement of only 10%, certainly a major factor not seen on the chart. Today we have QEternity lurking behind the price line.

 

A Long-Term Look at the Nikkei

By Carl Swenlin, Decision Point

The Tokyo Nikkei Average has been in another free-fall since the top in May, falling -22%. Before we get to the long-term chart, let’s look at the one-year daily bar chart.

The average rose +82% in just six months in a parabolic move that was doomed from the start. They almost always are. When a parabolic move breaks, as it did in May, the speed of the decline can be catastrophic. The downside expectation is for prices to return to the level of the basing pattern that preceded it. In this case between 8300 to 9100. That is not a prediction, just the level we at which we might expect to start looking for a tradable bottom.

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As dramatic as the the above chart is, it is hard to beat the long-term chart below for drama, when we look at the parabolic rise from 1970 to the all-time high in 1989. Over the last decade prices seem to have found a base at around 7000, instead of 5000, where the pre-parabolic base was. For this we can thank the super-human efforts of the government to avoid the inevitable by printing money. After over 20 years of avoidance, their economy has still not recovered, and recovery is nowhere in sight.

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Conclusion: Long-term charts put things into perspective, and the recent, exciting six-month rally is shown to be a mere blip in a long, grinding trading range. Also, the possible downside is at least 7000, or maybe 5000.

 

 

 

Are Interest Rates Turning Up?

By Carl Swenlin, Decision Point

Based upon very long-term charts and commentary from Hoisington Investment Management Company, for some time we have speculated that the 30-year bond rate would continue downward to around 2%. However, the charts are showing strong technical evidence that interest rates may be turning up in the long term.

The  monthly chart below shows bond rates going back to 1948, at which time long bond rates were about 2%. After the 1981 peak, rates have trended downward toward, we assumed, the historical low. Now it appears that the bottom is in and that rates are heading higher.

Note that the monthly PMO has turned up from its second most oversold level in 50 years, and has crossed up through its 10-EMA, rendering a PMO buy signal.

Zooming in on a 23-year monthly chart we can see a long-term double bottom (2008 and 2012). This compares with the lower PMO low, which sets up a reversal divergence (bullish). We can also see that yield has broken above a declining tops line drawn from the 2011 top, confirming the double bottom. The most important thing that needs to happen next is for yield to break above the declining tops line drawn from the 1994 top.

Conclusion: To answer the question raised in the title of this article, yes, we think that interest rates are making a long-term turn to the upside. The long-term double bottom in yield, plus the monthly PMO bottom and upside crossover are very significant events, indicating that a long-term bottom is in place. If rates do continue to rise, that will have an extremely negative effect on just about everything.

Technical Perspective: A Very Overbought Market

By Carl Swenlin, Decision Point

One of the general rules of the stock market is that things will get as good (or bad) as they can get, then prices will start moving in the other direction. This is another way of describing “regression to the mean”.

This is the reason that we technicians have our indicators — so that we can get an idea when conditions have reached extremes that could cause prices to start moving in the opposite direction. One of the indicators I like is the Percent of PMOs (Price Momentum Oscillators) Above Zero because it is smoother and has less noise than other intermediate-term indicators.

The second panel on the chart below shows the PMO for the S&P 500 Index, which is the price index just above it. The bottom panel shows the percentage of individual S&P 500 stocks that have PMOs above the zero line.

As you can see, the indicator has recently topped at a very overbought level. In similar cases noted on the chart, half were absolute top pickers, and, while the other half announced an internal peak in strength, they arrived well ahead of the price peak. But, even though they were early, the indicator peaks in early 2011 and 2012 were ultimately followed by price declines that sent prices lower than they were when the internals peaked.

While indicators may be topping in very overbought territory, a price top is not guaranteed. Nevertheless, conditions are less than ideal for making new commitments to the long side, and increased caution is warranted.

The Long-Term Technical View

By Carl Swenlin, Decision Point

At month end we like to look at the monthly chart to refresh our long-term view of the market.

The outstanding feature on the chart is the trading range between about 750 and 1550. Two bull markets have ended their run at the top of the range, and the current bull is only about 150 points below that long-term resistance.

A bit more subtle is the current PMO (Price Momentum Oscillator) pattern. Note how it resembles the PMO patterns around the two previous major tops. This pattern plus the approach of price to long-term resistance, leads us to believe that the bull market has very little time left.

Gold – Resuming a Long-Term Uptrend?

By Carl Swenlin, Decision Point

On the weekly chart below, we can see that, after making a new, all-time high back in August of 2011, gold went into a correction/consolidation mode, ultimately forming a descending triangle. While this formation suggests lower prices (the flat line is the weakest), price broke up through the top of the triangle. After a breakout the technical expectation is for price to pull back toward the line, which it did enthusiastically.

After testing that support, price has reversed upward, and this week made a strong move upward, signalling that the rally that began this summer is probably resuming. The weekly PMO (Price Momentum Oscillator) turned up again, which is a very positive sign.

Conclusion: Gold has completed its post-breakout pullback and appears to be resuming its long-term advance, but this will not be “official” until the October top is exceeded. It needs to overcome resistance in the area of 1800, and finally the resistance at the all-time high around 1900.

As of 8/8/2012 Gold is on a Trend Model BUY signal.

 

6 Month Seasonality Turns Favorable

By Carl Swenlin, Decision Point

We have just begun a new six-month period of favorable seasonality. Research published by Yale Hirsch in the Trader’s Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds.

The chart below shows the last two six-month seasonality periods. The first, November 2011 through April 2012, was supposed to be favorable, and it was, with prices closing well above where they started. The second period was supposed to be unfavorable, but, while prices did close slightly below their starting point, prices moved steadily higher after the initial decline in May. It is interesting that both periods began with a one-month decline, but this is not characteristic of the seasonality process.

Seasonal tendencies are always at work, but their influence on stock prices can be dampened or enhanced by the primary trend. For example, the chart above shows a one-year slice of a cyclical bull market, and the overall trend is obvious. The bottom line is that we should be aware of current seasonal tendencies, but first and foremost follow the primary trend.

In our subscriber area we have seasonality charts going back to 1950.

Soaring Gas Prices in California

Br Carl Swenlin, Decision Point

According to a news clip I just saw, there is a gas station in the Los Angeles area currently selling regular gasoline for $5.58/gallon. Some gas stations are shutting down because the owners don’t want to buy gas at these prices for fear that they won’t be able to sell it. Prices have been moving higher over the last few months, but the recent increases have fallen like a ton of bricks on consumers.

My immediate response was to check the charts for crude oil and gasoline. We can see from the weekly charts that crude is about midway its five-year range, and has most recently been trending downward.

The chart pattern for gasoline is not suprisingly similar to crude; although gasoline is closer to the top of its five-year range. Nevertheless, it too has been trending down recently. So on a national basis it is not the price of oil or gas that is the culprit behind California’s gas crisis.

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The problem it seems is that the fragile infrastructure for gasoline production and delivery in California has taken a few hits that have put a crimp in the figurative pipeline. Primarily supplies are drying up because of refinery outages.

Of all the articles I have read on this subject I have not seen a single chart. My purpose in writing this article was mostly to present the charts to people who may be following this story. A lot of inorrect assumptions and conclusions can be avoided by simply looking at the charts first. And we can clearly see that the price increases for gas in California are not related to a sudden rise in crude prices.