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.)



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.


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.


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.


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.

Technicals Not Confirming S&P 500 Highs

By Carl Swenlin, Decision Point

Decision Point tracks each stock in a given market index and determines the location of its current price in relation to the 52-week high and 52-week low. We express this relationship using a scale of zero (at the 52-week low) to 100 (at the 52-week high). A stock in the middle of its 52-week range would get a “Rel-to-52″ value of 50.

The chart below shows the average Rel-to-52 for all the stocks in the S&P 500 (we measure the Rel-to-52 of each stock in the S&P 500 and average the results). We can see that the recent price highs were not confirmed by the Rel-to-52 Index, which means that there are fewer stocks pushing into the high side of the envelope.

It is interesting to note that the number of new highs (below) at the recent price high greatly exceeded the number of new highs at the tops earlier this year, thus confirming the price move, but the Rel-to-52 Index doesn’t back that up.

Screen shot 2012-09-28 at 12.25.09 PM

To be sure, the Rel-to-52 is not extraordinarily weak, but it joins quite a few other indicators showing negative divergences.

Sentiment & Seasonality Urge Caution

By Carl Swenlin, Decision Point

The National Association of Independent Investment Managers (NAAIM) weekly poll* shows that they are 83% long. This qualifies as an extreme level of optimism, and should cause concern.

On the following chart we can see that readings above 80% are not a magic number or an automatic sell signal; however, when sentiment reaches that level, we should begin looking for at least a brief correction. (Note that we have not identified every reading over 80% but have placed markers to provide points of reference.)

This spike of optimism comes as we are entering the September-October time period, the most seasonally negative two months of the year. We do not view this as a happy coincidence.

This spike of optimism comes as we are entering the September-October time period, the most seasonally negative two months of the year. We do not view this as a happy coincidence.

* NAAIM sentiment polling is conducted by The National Association of Active Investment Managers ( Cutoff for the poll is Wednesday, and the results are released Thursday.Approximately 40 NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on Wednesday. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group.

Range of Responses

200% Leveraged Short
100% Fully Short
0% to 100% Cash or Hedged to Market Neutral
100% Fully Invested
200% Leveraged Long

* * * * * * * * * * * * * * * * * * * * *

Technicals Point to an Unhealthy Market

By Carl Swenlin, Decision Point

Decision Point publishes a daily Tracker report of our 152 Blue Chip list. This list is composed of the stocks in the S&P 100 Index, the Dow 65, and some large-cap Nasdaq stocks. We also track the Top 10 stocks in ths list, ranked by relative strength measured by Decision Point’s proprietary PMO (Price Momentum Oscillator).

I have observed this list over a long period of time, and my impression has been that the top stocks do exceptionally well during a bull market, and extremely poorly in a bear market; however, I wanted to develop a more objective way to measuring the performance of these top stocks.

To do this I constructed a “Blue Chip Top 10 Index”. This is done by calculating the daily change of the Index as being the daily average percent change of the securities in the Blue Chip Top 10 list. Stocks are tracked from the day after they enter the Top 10 list through the day they drop off the list.

The Top 10 Index is equally weighted, so theoretically one could only replicate the performance of the list with real money by reallocating an equal amount to each stock each day (and somehow avoid transaction fees in the process). More to the point, the Top 10 list are a good place to look for securities that will out-perform the market, but it will be impossible for you to duplicate the Index. You could also lose a ton of money if you are long these top ranked securities during an extended market decline.

The primary purpose of the 152 Top 10 Index (BC Top 10) is to how see well these top ranked large-cap stocks are doing in relation to the broader market. Specifically, in a bull market or extended rally we expect the Index to out-perform the broad market. This is because, when stocks reach the top of the list, they tend to stay on top due to persistent upward momentum. This is a healthy condition. In an unhealthy market, stocks tend to rotate through the Top 10 rather quickly, and the performance of the index poor in relation to the broad market.

Comparing three-year charts of the SPX and BC Top 10 Indexes we can see that the Top 10 have been underperforming for the entire time. Since the June low the BC Top 10 has advance only 5.9% versus 9.5% for the SPX. And while the SPX has been trending up for the period shown, the BC Top 10 has been trending down since the February 2011 top.

Conclusion: In spite of upward movement of the SPX, the Blue Chip Top 10 Index tells us that the leadership of the market has been rotating too rapidly, which suggests confusion and weakness. By the time a stock reaches the Top 10, it loses momentum and drops right back out again. This is evidence that for a long time the internal condition of the market has been turbulent and confusing, in spite of generally rising market prices.

New Buy Signal for the S&P 500

By Carl Swenlin, Decision Point

Today our mechanical Thrust/Trend Model (T/TM) for the S&P 500 switched from NEUTRAL to BUY. For our purposes, the S&P 500 represents “the market.”

The signal was generated by the Thrust Component of the T/TM, which consists of the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index). Once both of these indicators have moved above their EMAs, a BUY signal is generated. You can see that the PMO crossover occurred earlier this month. The PBI crossover occurred today, which was more delayed than we normally see.

While the T/TM is intended for intermediate-term timing, the Thrust Component of the model is really more short-term oriented and its intended effect is an earlier entry than we would normally get from the Trend Component alone. This makes it vulnerable to whipsaw.

At this point we will wait for the Trend Component to confirm the signal, which will happen when the 20-EMA crosses up through the 50-EMA. This will take a while because there is still a lot of separation between the two. (See arrows on the thumbnail chart below.)

The timing model is far from perfect, but it has proven to be a fairly reliable tool for identifying changes in trend. At this point we have to assume that a new up leg is in progress. Our intermediate-term market posture is now bullish.