There's been plenty of debate as to whether the current upward move in stock indexes is a new bull market or just a bear market rally. I have several indicators that I like to follow. In this post I'll interpret what each is telling me. While each of these indicators has in the past done an admirable job of signaling tops and bottoms, I prefer to look at them collectively to get a more reliable signal.
In no particular order here is a brief synopsis of each indicator, it's current signal and possible implications for the S&P500;
NYSE Cumulative Advance/Decline Line
This indicator is currently on a series of higher highs and higher lows. In fact, as of today the NYSE Cumulative Advance Decline line has reached a level it hasn't been at since September 19, 2008. On September 19, 2008 the S&P closed at 1,254.96. Signal = Positive divergence = Bullish
Coppock Curve
As of today (the last trading day of May), the monthly Coppock Curve for all 4 major US stock indexes (S&P500, Nasdaq Composite, Russell2000 and Dow Jones Industrial Average) has turned from downward sloping to upward sloping. The S&P500's monthly Coppock Curve appears to have bottomed out at the end of April at a reading of -417.20. The only other 2 times the curve turned upward after reaching a level below -225 were in December 1974 and March 2003. In December 1974, the S&P500 was 2 months into an uptrend that would see it top out in September 1976 at a level 57.3% higher than it was on December 31, 1974. In March 2003, the S&P 500 was 5 months into an uptrend that would not end until February 2004 with the index 36.5% higher than it was on March 31, 2003. If the S&P500 were to advance similarly to 1974 and 2003 we would expect to see the index somewhere between 1,254 and 1,445 before beginning the next downtrend. Signal = Slope change from downward to upward = Bullish
Surplus/Deficit Levels of Cash in Stock Mutual Funds
As much as they are supposed to be the smart money, mutual fund managers are just as prone as regular human beings to be fearful when they should be greed and be greedy when they should be fearful. This makes them terrible market timers as proved by Jason Goepfert in his study which won a Charles H. Dow Award. At the end of February 2009, stock mutual fund managers were holding 5.9% of their total net assets in cash. Since 1997, the level of cash as a % of total net assets at stock mutual funds has ranged between a high of 6.5% and a low of 3.5% with an average of 4.8% and a standard deviation of 0.7%. Per Mr. Goepfert's study, given where T-Bill yields were at the end of February 2009 stock mutual fund managers should have been willing to hold a maximum of 4.6% of their total net assets in cash. Thus, they were holding a surplus of 1.3% (or $40.3B) in cash which so far represents the peak in cash surplus. Since 1997, a strategy of going long an S&P500 index fund when the cash deficit was less than 0.9% and going to cash when the cash deficit was more than 3.3% would have provided a compounded annual rate of return of 5.7% versus 0.6% if the index fund were bought and held. Signal = Stock mutual fund managers still holding billions of dollars of "surplus" cash = Bullish
NYSE New Highs/Lows
Right into the March 2009 low, the NYSE New Highs/Lows was already making a series of lower highs. At the October 2008 low, the number of New Lows on the NYSE was 2,901. At the November 2008 low, the number of New Lows on the NYSE totaled 1,894 while the S&P500 made a lower low as compared to the October 2008 low. At the March 2009 low, the number of New Lows on the NYSE peaked at 600 while the S&P500 made yet another lower low as compared to November 2008. As of today's close, the number daily New Lows on the NYSE has been below 20 for 53 consecutive trading days. The last time there was such a sustained period of New Lows on the NYSE was in May 2007 when the S&P500 was north of 1,500. Signal = Positive divergence = Bullish
Moving Average Cross-Over
A simple yet powerful indicator is a cross-over of the S&P500 50-day simple moving average and the S&P500 200-day simple moving average. Following the signals given by this indicator would have kept an investor on the right side of every major trend in the S&P500 going back to at least the 1950's. Since 1953, going long an S&P index fund on the day after the 50-day sma crossed up and over the 200-day sma and going to cash on the day after the 50-day sma crossed below the 200-day sma would have rewarded an investor with a compounded annual growth rate of 9.0% as compared to 6.7% if the index fund were bought and held. As of today's close, the 50-day sma is moving upward and is within 7.8% of the downward moving 200-day sma. At the rate both are moving, the 50-day sma will cross up and over the 200-day sma sometime in the middle of June. Since 1953, the S&P has returned an average of 16.5% from the point of the bullish cross-over. A similar move would put the S&P500 near 1,100. Signal = Imminent cross-over of the 50-day sma up and over the 200-day sma = Bullish
Trend
In addition to the signals listed above it's also informative to keep things simple and look at the trend itself. For my purposes here a price advance must be at least 5% from a previous pullback low in order to qualify as a rally and a price decline must be at least 5% from a previous rally high in order to qualify as a pullback. An uptrend is a series of rallies and pullbacks that leads to higher highs and higher lows and a downtrend is a series of pullbacks and rallies that leads to lower lows and lower highs. Using these parameters, since the March lows both the Nasdaq Composite and the Russell2000 have already put in a couple of higher highs and higher lows thus meeting the basic requirements of an uptrend. The S&P500 and Dow Jones Industrial average in the meantime have stubbornly refused to pull back 5% or more and are thus still in the rally mode which dates to the March lows for each index. Since 1953, there have been 14 completed uptrends in the S&P500. The average duration of the uptrends has been 996 calendar days and the average return bottom to top of the uptrends has been 94%. If indeed an uptrend began at the March low then the S&P, if it runs true to average, should top out sometime towards the end of 2011 at a level around 1,300. Signal = Higher highs and higher lows = Bullish
So, just a bear market rally? Nope, not based on the weight of the evidence. Just wishful thinking by the shorts and perma-bears. Though I do expect that the March low was not a generational low and that such a generation low is still out there somewhere in the next 3 years as I wrote here and here.
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