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Friday, October 23, 2015

Daily update 10/23 LEI, Kissing 200 SMA good bye, Peter Eliades on CNBC

The PBOC to the rescue with a surprise rate cut in China.  Things must be getting pretty bad out there.

SPX closed above the 200 SMA.  While SPX closed up 1.1% the breadth was only +56%.  Today was very selective.  New highs expanded a little more to 126.  New lows expanded a bit to 57.  That should not happen on such a strong day.  We closed the last remaining downside gap today.  We are back to the scene of the crime as a friend of mine likes to call it.  This is where the break down started and I bet there are quite a few people anxious to sell now that they are back near break even.

The futures are very extended from the 100 SMA.  It seems pretty unlikely they will keep going here.  Even central bank easing probably has its limits.

Here is something a little different.  This is the count of stocks in the NYSE composite index with the 13 EMA above the 34 EMA on the monthly charts.

This is the third time this has dropped below 60 in the last 30 years.  Each time we had a recession.  This indicator bottomed out at 67 after the crash of 87.  We had no recession then.  That is as far as I can go back in the data.  Only in the 2001 recession was it a leading indicator though.  The other two occurrences we were in recession before it triggered.  It is 3 for 3 as a recession indicator with no false positives.  Obviously that is a statistically small sample, but it certainly backs up the economic data that indicates we need to be on recession watch.  The more I look at stuff the more it looks like odds are high we are in a bear market.

Lets look at a couple of market internals.

This is a look at the advance/decline line (green) vs. SPX (blue).  There has been a divergence building for a couple of weeks now.

This one is the cumulative volume index.  It looks very similar to the other one and started diverging at the same time.  So both breadth and volume indicators are showing negative divergences on this rally.  Not bullish.

The dollar extended yesterday's rally with another big gain.  This means it has a confirmed upside break of the 200 SMA.  This looks even more like it has embarked on a test of the high.  New lows now would indicate the basing pattern was a top instead of a bull market correction.  A continued rally would be a nightmare for many CEOs in this country.  It will also be a nightmare for all those foreign companies that borrowed money in dollars.  Kind of ironic when you think about it.  Many traders from 1987 partially blame the crash on a falling dollar.  If we crash now many will be blaming a rising dollar.  Stay tuned on this one.

The market is overbought at the 200 SMA.  For bears this is a dream short set up.  Odds are very high we will have a significant pullback even if we do not make new lows.  A close back below the 200 (2060) will likely bring out the sellers in force.

The Leading Economic Indicator from the conference board is showing some weakness.

In the inset box we can see the LEI has been sideways a couple of months before this month's decline.  This indicator has a history of turning down before a recession hits.  I can't say the economy is going to weaken significantly, but it does not appear the economy is about the get stronger any time soon.   This is a very useful indicator, but to my knowledge it is not freelly available to chart.  I am reliant on somebody publishing the chart which Doug Short happened to do this time.  If anybody knows where this can be looked at in a chart every month please email me.

Great article on the behavior of the market after a prolonged period under the 200 SMA..  The SP-500 200-day average “Goodbye Kiss”  Highly suggested reading.

Interesting interview on CNBC with noted technician Peter Eliades  He discusses a possible top for a decade or longer. 

The market and sector status pages have been updated.  Have a great weekend.


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