Best Stock Market Indicator Ever:
Unchanged at 96%; Secondaries Confirm "Tradable"
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The $OEXA200R Monthly (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com used to find the "sweet spot" time period in the market when you have the best chance of making money. See Is This the Best Stock Market Indicator Ever? for a discussion of this technical tool.
The charts below are current through the week's close.
Monthly OEXA200R Over the Past Few Years
The OEXA200R ended the week unchanged at 96%.
Of the three secondary indicators:
- RSI is POSITIVE (above 50).
- MACD is POSITIVE (black line above red).
- Slow STO is POSITIVE (black line above red).
According to this system the market is tradable. Not rational, tradable.
The "Printing Press Bull Market" continues. It could be seriously argued that since 2009, Fed intervention in its various forms has for all practical purposes simply camouflaged a second full blown Great Depression. Realistically however, Fed Chair Bernanke can only feed the economy so many cans of QE Red Bull before it eventually crashes. Consider the following realities:
- After 4 1/2 years and trillions of stimulus dollars GDP remains feeble. The stock market balloon is becoming increasingly untethered from the stagnant wealth of the nation - the classic asset bubble.
- The U3 unemployment rate fell to 7.5% in April, the statistical result of weak job growth and a Labor Force Participation rate hovering around a 35-year low. If the current LFP rate was the same as that of January 2009, the U3 rate would be 10.8%. In other words, the official employment picture is looking better if we just collectively pretend that huge numbers of discouraged, unemployed Americans simply aren't there. Most telling is the Employment to Population Ratio, the proportion of the country's working-age population that is employed, which logically includes the employable who have stopped looking for work. It fell from about 63% in 2008 to below 59% in 2009 and has remained there for the past 43 months, indicating no real improvement in net national job creation since the Great Recession began.
However, the overall net neutral rate of job creation masks an alarming trend. While higher-wage job loss / gain has remained steady since 2009, mid-wage jobs have suffered a devastating 60% loss with a corresponding gain of 58% in low-wage jobs. Incredibly, more than 1 in 4 private sector American workers now make $10 / hour or less, severely undercutting organic, non-debt driven consumer based economic growth.
As a result, according to the U.S. Census Bureau, median household income fell 1.5% to $50,054 in 2012, the fourth consecutive annual decline after adjusting for inflation. The typical household now takes in less cash than it did in 1996 when adjusting for inflation. In contrast, income for the top 5% of households rose 5.3% last year, with income gains greatest among the top 1%. The two are definitely related: falling wages have increased corporate profits, stock prices and disproportionately benefitted wealthy individuals whose income derives largely from dividends and capital gains. On the public policy side, the bottom line is that 4 ½ years of multi-trillion dollar effort by the Fed and Washington to bolster Wall Street has just further inflated the wealth of those fortunate enough to be substantive equity holders while those who are not have dropped into lower real income brackets.
- The gusher of money coming out of the Fed hasn't yet caused overall inflation to increase, true just inflation of the stock and now housing markets (see above). But how can a country print an ocean of new money out of thin air attached to a stagnant GDP without eventually causing an inflationary run which will disproportionately batter low and middle income individuals? It's never happened before in history and it won't happen this time.
- As far as the housing boom, from the Washington Post, April 2:
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery President Obama's economic advisers and outside experts say the nation's much-celebrated housing rebound is leaving too many people behind, including young people and minorities looking to buy their first homes as well as individuals with credit records weakened by the recession. In response, administration officials say they are working to get banks to lend to borrowers with weaker credit by taking advantage of taxpayer-backed programs including those offered by the Federal Housing Administration that insure home loans against default.
It's too bad we don't have any real life experience to determine how this may work out.
- But really, how fragile is the economic picture? Here's one indication: Atty. General Eric Holder (for Pres. Obama) recently stated that he would not criminally pursue the mega-thieves at Bank of America, HSBC and other too-big-to-jail banks because it would just be too "unsettling" for the economy. The Attorney General is afraid to prosecute the most dangerous financial criminals in American history. In essence, the U.S. Government has not just offered the banks the courtesy of underwriting their moral hazard, it's eliminated the obstacle of law for them as well. At this point, Federal policy reeks of desperation. That's how fragile the economy is.
The force driving the S&P to new highs is not actual economic recovery but mass delusion. The idea that no matter what hell, high water, incompetence or criminality the U.S. Government will do whatever it takes to keep the systemic banks afloat. That, and the assurance that the Fed will also go to any economically irrational extreme to keep Wall Street and those banks happy (since those banks ARE the Fed, that's no surprise). All in the slim hope that if the bogus appearance of recovery and prosperity can be maintained for long enough, actual recovery and prosperity will somehow materialize in time. But in the certainty that either way those who control Wall Street and the systemic banks will continue to make a fortune.
The recent bull market in the S&P is based on the same mass speculative self-delusion that has characterized every other financial bubble since the Tulip Mania of the 17th century. Will the market crash next week or next month? Probably not. But all the other bubbles eventually ended, and in the same way that this one eventually will.
Background on How I Use This Indicator
The OEXA200R is a valuable metric used to accurately assess the state of the market in order to make profitable trading decisions. That is, whether we are in a bull, a bear or transitioning from one to the other, as well as market volatility and risk within each of those situations. Historically, it has also given traders a clear early warning signal of impending serious market downturns and later safe re-entry points. While not intended as a day trading tool per se it can certainly be used as background information by day or highly speculative traders. Simply put, the OEXA200R gives traders the ability to identify the most opportune conditions within which to execute their various long, short or hold strategies.
Following a major market correction, the conditions for safe re-entry are when:
a) Daily $OEXA200R rises above 65%And two of the following three also occur:
b) RSI rises over 50
c) MACD black line rises above red line
d) Slow STO black line rises over 50 and is also above red line
Without the solid foundational support of two out of three secondary indicators it is unsafe to trade even if OEXA200R edges above the 65% line. Once two turn positive, the market is considered safely tradable as long as OEXA200R remains above 65%. Volatility and risk for long traders are relatively low. The trend is on their side.
When Daily OEXA200R drops to 65% it is taken as the conservative signal to exit all long positions, sit on the sidelines with your cash and wait for some clarity before proceeding. Volatility and risk increase substantially. Since 2007, this has often been a "tipping point" condition presaging a major market drop.
If the OEXA200R does not rebound but remains below 65%, how to proceed depends on the overall trend of the market, the macro-picture. During the cyclical bull of 2003 to 2007, the market was still safely tradable with OEXA200R in the 50% to 65% zone because there was enough upwelling lift in the S&P at that time to minimize the chance of a sharp, significant market downturn.
The problem is that we can by no means confidently compare our present situation to that of 2003 2007. There is no strong, steady wind pointing the market weathervane in one direction, it is being buffeted by swirls and gusts in unpredictable ways. To better understand this, take a look at the charts below, in particular the overall trend of the OEXA200R during the 2003 2007 cyclical bull compared to the trend from 2007 to present.
The S&P chart indicates that for the past five years we have not had a steady upwelling trend in the market comparable to 2003 2007. Absent that underlying support, the OEXA200R has undergone significant gyrations since 2007. Notice also that even in spite of the Fed-fueled rally, the S&P volume has experienced a steady decline since 2009, a classic Bear indicator.
If the OEXA200R drops below the 50% line we regain clarity as to the market's direction. That will be the strong signal to exit any remaining long positions immediately in expectation of a serious, imminent market decline. It will also be the clear signal to go short to take advantage of that sharp decline.
In my opinion, the most significant indicator of where we stand today is the fact that the market is above both its 140 year historical trend line and the trend line for the secular bear that began in 2000. These are the marco-forces that will gravitationally pull the market back into equilibrium at some point in the near future.
How far will the market drop? QE3 might save the day once again, temporarily. But in light of the factors mentioned above, it should come as no surprise if by 2014 we end up experiencing a market event worse than that of 2008 2009. Luckily, OEXA200R should give us ample advance warning of the next major correction however we want to trade it. Buckle up!
Note: Stockcharts.com offers free access to the $OEXA200R indicator on a daily and weekly basis. The monthly view requires a subscription. Stockcharts allows users the option to download the last two years of indicator data. Unfortunately, I have not found a source for longer-term $OEXA200R data for performance back testing. Meanwhile, here is a link to a chart that gives a better look at the correlation between the $OEXA200R and the S&P 500 over the past decade.
(c) John F. Carlucci
John F. Carlucci is a regular contributor to Advisor Perspectives and the author of "Ashes to Riches: How to Profit Spectacularly during the Economic Collapse of 2012 to 2022", available on Amazon Kindle.