Have We Been Tricked Again?

S&P500With the S&P 500 average now rising above both the 50- and 200-day moving averages, it feels like perhaps my friends Dr. McHugh and Michael Oliver got it wrong again. With a double bottom in place in late August and another late September, perhaps it’s now onward and upward to a new bull market after a “healthy” correction. At least that is the way many of the bulls see it. Never mind that earnings on average are in decline. Never mind that the masses of Americans are slipping from middle class to poverty and that food stamp usage in the U.S. continues to reach new highs. The stock market is on fire, fueled again by “happy” central bank talk from Europe and China this past week.

Yes, I admit I feel like my short positions in the NASDAQ have left me in the dust again. But neither of my two favorite technical analysts is convinced yet that their pronouncement of an end to the bull market is incorrect. Here is what Michael said after the strong market showing this past Thursday:

MSA’s assessment remains:S&P500-month-year

• Major long term momentum trend damage has been done this year—beginning in January and continuing in August. That damage cannot be erased by such a rally (look at momentum charts on next page for that vista).

• Expect this rally to peter out and probably be followed by resumption of downside in the last two months of this year.

• Expect the bear trend to last well into 2016 if not into 2017 before final footing can be found.

• Expect a hand?off to occur in terms of investor asset preferences—away from stocks toward commodities and commodity?related stocks (that evidence is obvious even today).

One of the annual momentum studies that MSA maintains is shown above right. Uptrend and horizontal support structures broken. Current rally impressive, but in no manner negating the structural damage. Just rallying back to scene of the crime.

S&P500-longAccompanying this email report is another pdf: an archival MSA report: “May, 2008.”That report is worth viewing, as it shows what MSA said back then—which was a very similar situation to what we have now. In January 2008, annual and quarterly momentum had blown any remaining structures or supports, and immediately dropped 200 points within a few weeks. But then the market developed a price chart “basing” situation that can almost be overlaid on current action. MSA gave a Bronx cheer to the bullish price chart action, and in one of our early May reports we labeled the upside as a “bull trap.” This May 24, 2008 report also offered prior archival examples—which are worth looking at and comparing with the current market upside.

It never changes. Old bulls are hard to kill. Especially when CBs regard equity markets as an asset category that is worthy of defense. Now more than ever.

Similar Pictures in 2008 vs. 1973 and 1977 vs. 2001

Michael is a seasoned technical analyst. He has seen the current scenario several times. In 2008 he used his past experience as well as charts as evidence to say, “Don’t get sucked into this bear market rally.” Following is what Michael wrote to his subscribers in 2008, warning them not to get drawn back into the market:

Many if not a majority of technicians regarded the apparent base of price action (since January lows) as being completed with the upside price “breakout” of late April – when S&P500 price finally fought its way successfully out above the rally high of February (1396). MSA did not share in that enthusiasm or positive assessment.

Instead, in the April 19 report, prior to the upside price chart breakout, MSA ran the archival charts that are again included here. Making the point that in prior bear markets and major corrections that the phenomenon of a false price chart bottom was not uncommon. Instead it proved to be a “hook” that lured many longs back in prematurely and cleansed the market of many shorts – and then proceeded to slip back below the breakout levels (the prior top of the basing action) only to erode downside – ultimately to blow out the prior false “bottom.” And that remains MSA’s assessment for the current market. The existence of these prior examples does not prove that the current market will or must follow these scenarios, but these prior examples do vividly demonstrate that the mere existence of an impressive price chart breakout in itself is meaningless. MSA’s “problem” with the current market’s similar upside efforts is simply that too many long term momentum factors are still unsatisfied and argue yet for deeper lows, before the final corrective bottom is likely. If for any reason(s) in the coming days or weeks MSA concludes differently, its assessment will change, but for now MSA simply suggests once again – look at these examples (examples among others that could have been included) that demonstrate the false and deceitful manner in which price action suggested that the worst was over, and then rolled over again for the final lows.

In this missive, Michael also passed along charts showing the 1977 vs. 2001 false bottoms as well. But Michael isn’t alone in believing that what we have experienced over the past couple of weeks is a bear market trap. As Dr. McHugh noted after Thursday’s market close, “The purpose of such a lengthy up/sideways move is to shake out the shorts, so they lose confidence in the new declining trend, and also to draw in bulls, so that they can be slaughtered at the next decline without a lot of Bears holding short positions. The point is: In primary Bear markets, the Bear wants everyone to lose, and he is good at it.”

In his letter put out before the market opened today, Dr. McHugh asks the following question:

dowAfter eight weeks of rising and sideways price action, and after a strong rally Thursday, October 22nd, how can we be confident that this rally off the Au-gust 24th intraday lows is not the continuation of the six year rally from 2009, but instead is merely an extended corrective move in a new primary downtrend that will soon finish and lead to a dramatic decline below those August 24th lows?

Both his question (in red) and his answer (in blue) can be seen in the chart on your left. Of course today, October 23, the markets rose again still further with the Dow gaining 0.9% and the S&P up 1.10%. The NASDAQ really took the cake as it rose 2.27% on some stronger-than-expected earnings news from a couple of the major tech companies. But for the most part, the story remains the same. The shares of the vast number of public companies are not doing well. The averages are jerked up by the big names that are overweight on the S&P and NASDAQ. But the breadth of this market remains weak. I will look forward to what both Michael and Robert have to say over the next couple of days and you can do the same by subscribing to their reasonably priced newsletters. For Michael’s Momentum Structural Analysis, go to www.OliverMSA.com, and for Dr. McHugh’s Technical Indicator Index, go to www.TechnicalIndicatorIndex.com.

                                          Jay Taylor’s Inflation-Deflation Watch (IDW)

IDW-2015-10-23After the market closed, Kevin Duffy of the Bearing Fund sent me the following chart with the following comment: “Jay, I think this illustrates the importance of separating the “fragile” from the “market.” This graph shows, essentially, the short universe we look at. Notice how it continues to struggle, even on a big up day like today.”

  The Bearing Short Index vs. S&P                       In my recent radio interview with Kevin, he talked about BearingShortthe concept of fragile vs. durable businesses. During the time when markets are levitating, fragile businesses often rise even more spectacularly than solid, less-exciting businesses. But at some point, when those fragile businesses begin to detach from more solid companies, it can be a sign that the party is about over. I don’t know what happened today, but if the pink line (speculative, fragile companies) continues to decline relative to the S&P 500, it may well indicate that a tipping point for this market is close at hand. Meanwhile, note my IDW. Despite a major rise in stocks over the past couple of weeks, it remains below five-year average.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.