Market Internals Have Broken Down
Figure 1 shows a weekly chart of the S&P Depository Receipts (symbol: SPY). The indicator in the lower panel is constructed from the 9 SP500 sector ETF’s (data hidden). The indicator assesses the relative strength of each sector utilizing a 13 week look back period. As you can see, the indicator is rolling over.
Figure 1. SPY/ Relative Strength/ weekly
Now look at figure 2 which is the same graph, but this time I have added an analogue of our “dumb money” indicator in the lower panel. (When the value is “up”, that means there are too many bears, which is a bull signal.) Going back to 2000, the breakdown in the indicator is associated increasing number of bears. The gray vertical lines indicate those two times where the breakdown in market internals failed to bring about the bears. As market internals (i.e., sector ETF’s) are breaking down, it is my expectation that investors will turn bearish. Shortly after that, it will be time to buy.
Figure 2. SPY/ Relative Strength/ Investor Sentiment/weekly
Taking another perspective, I still contend that it is too early to “BTFD”. Looking at this data, we still need to wait for investors to turn bearish.
Category: Equities, Uncategorized
You have done a nice job calling the action. So congratulations and thank you.
Hovering behind all this bearish price action is a near certain event from the central banks if we have learned anything over the past 4 years. Read: “Price Is Right for Stimulating Action by Fed”, WSJ today – core CPI came in @ 0.2%, total CPI @ 0%. Also, the notion that European leaders will allow the EU to fracture now is extremely unlikely.
The fundamentals in the US are good and improving. I don’t see how prices could go too much lower from here with P/E multiples so attractive and balance sheets in great shape. I guess anything is possible but it seems to me like we could blast off from these lows on any good news out of Europe.