During this afternoon's DecisionPoint Show, Carl looked at the chart below to make the case that the market is seriously overvalued now. We knew it was extremely overbought, but now we can add "extremely overvalued" to the equation. Note that from 1925 - 1990, the upside extremes of the SPX P/E were along the red dotted horizontal line. Since 1990, that has become part of the lower part of the range. There were two "outliers" in the 2000's, but the pink dashed line shows that we are now right where we were prior to the dot com bubble burst.
The DecisionPoint Alert Weekly Wrap presents an end-of-week assessment of the trend and condition of the Stock Market, the U.S. Dollar, Gold, Crude Oil, and Bonds. The DecisionPoint Alert daily report (Monday through Thursday) is abbreviated and gives updates on the Weekly Wrap assessments.
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MAJOR MARKET INDEXES
Each S&P 500 Index component stock is assigned to one, and only one, of 11 major sectors. This is a snapshot of the Intermediate-Term (Silver Cross) and Long-Term (Golden Cross) Trend Model signal status for those sectors.
CLICK HERE for Carl's annotated Sector charts.
THE MARKET (S&P 500)
IT Trend Model: BUY as of 5/8/2020
LT Trend Model: BUY as of 6/8/2020
SPY Daily Chart: We have a short-term rising wedge which is a bearish pattern. There was an attempt at an upside breakout on Friday, but it failed to materialize today as price traded and closed within the wedge. I noted during the DP Show today that VIX tested its 20-MA on the inverted scale. Should we see the VIX move below its moving average, that is a sign that the market is losing its internal strength.
The RSI is moderately overbought, just as the PMO is moderately overbought so rising prices could continue.
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Participation: The following chart uses different methodologies for objectively showing the depth and trend of participation for intermediate- and long-term time frames.
- The Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA).
- The Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA).
- The Bullish Percent Index (BPI) shows the percentage of SPX stocks on Point & Figure BUY signals.
We noted on Friday that the SCI had a negative cross over its signal line. The BPI is holding above it signal line, but is flat and not particularly encouraging. The GCI is rising nicely but is overbought.
Carl talked about this chart during the show today to juxtapose PE chart being overvalued and price being overbought. Not only do we have highly overbought readings, there are negative divergences that are accompanying them.
Climactic Market Indicators: No climactic readings today. New Highs did contract. Past that, it's a rather ordinary day.
Short-Term Market Indicators: The short-term market trend is UP and the condition is OVERBOUGHT.
The STOs are continuing to rise which is good for the short-term picture. These indicators are uncannily accurate on direction changes and right now, we don't have a change in direction as readings move higher. Despite readings moving higher, we still have negative divergences. Another problem is that the STO-V is very overbought.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is OVERBOUGHT. The market bias is BULLISH.
The ITBM is rising and somewhat overbought. The ITVM is extremely overbought. While there isn't a negative divergence visible on the ITVM, there is one on the ITBM and most markedly on the %Stocks on PMO BUY signals. It's a head scratcher when you see prices moving higher and yet have only 61% of SPY stocks on PMO BUY signals. The higher price goes, the fewer PMO BUY signals. The market can't maintain a rally when not all of the components are participating.
CONCLUSION: We've already been trumpeting the warning that indicators are overbought and have negative divergences to boot. Now we have a chart that displays how overvalued the market is right now. All of these things are recipes for a correction; however, with a strong bullish bias ruling price movement, this could resolve with an uncomfortable pullback of 10% and consolidation. A correction of 20% or is not off the table given the current market conditions, but market participants are still very bullish and Santa Claus is due to arrive in the near future so seasonality is on the market's side. Stay alert and read the Alert.
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This chart is included so we can monitor rate inversions. In normal circumstances the longer money is borrowed the higher the interest rate that must be paid. When rates are inverted, the reverse is true.
Currently, we are in a "rising rate" environment and that is putting pressure on the longer-term Bond prices.
IT Trend Model: NEUTRAL as of 5/28/2020
LT Trend Model: SELL as of 7/10/2020
UUP Daily Chart: The Dollar has been in free fall, but it is taking a pause. Trading over past three days has formed an island. This could be a reversal pattern. The RSI is coming out of highly oversold territory and the PMO is beginning to decelerate. All of which point to a price reversal on the Dollar.
IT Trend Model: NEUTRAL as of 10/14/2020
LT Trend Model: BUY as of 1/8/2019
GOLD Daily Chart: When the Dollar rises, Gold generally falls. If the Dollar does bottom as noted above, we would expect Gold to fail. However, I would point you to the Correlation in the last indicator window. Gold has been traveling mostly in the same direction as the Dollar. That is going away. What is left is a correlation that is moving toward zero. The closer the correlation is to zero, the less tied the two are. They are decoupling. Just because the Dollar could be reversing, that doesn't sound the death nell for Gold.
Today, Gold popped to the upside. With today's rise, price managed to overcome both the September low and the 20-EMA. The 50-EMA is Gold's next challenge and given the brand new PMO BUY signal that has come alongside an RSI that has just turned positive, I am expecting a breakout above the 50-EMA and a likely successful test of overhead resistance at the $1925 level.
GOLD MINERS Golden and Silver Cross Indexes: Gold Miners also popped to the upside. GDX overcame not only the 20-EMA and the October low, but it also vaulted the 200-EMA. This successful test of overhead resistance and the near positive RSI, along with a new PMO BUY signal tell me that Miners are waking up again. The BPI just had a positive crossover as well. The improvement in the indicators suggest more upside. A viewer asked me in the trading room if I thought a market decline would be a problem for Miners. It will certainly put downside pressure on Miners should the market turn, but if Gold continues to rally, that will likely translate into internal strength for the Miners. They should be okay unless Gold prices tank.
CRUDE OIL (USO)
IT Trend Model: BUY as of 10/20/2020
LT Trend Model: SELL as of 2/3/2020
USO Daily Chart: USO continues to struggle with overhead resistance at the summer highs. It has overcome that price level but hasn't done too much since. the PMO is rising and on a BUY signal and the RSI is positive and not overbought. I'm expecting USO to hold this new support level based on a review of $WTIC below USO's chart. Notice $WTIC has relatively new LT Trend Model "Golden Cross" BUY signal. USO won't see that for some time given the distance yet to be traveled to the 200-EMA. I still like Oil and Energy.
IT Trend Model: NEUTRAL as of 8/27/2020
LT Trend Model: BUY as of 1/2/2019
TLT Daily Chart: As noted in the comments on the yield array, rates are in a rising trend. This will make it difficult for TLT to overcome resistance at all of the EMAs. However, it is positive that price bounced when it reached the November low. The PMO is trying to turn up, but the RSI is still negative. This could be the second bottom of a double-bottom pattern, but it's too early to annotate it. We're cautiously optimistic on Bonds.
Full Disclosure: I own TLT
Technical Analysis is a windsock, not a crystal ball.
Happy Charting! - Erin
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
NOTE: The signal status reported herein is based upon mechanical trading model signals, specifically, the DecisionPoint Trend Model. They define the implied bias of the price index based upon moving average relationships, but they do not necessarily call for a specific action. They are information flags that should prompt chart review. Further, they do not call for continuous buying or selling during the life of the signal. For example, a BUY signal will probably (but not necessarily) return the best results if action is taken soon after the signal is generated. Additional opportunities for buying may be found as price zigzags higher, but the trader must look for optimum entry points. Conversely, exit points to preserve gains (or minimize losses) may be evident before the model mechanically closes the signal.
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