Last week, I recorded a 40-minute presentation with my friend Bruce Fraser on the 2021 outlook. It's currently being featured on StockCharts TV and calls for a significant extension to the bull market. We present a number of long-term charts featuring several indicators whose bullish signals have consistently been followed by a year or so of rising equities. I have to add that none of them are perfect, so there are no guarantees.

A typical example is featured in Chart 1, which compares the KST for the ratio between the S&P and the 30-year bond price with the S&P itself. When this smoothed momentum indicator crosses above its MA, it signals that the odds favor stocks outperforming bonds for an extended period. It also indicates that stocks are likely to rise in their own right. The reason lies in the fact that a liquidity injection at the beginning of the cycle drives both stocks and bonds higher. However, when the ratio between them reverses, it means that stocks realize that the economy has the momentum to grow on its own, with little or no help from the central bank. This rotational concept is explained here. In most business cycles, the transition in relative performance develops early on, hence the tendency for a year or more of rising equities following such signals.

Chart 1Chart 2 just compares the ratio to its Special K (SPK). The thick green and red arrows indicate that both consistently reverse at more or less the same time. Those reversals are an easy thing to spot with the benefit of hindsight. Consequently, trendlines have been inserted to demonstrate how they might be identified in real time. Note that the 2019-2020 down trendline was recently breached. That action has now been confirmed by the ratio itself. The green resistance trendline marks the upper end of a right-angled broadening formation, a particularly bullish pattern. It's really a reverse head-and-shoulders that does not have enough time to complete a right shoulder. To see how powerful these patterns can be, look no further than the breakout that took place in 2009.

Chart 2Before we talk about a possible correction, Chart 3 tells us that the market continues to climb a wall of worry. That wall is represented by the declining trend in the VIX since last spring. However, it's still at a fairly high level. The red arrows flag all the major peaks since 2000. Note that, in every case, the VIX was reflecting complacency, with readings below the blue line at 18.5. The latest reading is 23. The long period spent below the blue line from 2004 to 2007 tells us that a complacent reading on its own is not a reliable indication of vulnerability. By the same token, experience since 2000 tells us that a major top is unlikely to develop until a sub-18.5 reading has been registered.

Chart 3

The Correction?

I have often argued that trying to call a correction in a bull market is a mugs game. That said, there are some things that worry me about the near-term outlook, not from a bear market point of view, but more in the way of a sideways correction. I guess what I am saying is that all bull markets are temporarily interrupted by corrective action, and now might be as good time as any to expect digestion of recent gains.

Chart 4 features the NYSE Bullish Percent indicator. On the one hand, it's very overextended, as it was in 2004 and 2009. Both situations were followed by sideways consolidations. On the other hand, such strong readings also represent a form of breadth thrust. A breadth thrust is an exceptionally overbought oscillator that occurs in the early stages of a bull market. You can see that because these corrections were part of the overall bullish trend, as flagged by the green arrows. Bottom line, while the current high reading suggests that the market may be risky for traders, it's a positive sign for long-term investors.

Chart 4

My Dow Diffusion indicator (Chart 5) triggers sell signals when it reverses to the downside from a reading above its red overbought line. Since 2015, such signals have consistently been followed by a downward or sideways correction. So far, the Dow's reaction has been to rise. However, the failure of the indicator to rally back above its MA is not a positive sign.

Chart 5

US equities are closely tied into the global technical picture. In that respect, Chart 6 compares the MSCI World ETF (AWCI) to my Global Net New High indicator. This oscillator is calculated from a universe of country ETFs registering net new highs over a 40-day time span. It triggers sell signals when it drops below its MA from an elevated level. Solid arrows represent valid signals; dashed ones, false negatives. A sell signal has been triggered in the last few days, which further points us in the direction of a correction.

Chart 6

Finally, we return to our old friend the VIX. This time, it is being featured in the form of its daily KST. The pink shadings approximate periods when it is above zero; in other words, when fear and concern are on the rise. Typically, if a sell-off or correction is going to develop, it does so during one of these plus zero periods. The unshaded areas, when the KST is below zero, are mostly associated with rallies. Unfortunately, this VIX momentum indicator is edging through zero again, but not yet in a decisive manner. If it does, that will represent a strong signal that a correction is underway. Remember, you can update this chart going forward by simply clicking on it.

Chart 7

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This is an updated version of an article previously published on Tuesday, January 19th at 11:56am ET in the member-exclusive blog Martin Pring's Market Roundup.

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Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.

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The Semiconductor ETF (SOXX) and several other ETFs are on a serious roll in 2021. For the fourth time since 2009, 14-day RSI was above 70 for ten or more days. This is an exceptional streak, but SOXX is not alone and there are even longer streaks. The following list shows some ETFs and the number of days RSI has been above 70: ROBO (39), DRIV (25), ARKQ (13), EWT (13), MOO (12), XRT (11), SOXX (10), YOLO (10). Note that these numbers are based on Thursday's close.

The chart below shows SOXX with the last three times RSI was above 70 for 10 or more days (blue lines). Admittedly, three instances is not enough to base a strategy, but SOXX is clearly extended and ripe for a rest. The shaded rectangles on the chart show price action three to four months after each occurrence. Notice that SOXX had choppy trading each time.

The next chart shows SOXX advancing some 140% since the March low and 40% since the late October low (58 days). We do not need a momentum oscillator to figure out that SOXX is quite extended and ripe for a rest. Timing a correction or a pullback is quite a challenge because ETFs can become overbought and remain overbought, as we are seeing here in January.

While I would not be interested in calling a top or shorting a strong group in a bull market, now does not seem like a good time to force a shot with a long position. Instead, chartists should consider exercising a little patience and waiting for a better shot (opportunity). It will come - we just don't know when, exactly. The chart shows four such opportunities during this uptrend with small corrections along the way and RSI dips into the 30-50 zone. RSI moved back below 70 on Friday and could pullback for the next setup.

TrendInvestorPro focuses on finding bullish setups and short-term oversold setups within leading uptrends. Using our core list with 117 ETFs, we rank trend strength, track trend signals and identify tradable pullbacks within uptrends in a systematic manner. Click here to take your analysis to the next level!

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Some online retailers are all lined up to explode higher. This is a good weekend to take a look at them before they report earnings and decide how you want to position.

Amazon (AMZN) has been consolidating sideways, and this is seasonally a nice time for this chart. The company kicks off February with a report on Feb 2.

Here is Shopify (SHOP). Tilting up and to the right, it looks strong here. After the 6-month consolidation, the stock broke out above $1125 to a higher high on higher volume. Now we are seeing the volume subside as we settle in around $1200. Watch closely. My sources have the earnings on February 11th. You may wish to research that. Shopify and Walmart (WMT) recently teamed up; that's a pretty powerful pair working on the world around us.

Wayfair (W) is another website I have been rolling through. Their earnings are not until February 26th, so that gives us some time. The stock recently surged up and is consolidating just under the prior highs. I was on their site just the other day. I will say their search field has room for improvement, but it was a lot better than most of the sites I went to.

I have put ETSY on here, but it continues to be moving higher already. It continues to build little flag patterns and march even higher. Nothing wrong with that either, but the other three all look set to push away from the 6-month consolidations. They report February 24th, if my data source is correct.

This is a nice seasonal time for retail consumer cyclical stocks and, with COVID, these online names continue to look good.

I believe it is time to revisit the Rydex Ratio sentiment chart. A few DecisionPoint.com subscribers have noticed how overbought it has become; I wrote about it in last week's DP Weekly Wrap for subscribers of the DP Alert. Thursday night (1/14), after the latest asset counts were in, the Ratio finished with the lowest reading recorded, at 0.09. We invert the scale to arrange overbought readings on the top. A very low reading means participants are VERY bullish. Euphorically bullish investors lead to downside reversals.

On the chart below, we've annotated cardinal price tops. You'll note that at these tops, the Rydex Ratio was always overbought.

The long-term chart shows you that, indeed, these are the lowest readings we've ever recorded for the Rydex Ratio.

But wait! There's more! Tom McClellan wrote an article last night about the National Association of Active Investment Managers (NAAIM) Exposure Index that is a must read. We had thought that this new reading was the highest exposure reading ever, but it turns out our 2017 data wasn't quite right, so we did see a higher reading back then.

I still think seeing the second highest exposure reading is big news and goes hand in hand with what we are seeing on the Rydex Ratio. I've annotated cardinal market tops to give you perspective on how this sentiment works. Typically, right before major market tops, we see very high exposure readings. You will also note that, after the highest reading ever in 2017, it took a few weeks before the top was in. That could be the case right now, given the strong bullish bias in the market. I also annotated one of the lowest exposure readings ever and you'll note that came right before the bear market bottom.

I have a special announcement regarding sentiment! Mark Young, CMT at WallStreetSentiment.com will be joining me in the free DP Trading Room on February 1st. He will talk to us about highly bullish sentiment and also analyze your symbol requests with me. I hold the free trading room each Monday at noon ET. It's recurring, so you only have to register once to have access every Monday. I demonstrate how I trade using 5-minute candlestick charts and we review stocks that are in the news, as well as your symbol requests, as time permits.

It's Free!

Mark Young, CMT of WallStreetSentiment.com will be joining me in the free trading room on February 1st! He has all the latest sentiment data and will give his opinion on your symbol requests too!

"Investor sentiment is one of the most powerful forces in the stock market. It can make the difference between selling out at a market low and buying there." -- Mark Young, CMT

 

***Click here to register for this recurring free DecisionPoint Trading Room on Mondays at Noon ET!***

We didn't hold a 1/18 Trading Room, but did you miss the 1/11 trading room? Here is a link to the recording -- access code: ?H++t+d5

For best results, copy and paste the access code to avoid typos.

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I would like to also say that DP Diamonds Report subscribers got the intel early on Home Builders last Tuesday. Our "diamonds in the rough" from Tuesday had an average gain of 14.7%, with the big winner up over 27.5%! If you'd like to try us out for a free week, subscribe to the Bundle of both the Diamonds Report and DP Alert and use the coupon code: dptrialcw

You'll get access to all of our reports since January of last year. You can look at prior Diamonds and review our stance on the market in the DP Alert. We're proud of what we provide and definitely want you to see it. Additionally, I've had many Diamond subscribers tell me that trading a Diamond or two paid for their subscription for the year. A product that can pay for itself is worth a look.

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Check out the latest episode of StockCharts TV's Chartwise Women! Mary Ellen and I examine what's driving the rotation into new sectors and how you can take advantage. We also delve into the top industries within these leading sectors as well as individual stocks.

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Technical Analysis is a windsock, not a crystal ball.

Have a great weekend!

 

Happy Charting!

- Erin

erin@decisionpoint.com

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Helpful DecisionPoint Links:

Erin's PMO Scan

DecisionPoint Chart Gallery

Trend Models

Price Momentum Oscillator (PMO)

On Balance Volume

Swenlin Trading Oscillators (STO-B and STO-V)

ITBM and ITVM

SCTR Ranking

Relative Strength Index (RSI)

For more links, go to DecisionPoint.com!

Earnings season is off to the races, with Netflix (NFLX) flexing its muscles last week as it beat expectations all the way around, rising 18% at its peak the day after its numbers were released.

Netflix isn't the only company to report strong earnings. JP Morgan (JPM) and Goldman Sachs (GS), just to name a few, easily beat expectations. And we're expecting a bunch more to beat expectations over the next few weeks as thousands of companies report their numbers. And when considering some of the big names reporting next week - Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Tesla (TSLA), to name a few of the most visible companies - things are likely to heat up.

Why are we seeing such strong results with so many people out of work and the coronavirus raging on? Because many companies are actually benefiting from the stay-at-home economy - Netflix being one of the poster children - and are able to leverage their respective balance sheets with the cost of money being so cheap.

One thing we are excited about at EarningsBeats.com is our upcoming webinar this Monday, where Chief Market Strategist Tom Bowley will conduct his quarterly earnings event: "Q4 Earnings Season." During this event, Tom will be revealing a significant number of companies getting ready to report earnings that could see blowout numbers. These are the companies you want to focus on, especially those that pullback to key technical and price support levels once the dust settles. To learn more about the webinar and save a seat, click here.

Also, if you would like to see another company (hint, a company in the semiconductor space that's being accumulated ahead of what appears will be a blowout quarterly earnings report), sign up for our FREE EarningsBeats Newsletter and Tom will highlight the stock in Monday's Digest.

There will be a lot of hits and misses as earnings season progresses. Make sure you focus on those companies that beat expectations and guide higher, as these are the stocks you'll want to be involved in.

At your service,

John Hopkins

EarningsBeats.com