The Dow's Uptrend Is Over
The Dow's uptrend is over... Two big worries for stocks... Investors are wildly bullish again... A warning from the bond market... Don't get too bearish yet...
Five hundred and one trading days...
That's how long it had been since the Dow Jones Industrial Average closed below its 200-day moving average ("DMA").
Until yesterday, that is.
As you can see in the following chart, the Dow officially closed below this widely watched technical level for the first time in nearly two years on Monday...
As regular Digest readers know, the 200-DMA is exactly what it sounds like... It's simply the average price of an asset over the previous 200 days.
Averaging prices over many months helps to "filter out" short-term price
During bull markets, stocks tend to spend most of their time above the 200-DMA. During bear markets, they spend most of their time below it. As a result, whenever stocks break below this level, many investors and traders alike take notice.
But the last time the Dow closed below this level, it was anything but bearish...
In fact, that day – June 27, 2016, the day of the "Brexit" panic – marked a significant bottom.
The Dow closed back above its 200-DMA the next day. And outside of a brief "test" of this level ahead of the November 2016 presidential election, it hadn't been anywhere near it in more than a year.
That could be the case again this time. In fact, as we write, the Dow is on pace to close back above this critical level today.
Meanwhile, other major U.S. indexes are showing relative strength. The benchmark S&P 500 Index is still about 1% above its 200-DMA, while both the tech-heavy Nasdaq Composite Index and the small-cap Russell 2000 Index closed at fresh all-time highs last week.
Still, we aren't ready to give the 'all clear' just yet...
We've been cautious on stocks for the past several months, and we remain so today. And there are two big reasons...
First, short-term investor sentiment remains extremely bullish.
The following chart shows the S&P 500 along with the CBOE Equity Put/Call Ratio. This indicator compares how many put options individual investors are buying versus how many call options they're buying. And like other sentiment indicators, it's contrarian in nature...
When folks are piling into put options (bearish bets) relative to call options (bullish bets), this number jumps higher. This tends to be a bullish sign for the market. It signals the "crowd" is too bearish, and at least a short-term rally is likely.
Likewise, when folks are piling into call options relative to put options, this number shoots lower. This tends to be a bearish sign. It suggests the crowd has gone "all in," and at least a short-term pullback is likely.
Because this indicator can be volatile, you'll often see it presented alongside a short-term moving average of its own to help "smooth" out the short-term moves.
As you can see, the put/call ratio plunged below 0.5 three different times back in late December/early January. These were the lowest readings in more than a year... and more
According to this measure, investors had indeed gone "all in" in late January... just before the sharpest correction in more than two years began.
Now, take another look at that chart...
You'll notice that the put/call ratio spiked higher in February. Panicked investors piled into put options as the market plunged. But they didn't stay bearish for long... and the put/call ratio has been trending lower since.
Earlier this month, the ratio plunged back below 0.5 for the first time since February. And last week, its 10-DMA nearly matched January's extreme.
In other words, investors have once again become as wildly bullish on stocks as they were at January's top. And yet, as you can see, the broad market itself remains well below those highs.
This is classic 'correction' behavior...
And it suggests we could see further downside in the near term.
The latest Commitments of Traders ("COT") report sends a similar message. As regular readers know, this is a weekly report published by the U.S. Commodity Futures Trading Commission that shows what various market participants are doing with their own money.
We pay particular attention to what speculators are doing. That's because these folks are typically trend followers, which makes their behavior a useful contrarian indicator. Like we saw with the put/call ratio
The COT report is best-known for tracking positions in the commodities futures markets. Yet it also covers futures for several other assets, including stock market indexes. And this week's data show large speculators on S&P 500 futures are wildly bullish today. In fact, they're holding an even larger bullish position today than they were at the January high.
But sentiment isn't the only reason we remain cautious for now...
Equities and corporate credit are also sending starkly different messages today...
Both stocks and investment-grade corporate bonds have marched higher for the past several years. And both suffered sharp corrections early this year. Yet as you can see in the following chart, corporate bonds haven't participated in the rebound with stocks...
This doesn't mean stocks can't continue higher, but it is concerning. The last time we saw a similar divergence between stocks and investment-grade bonds – in the spring and summer of 2015 – stocks eventually played "catch up" to the downside... and the S&P 500 lost nearly 15% over the next several months.
In short, contrary to what many folks appear to believe, the recent correction may not be over just yet...
But let us be clear... We certainly aren't recommending that you sell all of your stocks today.
You see, despite these concerns, four out of five of Steve Sjuggerud's market "vital signs" – including the critical "advance-decline line" – remain solidly bullish today. Only one – financials – is flashing yellow today. As Steve explained in the June issue of True Wealth Systems earlier this month...
Financial stocks have been falling in recent months. That decline pushed the sector into a long-term downtrend this month. That means financial stocks are signaling a yellow light right now.
Remember, a yellow light isn't a reason to panic. It's simply something to watch closely.
We'll be worried if we have several red and yellow lights. That's not happening today.
We still have four indicators giving us the green light. That means that overall, the market is still in a healthy state.
Don't let the headlines scare you out of the market. I believe we still have new all-time highs in U.S. stocks ahead before the bull market ends. And our indicators are giving a positive report on the market today.
Our advice remains the same: Stay long... stay "hedged"... and keep a close eye on your trailing stops, just in case.
New 52-week highs (as of 6/25/18): Quest Diagnostics (DGX) and Sysco (SYY).
In today's mailbag: Feedback on America's savings crisis... and another "boots on the ground" report on the economy. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com. We can't provide individual investment advice, but we read every e-mail.
"The reason that most Americans don't have savings or emergency funds is that most Americans believe the government will take care of them when the financial s**t hits the fan and they are envious of the 'haves'. I'm 58 and it took me 30 years of working hard, saving, investing and living within my means to get where I am today. Now I'm a millionaire and can retire and never depend on the government.
"Unfortunately, the majority of Americans want 'NOW' what took me 30 years to acquire. They want the big house, 2 car garage, 2 cars, fancy vacations, multiple vacations, fashionable schools
"When I hear someone say I work 2 jobs and don't have enough I want to puke. If they don't have enough it's because they are not living within their means. Enuff said." – Paid-up Stansberry Flex member Charlene P.
"Porter: We recently
"We observed a LOT of trucks on the road – and my wife kept commenting how most of them seemed to be quite shiny and new! It looks like the trucking companies (and independents) have taken the Fed up on their 'free money for everyone' policies and bought the latest tricked-out models of 18-wheelers. Gotta wonder how they'll fare once the economy turns south, their loads start to shrink, and the big multi-year debts for their fancy wheels begin to weigh heavily on their corporate and personal finances.
"Anyone building up war chests to buy parking lots full of almost new big rigs out of bankruptcy in a couple of years?
"By the way, we were able to buy a 3/4 acre parcel of vacant land near our town for $13,510 in cash less than four years ago. Now with the big building boom going on here, we have a buyer for it at $150K! Nothing like having cash on hand to scoop up bargains when no one else has the will or wherewithal to grab them!" – Paid-up subscriber David G.
Regards,
Justin Brill
Baltimore, Maryland
June 26, 2018