Why I am Cautious On Stocks
The market has had a very nice move up since the March lows, but I am now turning very cautious on stocks because of the above chart.
Let me first explain the above chart so that there is no confusion. The green line you see is a weekly chart of the S&P500. The pink line is the 30 year U.S. Treasury bond smoothed and offset 10 weeks into the future. What I'm trying to illustrate in the above chart is that bonds lead the S&P by about 10 weeks. To make the correlation clearer I offset the bond market 10 weeks into the future so that the turning points line up with the S&P's turning points.
If you look closely at the chart, you will see many of the trend changes in the S&P coincided perfectly with trend changes in the bond market. Keep in mind these trend changes were known 10 weeks in advance! It's not perfect but in my opinion looking at this relationship is like having a road map as to where the S&P might be headed in the coming weeks.
Looking at the chart now we see that the pink line is turning down and trending lower into August. If this relationship holds up, the S&P should make a top about now and trend lower into at least August.
Now before all of you bears get excited about what this chart is forecasting, let me say the following. I have seen inter-market relationships work amazingly well and at other times the relationship decouples and falls apart. As of now the relationship between bonds and the S&P 500 are correlating well and that is why I am cautious on the market.
The trend in the market is up and there are no signs as of now that the uptrend has been broken. I will however be on the lookout for technical sell signals if they do indeed develop. What I'm looking for is heavier volume on the down days than on the up days, maybe a breaking of the trendline from the march lows, less and less stocks making new highs, a key reversal day, failure for stocks to rally on good news, extreme bullish sentiment..etc.
As of now I have no bearish position in the market but I wanted to share with you what I am thinking so that if my analysis does have any value, maybe some of you can benefit as well.
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4 comments:
Of course you can't trade the market based on one chart - but this is fascinating!
Also fascinating is haw you did the chart. I've subscribed recently to StockCharts basic membership, but I never saw any option to shift prices into future.
Did you just use photoshop?
No, I don't use photoshop...It's a little complicated how I offset the chart. I don't think stockcharts.com knows how to do it either.
Kevin,
Thanks for the charts. Do you ever trade with the COT? The "famous" Gary from Lauriston letters continued to pound the table with the COT signal. He too is guessing that the bulls has at least 10 more weeks to run so I wondered if your chart analysis is maybe off by a few more weeks as to predicting the top of the market. Again thanks for the wonderful lesson.
PS. Does your 2nd week DOW bullish signal still in play?
Hi Mike,
Yes I do trade with COT data but only in certain markets. I think COT data doesn't work well with stock indices. I mostly use COT data on metals, currencies and grains.
My chart may or may not be off by a few weeks. No reason to short this market now, however if I do see sell signals I will take them because of what my chart is showing me.
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