In the last bear market the percentage above their 200-day moving average fell below 30% for the first time in January of 2008. The markets experienced an oversold spring rally before peaking in May with the percent above their 200-day moving average only making a feeble bounce to 41%. Throughout the 2007-2009 bear market, stocks never saw the percentage of NYSE members above their 200-day moving breach the 50% mark until the March 2009 bear market bottom was in. An important watch-point going forward to gauge whether we just experienced a bull market correction or the kick off to a bear market will be to see if the percent of NYSE members trading above their 200-day moving can breach the 50% threshold.
Similar to the breadth measure cited above is the McClellan Summation Index. The Summation Index is a running total of the McClellan Oscillator, which is another way to measure market breadth. In bull markets, breadth is strongest and signs of a bear market occur when breadth weakens as fewer stocks participate in the bull market. Looking for signs of market breadth deterioration is a helpful clue to gauging whether the market is in a bull or bear market. Typically during market rallies the Summation Index rises above +500 but near a bull market top when breadth weakens peaks occur below 500. We saw this leading up to the 2000 and 2007 top (see red circles) and all of the counter-trend bear market rallies fell short of the +500 level to indicate the bear market was still alive.
NOTE: Readings north of 500 between 2001-2002 occurred when the market stabilized and the recession of 2001 was nearing its end. The equal weighted S&P 500 did much better than the S&P 500, which, in 2000, was nearly 30-35% technology stocks. So from 2001-2002 the market was improving until fears of another Persian Gulf War late in 2002 pushed the market over the edge until it bottomed after the first missiles were fired.
The September peak saw the Summation Index push close to 600 and it more than cleared the +500 level, which is bullish. What we need to see now is where the next short-term peak in the Summation Index occurs when the market begins to stall. Should it peak below the +500 level that would be a big bearish red flag and suggest we are moving into a new bear market. However, should we again move north of +500 the market needs to be given the bullish benefit of the doubt.
Some Fodder for the Bulls
There are some supports for the bull camp for the coming months as the markets may continue to rally. Most corporations are precluded from buying back their shares during the five weeks before their earnings release and so the month before the onset of earnings releases typically show the lowest percentage of share buybacks seasonally. Peak earnings releases for the S&P 500 will be between October 13th and October 31st, which is significant as four to five weeks prior the S&P 500 peaked as a major buying source of the market dried up. Near the end of this month roughly 75% of the S&P 500 companies will have reported and will be able to restart their share buyback programs. According to Goldman Sachs data going back to 2007, roughly 25% of annual share repurchases occur in the last two months of the year with November being the largest month (14% of total annual share repurchases). This indicates corporations may be a significant marginal buyer of the stock market beginning in the next few weeks.
“We are now in a blackout period so companies have been precluded from conducting tactical buyback activity that has supported the equity market during sell-offs in the recent past,” said Goldman Sachs in a note earlier this week.
October has been particularly quiet for buybacks by U.S. companies, with about $1.7 billion in stock repurchases announced or completed so far this month, compared with about $250 billion during the first nine months of the year, according to Thomson Reuters data…
“Next week is one of the busiest we have, so that unlocks a lot of buyback programs after that’s over,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.
He said the impact of those post-earnings buybacks has been consistent in the past years as “companies have been buying stock pretty aggressively.”
Another potential liquidity support for the market comes from global central banks. I created a proxy for global money in USD-terms and there has been a pretty strong correlation with the stock market since 2009 as seen below.
My global money supply proxy began to dip sharply in the middle of August a month prior to the decline in the S&P 500 and it also led on the upside, bottoming in early October and rising sharply higher. Should global money supply drift higher in the weeks ahead stocks should find some support.
Additional support for the economy and consumer comes from the slide in gasoline prices. Over the last two months the national average gasoline price fell by nearly 10%, a level often associated with market bottoms as consumer spending and confidence pick up.
One additional source of strength for the bulls in the coming weeks could be a pickup in positive economic surprises. Typically breakeven inflation rates lead economic surprises by several months and indicate that the decline in inflation expectations (shown inverted in red below) should mean economic releases from now through the end of the year should tend to surprise to the upside.
Global stock markets took a nosedive since the middle of September as buybacks by US corporations went on hiatus and global money supply shrank sharply leading into the market peak. Lots of technical damage was done in which markets reached elevated fear levels and severely oversold conditions, which made the markets prime for a short covering bounce. This was also helped along by accommodative statements from global central bankers.
How the markets behave in the coming weeks will go a long way to help determine if the September-October correction was the start of a new bear market or just a normal correction in a bull market. There are some supports for the bulls for a decent year-end rally as the blackout period for share buybacks will be lifted and the last two months of the year are the strongest two month period for buybacks. Additionally, global money supply is rallying again and should lend some liquidity support to the markets. The recent plunge in gasoline prices will also prove to be a support for the consumer and overall consumption trends, and the decline in inflation expectations argues for positive economic surprises into year-end.
Given the lack of deterioration in leading economic indicators and lack of severe stress in the credit markets, the bulls should be given the benefit of the doubt until proven otherwise. Should the current rally fizzle out and the markets head south even in the face of bullish supports, the bulls will have to re-examine their thesis.
This article is brought to you courtesy of Chris Puplava from Financial Sense.