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Word That the Overly Positive Liquidity (From the Breadth 1900 4 Data) and Overly Bullish Sentiment Data 450 INSIDE 445 N RASI PROMISES MORE P. 1 440 LA THE CLEL DEM. PRES. CYCLE P. 2 435 c KET GOLD COPPOCK CURVE P. 4 AR NASDAQ/NYSE VOLUME P. 5 430 T TIMING MODELS P. 6 425 OR REP ABI DOWNTURN P. 7 420 EURDOLLAR COT WORKING P. 8 AGAIN? 415 Prepared After the Market Close, January 21, 2014 Report #451, January 22, 2014 3500 4.25 RASI Above +500 4.2 3000 DJIA - Log Scale Wards Off Evil, At 4.15 2500 4.1 Least For Now 4.05 2000 Final price high 4 With all of the potential for prob- made here, at a Final price high 3.95 lems in the market, the bulls still have 1500 peak below +500 +500 made here, peak 3.9 one argument in their favor, which is at +500 1000 failures 3.85 that breadth data have been strong. ? 3.8 That means liquidity is good, and thus 500 the market is much more immune from 3.75 the worst sorts of problems. There can 0 3.7 still be garden variety corrections, and 3.65 -500 3.6 one is more than due right now. But a +500 3.55 -1000 Ratio-Adjusted Summation Index (RASI) fake out crash is off the table. 3.5 The key piece of evidence of that -1500 -1577 3.45 strong breadth is shown in the first 01/04/08 01/05/09 01/05/10 01/04/11 01/04/12 01/03/13 01/03/14 chart. The Ratio-Adjusted Summation rective dip and then is able to climb up liquidity, then the Fed should be first in Index (RASI) is just like our classic above +500, it says that the rally has line. QE may be slowing, or maybe not Summation Index shown on page 3, achieved “escape velocity”, and thus depending on who one believes, but it except that the RASI adjusts for chang- does not need to come falling back has been a positive factor for the stock ing numbers of issues traded on the down to earth. market even if it has not been as much NYSE. When the RASI makes a cor- Back in 2008 and early 2009, we of a help to the “real” economy. BOTTOM LINE saw classic failure signals from the For as long as the Fed keeps pump- Seasonality has pulled the market down RASI when it failed to climb up above ing money into the financial system into a low ideally due Jan. 22-23, but +500. And then after the March 2009 through its purchases of Treasury and another top is due Jan. 28-30. In a bearish bottom, the RASI was able to surge up mortgage backed securities (MBS), the scenario, that will be a top to drop out of, well above +500, which announced that positive effect should continue for the and overly bullish sentiment indications things had changed and the bear market stock market. The big caveat to this is support that idea. But positive breadth was over. that stock prices reached their tops data say that liquidity is not a problem. If “credit” is to be awarded for ahead of the actual end of both QE1 and So the market stands poised between bringing about this sustained strong QE2, and so waiting for word that the overly positive liquidity (from the breadth 1900 4 data) and overly bullish sentiment data. 1800 That’s a recipe for going nowhere. Look 1700 1600 SP500 for a tradeable stock market top due Jan. 3 28-30, also for gold stocks, and coincid- 1500 ing with a bottom for T-Bond prices. 1400 Who wins in early February, bulls or 1300 1200 bears, is seriously in doubt now, and per- 2 1100 haps depends on the comments of new $Trillions 1000 Fed chair Janet Yellen. Bernanke killed 900 the housing bubble in 2006; Greenspan 800 killed the stock bubble in 1987. Volcker 1 700 killed the gold bubble. Arthur Burns 600 Total Treasuries & MBS Held By Fed killed the Nifty Fifty bubble. So it’s not 500 Source: http://research.stlouisfed.org/fred2/ so much a question of whether Yellen will 400 0 kill a bubble, but which one, and when? 01/08/06 01/07/07 01/06/08 01/04/09 01/03/10 01/02/11 01/01/12 12/30/12 12/29/13 Report #452 will be published on Wed., Feb. 5, 2014 ©2014, McClellan Financial Publications, Inc. The McClellan Market Report p. 2 Report #451, January 22, 2014 Fed actually has tapered down to noth- 1.5 ing this time would likely mean missing 1.45 the actual top. The chart at the top of page 2 shows 1.4 a comparison of the current SP500 plot 1.35 SP500 2012-2016 to the average performance during years when a Democratic is in the White 1.3 House. Both are on the same scaling, 1.25 Equates showing that the market since the 2012 1.2 to Feb. 4 election has been slightly stronger than the average performance. We count 1.15 presidential years somewhat differently 1.1 than others, starting each of four years as of the beginning of November rather 1.05 than January, since November is when 1 Democratic Presidential Cycle Pattern the election occurs. Investors tend to 0.95 respond to the election outcome as soon Election Nov. 2013 Nov. 2014 Nov. 2015 Election as it is known. While the overall performance has stand. Chart 6: The Volume Oscillator shows been slightly better than average, the Chart 3: The McClellan A-D Summa- a similar tight posting range, but closer SP500 has still managed to generally tion Index has risen to +2887 in Janu- to zero and with several crossings of the follow the ups and downs of the Pattern. ary, a level that proves quite sufficient zero line. A straight edge can be laid That is relevant now because it shows a liquidity to allow prices to move to across all the tops on the chart exclud- top equating to Feb. 4, and then a higher levels as they are moved to do ing two September spikes that can be decline into September. That Feb. 4 so. The recent Summation postings attributed to Bernanke and the Fed. The date is very close to the cluster of top have been congested rather than well narrowing of the oscillations across signals due Jan. 28-30 from our Timing spaced out, reflecting the relatively low zero since the end of June on the lower Models (page 6). Oscillator numbers. The price action in end and September on the higher end Bottom Line: There are lots of reasons the Composite has been flat since the echoes the less volatile price postings. why the market ought to correct, but the end of last year with the index unable to It will take a change of Oscillator char- strong breadth says that any damage close above its end of year value. acter to identify that the market will should be diminished. Chart 4: The Volume Summation has move in a new direction or become flattened out into an almost horizontal more volatile. Page 3 Charts move. This explains the inability of the Chart 7: The DJIA Price Oscillator Chart 1: The A-D Line continues to price indices to get above their year end made its high at +199.7 on Jan. 7, the display itself in a strongly bullish pat- highs in January. Horizontal Summa- day that the DJIA closed at its high for tern by rising from the lower left to the tion moves can only go on for so long the year, so far. On Jan. 15 the Price upper right on the chart.. It is into new before a correction takes place to drop Oscillator managed to only go down by all time high postings. The bottom that them down to lower levels. It is ex- 1 point, as the DJIA retested its Jan. 7 formed at the end of last year came right tremely hard and would be very unusual high, if you can call about 95 points at a trendline that can be drawn across to see the Summation take off and run lower a retest. The declining Price prior lows in the middle of the chart. higher directly following a horizontal Oscillator explains a good bit as to why That provided extra power to the cur- move, such as is being painted out. January has been unable to exceed the rent advance. Weak markets follow a Chart 5: The McClellan Oscillator December price high. There is still weak A-D Line, so there is some immu- dropped to a +12.7 on Jan. 13, failing to quite a bit of room between the current nity from harm offered by breadth data. confirm the negative numbers in most +156 posting and the zero line. Having Chart 2: The Daily Volume Line shows other indicators on that day. That the Price Oscillator turn up before the same bullish construction, moving action provided the compression such as reaching zero would invite the DJIA to from the lower left to the upper right on one would experience on the down run to a new high. It takes a change in the chart. However, the Daily Volume stroke on a trampoline before the recoil the current pattern of higher highs and Line made its highest posting on Janu- produced a move up. It only took 2 higher lows to produce the type of ary 15 and has failed, so far, to confirm days for the NYSE Comp to post its divergence that provides the expectation the higher postings on the Daily A-D high for the month and the DJIA to of a larger correction taking place.
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