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I have been trading in the market since the 1960s. Over that time I have witnessed many market cycles. The late perspicacious Martin Zweig published a book that educated me about the force that the Federal Reserve’s actions exert on the markets. After the Fed raises interest rates several times the market eventually declines. I observed that when interest rates rise, there is typically a market decline and afterwards people, ever optimistic, believe that the market can survive rising rates or they won’t continue to rise. At some point, however,  investors eventually surrender to the rising rates and the market enters a sustained decline. We are now in the period after the bull market euphoria has been dissipated and people are turning their attention to interest rates. Pundits want to believe that the short correction is over and the bull market will resume. Still, every move and utterance by the Fed members will be scrutinized for an indication of how much and how rapidly they will raise rates. The Fed has to raise rates because they had to lower them to historic levels to bring the economy back from the horrendous debacle of 2007-2008. As the economy recovers they want to normalize rates and get most of the bonds they purchased to bring down rates (quantitative easing) off of their balance sheets. The resulting increase in the supply of bonds will reduce bond prices and raise interest rates.

As a psychologist and a chartist, I have found that the best way to predict behavior is to study the behavior itself. I therefore monitor a number of treasury bond ETFs as a way of understanding what is happening. I usually provide daily or weekly RWB charts (see glossary for definitions) to show trends. However, with the bond ETFs, I look at long term monthly RWB charts to see the major long term trends. I do not want to scare you, but these charts tell me that the multi-year RWB rise in bonds and corresponding decline in interest rates is over and bonds may be entering a significant BWR down-trend pattern. Note the huge RWB pattern in SHY through about 2013.

This chart zooms in on the recent past and shows the RWB pattern actually lasted until mid 2016 and now SHY is entering an ominous BWR decline (see glossary) for the first time since at least 2003 (as far back as I have data). Given that this is a monthly chart, it suggests to me that this trend could persist for months if not years.

Rather than looking at bonds to discern rates, TC2000 also offers a chart of the short term interest rates themselves. This monthly RWB chart shows the Fed reducing rates after the collapse of the internet bubble in 2000, then raising them again until the 2007 housing related crisis when they lowered them tremendously through 2015. Now look at how rates have been rising so much that they now form a steep RWB up-trend.

If we are indeed entering a period of a persistent decline in short term bonds and a rise in interest rates, the market may be forming a long term top. The lure of higher rates will eventually suck money out of relatively more risky stocks, especially by anxious boomers nearing retirement. With that in mind, I am willing to own some stocks but am keeping one foot out the door so that I will be ready to exit quickly if my market technical indicators should weaken…..

Meanwhile the market indexes are currently rebounding, as shown by the GMI being Green and the SPY and QQQ having closed above their 10 week averages for the 2nd week in a row. Note, however, the paucity of new highs among US stocks on Friday (90). Prior to January 29, there were  more than 200 new highs each day.

I show my students each semester this monthly chart of T2108 going back to when Worden created it in 1986. (You can access T2108 with Worden chart analysis software.) T2108 measures the percentage of NYSE stocks that are above their simple 40 day moving average of price. The few times since 1986 when T2108 was below 10% the market was severely oversold and did not remain there long. Once, in 1987, it registered its lowest, <1%. I call T2108 the pendulum of the market, moving from extremely oversold to overbought levels. The red and green lines in this monthly chart mark these levels.

Here is a more recent weekly chart of T2108 since 2008.

A maximum of one or two weeks below 10% is the norm. On Friday, T2108 traded as low as 8.6% and closed at 14.6%. In addition, the put/call ratio closed at an extremely high 1.27, indicating that a lot of option traders were buying puts and/or insurance against a decline. This ratio is another contrarian indicator with extreme levels of bearishness usually occurring near short term bottoms. The market always bounces after readings above 1.2.

I closed out my SQQQ (3x leveraged bearish QQQ ETF) on Friday with a nice gain. I did not have the courage to follow my rule to buy the market, SPY (I never do!) on Friday  but am looking to make a small pilot buy this week. (This will be a small initial purchase and I will only add to it on the way up if the lows hold)…….

I love weak markets because only a small number of stocks hit all-time highs. Those that do amidst market carnage may turn out to include new leaders when the market turns up. Imagine a stock hitting an all-time high (ATH) last week! These are stocks worth researching and monitoring because someone is accumulating them. Each of these stocks hit an ATH on Thursday or Friday and are above a recent GLB (green line break-out, see blog glossary above):

COLM, ARRY, BLBD, VIRT, WWE, GRUB, PIRS, INST, MC, MCFT, HAE, HLG.

As an example, this weekly chart shows GRUB’s high volume move up last week after beating earnings estimates. I will look for an entry once it consolidates.

The GMI remains on a Red signal and indicates the need for caution. IBD now sees the market in a correction. Both the QQQ and SPY are now below their 10 week averages, a critical sign of weakness.

I am 100% in cash in my trading IRA account, having reduced holdings the past 2 weeks. I like to do most of my trading in my IRA because there are no tax issues. I can go in and out at will. I remain 100% invested in mutual funds in my pension accounts, where trading is limited.

This is not the time to panic. It is true that bloody Fridays often lead to bloody Mondays when many people decide to exit after pondering their falling balances over the weekend. These people will likely sell to the eager professionals at lower prices. The market indexes I follow have not become oversold. The put/call ratio =.97, showing that option players are not scared enough yet. When the ratio reaches 1.2 or higher we will be near a bounce. Similarly, the daily 10.4 stochastics indicator I watch for the QQQ is at  .47. The market indexes usually bounce around .20 or less. So I expect more of a decline, at least early in the day on Monday.

The chart below is a RWB monthly chart of the SPY. I want to show what the bull market tops looked like in 2000 and 2007. Note that a major decline begins with the index (indicated by the gray dotted line) closing below all of the red line shorter averages. Then the red lines turn down and converge with the blue lines.This pattern takes several months to develop. The RWB pattern (red above blue with white space between them) then dissolves and the red lines move below the blue lines (for ming the opposite BWR pattern).  A quick glance at the current market shows that the RWB pattern is intact and the index (dotted line) remains above all of the rising red lines.

Alternatively, this weekly chart of the SPY shows it to be in a Weinstein Stage II up-trend. It is rising above the rising 30 week average (red line).

I tend to exit the market in my pension accounts when the index closes below its 30 week average and the average begins to turn down. Such a decline last happened in 2016. The 30 week average for the SPY is now at 258.20. Let’s see if the SPY finds support at its 10 week average (blue dotted line), currently at 272.46. The SPY and QQQ have closed above their 10 week averages for 24 straight weeks (see table below). My long term pension money remains fully invested, for now, while my trading account is in cash.

The GMI and GMI2 have both weakened considerably. Two consecutive days with the GMI less than 3 turns its signal to Red. IBD now sees the “uptrend under pressure.”