WASHINGTON. US stock markets were, in my view, an unmitigated disaster in May. After a great start to the year, nearly all 11 of the business-industrial sectors in the S&P 500 collectively dropped like a stone. Exceptions were, to some extent at least, consumer durables, utilities and – late in the game – real estate. It’s starting to look like an instant replay of the vicious bear market that hit stocks almost without warning in the fall of 2018. Are we hearing the same alarm bells in June 2019? Will the June market direction repeat the May pattern of lower lows on each successive downturn.
Upcoming market direction: Is Mr Market ringing alarm bells?
As we launch the first trading day of June Monday, it seems as if we’re on the verge of repeating a genuinely unpleasant trading pattern. One we’ve seen before. And recently. Recall last year. After an exhilarating and generally positive first 8 months in calendar year 2018, stocks and market averages were brutally obliterated last fall. Nearly every stock group was brutally crushed.
Then, a seemingly miraculous recovery began, almost like magic, at the dawn of the New Year, 2019. Stocks seemed eager to resume that Q1-Q3 2018 bull market move, even in the face of uncertain political and economic news. But May took the smile off the bulls’ faces, big time. After a generally exciting March-early April run, stocks looked a bit puzzled about all the exuberance in the second half of the latter month.
Then, after thinking about things a bit, the bullish attitude began to implode, leading to a vicious conclusion at the end of of May. Hence, our concern over June’s market direction.
The McClellan Oscillator looks bearish. And weird
You can see the seriously weakening pattern in the chart of my favorite overall stock movement indicator, the McClellan Oscillator, in the chart below. Chart courtesy of Stockcharts.com, an excellent technical analysis service to which I subscribe. Check out the recent market direction on the chart. And the alarm bells ringing toward the lower right hand of the chart. Since approximately April 7-8, we’ve experienced lower highs and, mostly, lower lows as stocks keep bouncing relentlessly lower, punctuated by a brief mid-May fakeout rally.
What’s the McClellan Oscillator and how does it work?
The McClellan Oscillator is a highly reliable indicator that, with surprising accuracy, usually predicts major movements in the US stock market. To oversimplify, it’s essentially based on the movement of the broad market, with an emphasis on trading volume.
If you’re a long time investor like me, you can’t fail to notice that large moves in individual stocks or market averages, whether up or down, don’t seem to have much significance on light-volume trading days. On the other hand, if large moves occur on trading days with heavy volume, they have greater significance. The reason: heavy volume days indicate that the moves we see have quite a lot of conviction behind them. Investors are either storming the ticket offices – or heading quickly for the exits.
The McClellan Oscillator usually illustrates fairly decisive up-moves followed by fairly decisive reversals to the downside. The zero-line of the chart’s X-axis indicates a neutral position. Anything above it is bullish, anything below bearish.
When these up-and-down moves hit extremes as measured on the Y-axis, those moves tend to reverse quite strongly. So when you see the chart hitting either extreme, you can generally count on a strong momentum reversal, often within 1-3 days.
What does the chart suggest regarding current stock market direction?
In the chart above, however, we currently seem to be trapped below the zero-line on the X-axis, with stocks making tiny up and down moves, indicating a certain amount of confusion. But with a bearish bias. The market direction seems to point down, as it’s not hitting the McClellan Oscillator’s extreme low points. Such a decisive low or lows is what we need to see to get Mr Market to shift into reverse and go up.
That means markets are eroding steadily. But with a lack of certainty that seems unlikely to produce the kind of rally that will move stocks strongly back above the zero-line. It’s like the effect of invisible water currents that slowly erode the base of an earthen dam. If this goes undetected, the dam eventually bursts without warning. The result: a disaster that engulfs everything in the valley below before anyone knows what’s coming.
That’s what this chart could be indicating. And that’s why alarm bells are ringing in many investors’ heads, including mine. Mr Market doesn’t seem capable of reaching the kind of decisive low that would give us a definitive snapback rally. What we’re seeing instead is that on any positive blip, traders and investors who haven’t already sold off underperforming positions – i.e.,most of them – are using each positive trading day to dump remaining positions at slightly better prices, before they slip again.
In other words, we’re seeing an extreme lack of buyers right now. Everyone is heading for the exits. But quietly. Hoping no one else will notice. Except that in May, this movement became pretty obvious anyway. That caused more and more investors to jam the exits.
Decision Point indicators also point downward
Father and daughter team Carl and Erin Swenlin are top-notch technical analysts I’ve followed since the 1990s. That’s when Carl first began running his Decision Point service back in the heady early days of America Online. (AOL. Remember them?) Carl and Erin are now part of the Stockcharts.com team and provide detailed and accessible technical information for that service.
In a Friday column free to non-subscribers, Carl offered a worrisome chart of the S&P that tracks with the latest chart of the McClellan Oscillator. This also caused him to make more changes to his buy-neutral-sell sector box, as you can see below.
As recently as 4-6 weeks ago, this yellow box had flashed buy signals in every sector in both intermediate- (say, 4-6 months out) and long-term (maybe a year) timeframes.
But look at things now. Very few buy signals now remain. (Note: “Neutral,” as indicated in the legend, is a soft sell signal.) Alarm bells, anyone?
Any good news at all?
Utilities and real estate still look okay, although real estate is a weird surprise, given that the Fed’s absurdly increasing interest rate hikes from last fall now seem to have produced the opposite effect. The resulting lower consumer interest rates for autos and real estate are, for the moment, encouraging real estate transactions, and could be helping autos as well, although that industry seems to have peaked.
I point these technical elements out here in today’s fairly eggheaded column for, perhaps, an unusual reason. Over the years, I’ve blended a partially fundamental and partially technical investment style into a fuzzier blend, indicative of the way high speed computing and information overload — including fake information — influences investors regardless of standard styles.
In other words, I base my investment decisions primarily on the rising or falling earnings and profitability of any given sector or company. But I also keep an eye on the charts, which, to me, are as much a measurement of human emotion as they are of predictable market direction.
The rise of headline investing, trading on news that may or may not be true
In an investing environment that has tended to favor individuals with a mathematical or engineering background, you have to start divining an emotional component to the stock market. For this, the McClellan Oscillator serves as an excellent indicator. That’s because today’s insanely machine- and algorithm-driven trading action is based more and more on real or fake news headlines. And that is now a far heavier influence on trading action than traditional fundamentals or the historical movements of a given stock.
The 6th Sense
All of which means that you need to work on developing a very strong 6thsense.
And my 6thsense is telling me we’ve got big problems in the stock market right now. Today’s market direction? It’s going the wrong way for the bulls. Most of whom now appear to be heeding the alarm bells we started hearing in mid-April.
Which is why I continue to slowly raise cash while retaining preferred stock and bond positions. I hope I’m not still exposed to too many common stocks if and when the bullish dam suddenly bursts and a raging torrent heads for the valley where every small investor lives.
Best case scenario: the dam holds off a little while longer. But, with the increasingly embattled Eurozone; the World War Z-style waves of illegal aliens swamping our deliberatelyunprotected southern border; with Chinese thievery, spying and economic intransigence pointing us rapidly toward Cold War II; with murderous bits and pieces of ISIS and Al Qaeda still on the loose; and with failing political parties in both the UK and the US increasingly splintering, investor nervousness is increasingly obvious. It’s creating a buyers’ strike that can only mean bad news in terms of the current market direction.
Conclusion: Bullish investment decisions at this point could prove quite disastrous to the average portfolio.
—Headline image: Today we offer you a lazy American black bear. He’s a good symbol for recent trading action: down hard with a potential for nastiness. (Image via Wikipedia entry on bears, CC 2.0 license)