The Hidden Message in the Stock Market Revisited

The Hidden Message in the Stock Market Revisited                                   

Its alright Ma, I’m only taking a beating

with apologies to Bob Dylan

During late August of 2014 a disturbing trend was developing in the advance decline line of the NYSE. After going straight up since December of 2012 it seemed to be topping out. After making a new high in July it sold off and made another high in late August but it was slightly lower this second time. The momentum of the adv/dec line was saying more. Long term momentum was down sharply on the second high in late August. Intermediate momentum put in a much lower top. I was worried. I haphazardly sold off some positions. Selling is always hard. But in September I jumped back into the market and bought some pharma and financial stocks because I wanted more exposure to that part of the market. It was done on impulse. I spent years developing these momentum indicators but because the market had been so strong for so long I never paid too much attention to them.

Anyway the market went down sharply that October, put in a V-bottom and bounced straight up. Over the ensuing months it continued to go up but once again my charts of the adv/dec line and the charts of its momentum was telling a different story. The 39 day moving average of the adv/dec line was much closer to its 144 day moving average. The market was clearly losing momentum. Long term mom was trending slightly higher but at a much lower level than where it was that previous summer. Intermediate term mom was capped at the 50 percent level after being much higher in the summer. This continued on during the spring and summer of 2015. What did I do? I stopped looking at my indicators. I didn’t want to believe what was happening. Some of my best performing stocks were way up above their long term moving averages but I couldn’t get myself to sell them. All of this was going to prove to be a very painful lesson. Momentum really started to break down in June that summer. Intermediate term mom broke below the zero line. The market was screaming at me to do something, but I couldn’t rouse myself to act. I would generate my charts on the weekend but didn’t want to look at them. In early August long term mom went below the zero line.

The market caved in around August 20th and bounced back in October at extremely low momentum levels. I felt trapped but hung on. The market sold off again in November and December, it felt like chinese water torture. Momentum continued to deteriorate topping out at lower and lower levels. In Jan of this year it caved in again. When you go through something like this you stop looking at the market because it is just too painful. It was too late to sell.

Momentum bottomed in late January 2016. When the SP500 tested that bottom in mid Feb intermed mom and the short term oscillator were both higher. Long term mom was headed up after putting in its lowest bottom since 2011. I felt a prominent bottom was in place. I didn't know how high this bounce in the market would be but I did feel that an important bottom had been put in. Market sentiment was awful. The media was doing their part painting as dark a picture as they could but I knew better.

The move off the bottom has been so powerful that it is a message in and of itself. Impulse "up waves" occur when a market is oversold and then surges up from nowhere. I read about this from Justin Mamis in his book, The Nature of Risk. I'll have more to say about all of this in my next post.