Is a Market Crash Imminent?

Tuesday, February 21, 2017

Sheila Jamison and Rich Jamison

February 18, 2017

With the markets as lofty as they are, do you find yourself questioning if you should be participating in them? Worse, asking if you should be running from them? They’re valid questions and you’re not alone. We keep asking the same questions.

We begin searching for answers by acknowledging that nobody can know what will happen. Then, we work from there. We use technical indicators that can show us what is happening in the market rather than relying on anyone’s predictions of what will happen in the market. Below is a summary of what we believe to be the most relevant indicators – and what they mean to you – as of Friday, February 17’s market close.

The Pros

1. Domestic Equities (DE) occupy the top position in “Dynamic Asset Level Investing” (DALI) calculations. DE leads the also-strengthening, second-ranked International Equities by a score of 316 to 215.

2. Calculations against cash show the DE class with both long- and short-term DALI strength. (The “Cash Percentile Rank” is 0.00 %.)

3. Our broad measure of stock trends within an asset class is the Percent Positive Trend for all Optionable Stocks (PPTOS). PPTOS indicates the majority of securities in the DE asset class are trading in positive trends ... and positive trends tend to indicate higher prices in the long term. (In “techspeak” this indicator is in a column of X's and is now sitting around 62%. In English, a comfortable majority of the stocks are in a positive trend, with positive long-term price direction.)

4. We like the Bullish Percent indicators (BPs) as indications of breadth of market participation because they give us two pieces of information.

a) They indicate whether we should focus on wealth accumulation or wealth preservation.

b) They indicate our current risk level.

Let’s use the BP for All Optionable Stocks (BPAOS) as it includes a broad universe of stocks. BPAOS shows an increasing number of stocks giving buy signals – indicating we should be in wealth accumulation mode. Further, the current reading is about 64%, somewhat “midfield” and representing medium risk. Readings breaking above 70 suggest being more cautious.

5. The Multiple Buy Bullish Percent (MBBP) adds a measure of "follow-through” to provide some long-term guidance to the BP’s participation scores. MBBP shows the percent of stocks that have shown at least two consecutive ‘buy signals’ on their (Point and Figure) charts. Multiple buy signals indicate increasing demand and diminishing supply for those stocks. About 1/3 of the stocks within the optionable universe now meet this criterion.

6. The 10-week, 30-week and 40-week indicators* measure the percent of stocks trading above their 10-week (50-day), 30-week (150-day), or 40-week (200-day) moving averages, respectively. All three currently sit between 64% and 72%.

7. The HILO indicators* measure the percent of stocks moving to new highs relative to the total of those moving to new highs and those moving to new lows. The HILO for the NYSE is at 90%. This is in the upper range – as we would expect given the series of new market highs – but we have seen this indicator rally as high at 98% in very bullish markets.

The Cons:

1. The Percent Overbought/Oversold reading (OBOS) for all US Equity Funds currently reads over +100%.

2. The weekly distribution (WD) readings for the S&P 500 Index (SPX) and Dow Jones Industrial Average (DJIA) show them 97% and 105% overbought, respectively.

Pros & Cons Considered

The “pros” are self-explanatory. The “cons” can use a little more explanation. Both “con” indicators refer to the generally overbought stature of the market. Because ‘overbought’ is the stuff of headlines, let’s examine them a little closer.

Percent Overbought/Oversold

Historically, OBOS readings for US Equity Funds have tended to top out between +100% and +150%. Then they have ‘reverted to mean’ or even into oversold territory. It is critical to note that reversion to the mean can happen in one, or both, of two ways.

a) The easiest to grasp is when there is a pullback or correction in price, which makes the OBOS reading lower.

b) The other way is when there is a persistent period of sideways price movement (or “consolidation”). That shifts the entire trading band higher as it adjusts to the most recent price data. As the trading band shifts higher, the OBOS becomes lower. The prices didn’t change, the yardstick moved. This is often the case during strong markets.

Weekly Distributions

The SPX at +105% is its highest WD since May 2013; although it did reach the 90% overbought range in December 2016. The DJIA climbed to as high as 139% overbought in December. These extended readings may have you questioning what to do with new money, or whether you should take profits.

It might help to keep in mind the last time we saw similar WD readings (December 9, 2016 – about 2½ months ago). The DJIA and the SPX were 139% and 92% overbought, respectively – numbers that probably raised the same questions then. However, the largest pullback in price that occurred since then in the SPX (if used the lowest closing price) was just 0.92%. For the Dow, even less at just 0.12%. The normalization in OBOS that occurred throughout January was primarily a function of the trading bands adjusting to higher prices, rather than from price pullbacks adjusting to the trading bands.

Bottom Line

The market is in overbought territory. However, the weight of the evidence continues to show the pros outweighing the cons.

If you’re still unsure about being in a strong market, you need look only as far as the charts of the major market indices. They continue to push higher into uncharted territory.

Personal Concerns?

We’re here to discuss with you any particular concerns you may have. Moreover, if any of your friends, colleagues or family has caused you to lose sleep over the market, pass this article along to them. Better yet, invite them to give us a call to talk about it. If he or she tells us you sent them, we’ll give them the time to discuss it all thoroughly. Just maybe you’ll be able to get a better night’s sleep once we’ve chatted with them for a while.

*These are shorter-term indicators. We don’t act based on short-term indicators. However, we do watch them as together they comprise an early warning system of potential coming changes. Right now, they are all still sitting comfortably in the pro column.

All data is from, and calculations are by, Dorsey Wright Associates, a NASDAQ company. Dorseywright.com. accessed February 18, 2017.

The data above were taken from sources deemed reliable. However, no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Past performance is no guarantee of future results.

© 2017 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information.