Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Bottoms Have Two Elements: We’re Still Missing One

Stock-Markets / Stock Markets 2014 Feb 06, 2014 - 01:23 PM GMT

By: PhilStockWorld


Courtesy of Doug Short: Monday’s ISM wipeout pushed the stock market into deeply oversold territory as fear levels in the market began to surge. The ISM Manufacturing PMI came in at 51.3 versus the estimated 56.0 reading and down from 57.0 for December 2013 and was the biggest miss in years, elevating growth fears. However, while many bears will dismiss pundits blaming the cold weather and see the miss as a sign of things to come, the ISM national PMI is just one survey and it moved opposite to many of the regional Fed manufacturing surveys for January. In fact, when reviewing various PMI readings across the country there were more positive improvements than negative with the average among surveys increasing during the month, as shown below. Note the positive changes in the Austin PMI (+9.4) and the Empire Manufacturing Survey (+10.3) were greater in size than the negative declines. Another encouraging development was a slight uptick in the JP Morgan Global Composite PMI.

Source: Bloomberg

Given these details, the reaction to Monday’s ISM miss appears to be overdone and drove the Arms (TRIN) Index to the highest level in over two years. As shown below, readings north of 2.5 tend to correlate to market bottoms and should at a minimum indicate a pause in the current pullback.

Source: Bloomberg

The recent decline has also seen the VIX Index spike with its 1-month rate of change resting at the highest levels since the June 2012 lows and levels associated with prior bottoms. What is discouraging is the lack of put buying to suggest elevated levels of fear associated with bottoms. This means we may need to see a retest of the recent low or slightly lower levels to cause enough fear to put in a sustainable bottom.

Source: Bloomberg

There are two conditions for a market bottom and so far we have one of them, which is a significantly oversold market. As seen below, all four of my intermediate-term indicators have reached oversold territory that has marked prior lows.

Source: Bloomberg

Another set of indicators I track also confirm we’ve reached an oversold condition associated with bottoms (panels 2-5 below). However, what is missing is the second ingredient of a market low, which is a surge of buying to suggest that selling pressure has been exhausted and prices have reached a low enough level to bring out the bulls.

This can be seen by a lack of MACD buy signals on the S&P 500 over the last few days. A strong surge of MACD buy signals by the 500 members within the S&P 500 over a short time period (10 days) is often the final seal needed to mark a bottom, with readings north of 15% typically seen after a market bottom is in (see panel 6 below).

Source: Bloomberg

Given the lack of fear seen in the put/call ratio and lack of a surge in MACD buy signals in the S&P 500 members, I believe at best we will see a weak rally attempt until we get the jobs data on Friday. Should the report disappoint we will likely see a retest of the recent lows and likely a further drop down to the 200d MA on the S&P 500 currently at 1709. However, if the jobs data confirms the economy is on solid footing we may get the surge in buying that we are missing to call a market bottom and end the current pullback.

What can’t be stressed enough is that even if the recent low of 1737.92 gets breached on the S&P 500 we are still likely experiencing an overdue correction in an ongoing bull market. This current correction may turn out to be deeper than your average 5% correction since 2013 was such an atypical year for consistent stock returns.

To put things in perspective, consider the following: Going back all the way to 1928 on the S&P 500 shows an average of three 5%+ corrections each year. Outside of last year, since 1961 there have been only three years when the market didn’t have more than one 5%+ correction. Suffice to say, volatility is the norm, not the exception, with this current one clearly overdue.

While some noted bears have taken this recent pullback as an opportunity to warn of a major crash (again), don’t be so quick to jump ship as we still find many supports for this being another pullback, as I’ll identify below. For example, most bear markets are associated with recessions and the chance of recession on the horizon still remains remote. Our recession probability model assigns only a 4% chance the U.S. is slipping into a recession. For the recessionary alarm bells to ring we need to see readings north of 20%, which we are still far away.

Source: Bloomberg

Also arguing against a coming recession is the Philadelphia Fed’s State Leading Index survey, which measures the leading economic indicators for all 50 states. We just received the December readings this week and the survey shows that 47 of the 50 states are expected to grow over the next six months. When 94% of the nation is expected to show positive growth over the next half year, talk of a coming recession is highly premature.

Source: Philadelphia Fed

The Philly Fed constructs a national index based on the 50 state indexes and the national index is projected to grow 1.65% over the next six months. As shown below, typically we see the national index deteriorate well before the stock market peaks and typically falls below 0% just as a recession starts. We currently rest near the highs seen since the recovery began and why a recession occurring in the near-term is highly unlikely.

Source: Bloomberg

Outside of economic indicators, looking at market signals for a read on the state of the stock market also shows healthy developments. An example is looking at the credit market, specifically the junk bond market, as you often see major signs of financial stress arise there before the stock market.

Highlighted below is the Barclays US Corporate High Yield (Junk) Total Return Index relative to the S&P 500. The two pullbacks we had in 2013 were associated with declines in the High Yield Index (red shaded regions) but anytime there was a market selloff not associated with a sizable decline in the High Yield Index the market tended to regain its footing and take its cue from the junk bond market (yellow boxes). Of note is that we have only seen a tiny decline in the junk bond index while the S&P 500 has taken quite a hit and suggests the selloff in the stock market is overdone.

Source: Bloomberg

Other signals from the credit markets suggest this is likely a pullback and not indicative of a major top. One of my favorite credit measures is the yield spread between corporate short-term commercial paper and US T-bills, which measures the relative default risk between corporate America relative to the US Treasury. During economic expansions the yield spread between the two should be low while as we begin to slip into recession and corporate earnings near a peak, investors begin to price greater default risk on corporations relative to the Treasury by requiring higher yields to invest in commercial paper.

The spread begins to spike as the market discounts a coming recession, with the initial spike serving as a major red flag (see red circled areas below). These initial spikes occurred well before both prior recessions and market tops and they also served as early warnings of a coming bear market.

Source: Bloomberg

Note that the spikes in the spread began to diminish in 2001-2002 and returned to normal levels before the market bottomed. Also of note, the spread peaked in late 2008 several months before the market bottomed in March 2009. The fact that commercial paper and T-Bill spreads rest near multi-decade lows should give the bulls out there plenty of conviction this is just a decline and not the early innings of a bear market.


Currently the market is at an oversold condition similar to what we’ve seen at all of the significant bottoms over the last few years. However, we’ve yet to see clear evidence of exhaustion in selling followed by a surge in enthusiastic buying, which is the final evidence of a market bottom. So far we have a tepid rally attempt as buyers are likely waiting on the sidelines heading into the big payroll report this Friday that has the potential to send the market flying in either direction. Should the jobs report come in ahead of expectations we may finally see the surge in buying to declare a market bottom. On the other hand, if we get another disappointment in Friday’s labor report like Monday’s poor ISM PMI reading, we are likely to breach the recent lows and head further south towards the 200 day moving average on the S&P 500 (1709 currently).

Even if the labor report comes in weak and the market declines further, given the above we are likely only experiencing a correction in an ongoing bull market rather than a full blown bear market.

- Phil

Click here for a free trial to Stock World Weekly.

Philip R. Davis is a founder of Phil's Stock World (, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (

© 2014 Copyright  PhilStockWorld - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

PhilStockWorld Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in