She keeps her options open

Janet Yellen says she is keeping her options open on interest rates after a two day testimony that I will leave your weekend papers to analyze. She played down the concept of taking US rates into negative territory as headwinds grow in the global economy but it’s still on the table should future economic data stall. Futures traders have a different view and are currently betting on a high probability of a rate cut. I read that the FED has just released the details of its latest stress tests on US banks. In this they have asked the biggest banks to model how their balance sheets would stand up to a negative interest rate environment, where 3 month Treasury Bills would drop to minus 0.5% for a reasonable period. This has set tongues wagging.

This all follows from both the European central bank and the bank of Japan lowering rates into negative territory and Sweden’s decision to move deeper into negative territory. Last week the latter cut its repro rate by a further 15 basis points. Policy makers might not want to admit it but a flight to negative rates has the ability to devalue the currency of that country, although this concept has failed miserably in Japan.

During the week markets sold off hard as you will all have seen accompanied by a flight to the safety of Gilts and Gold. Banking shares in particular have had an awful time in this low interest rate environment. Markets seem to be saying strongly that central bankers have “lost the plot”. The questions to Mrs. Yellen during her testimony also showed a lack of respect for her office and hinted that politicians may feel the same way as market traders. She may be a well-qualified economist but she could do with a crash course on presenting and speaking to an audience.

All the trends on VectorVest are down at the end of trading on Friday 12th February as I write. Friday was an up on the back of the oil price day but not enough to change the Primary Wave to UP. The underlying trend on VectorVest has been on a down signal since the end of 2015 and if obeyed would have kept the trader/investor well out of the way in this selloff. This is, without doubt the worst period in the stock market since the bear market of 2007 and 8.

The underlying trend on VectorVest is determined by a very clever indicator named the Market Timing Index (MTI). The MTI is a momentum based indicator but in its composition combines the momentum (speed) of the both the price and the breadth of the market. On VectorVest we assign a BUY or Sell or Hold recommendation to each share on the LSE each day. The program keeps a careful tally of the number of BUYS divided by the number of SELLS to compute the BUY/SELL Ratio. This is the VectorVest metric that measures the breath of the market. As a market technician I feel it’s impossible to complete too much work on market breadth and volume.

The MTI indicator is mathematically massaged to fit between 0 and 2 (as is everything else on VectorVest) and above 1 the underlying trend is UP. Simply, if the MTI is less than 1 then the underlying trend is DOWN. Reacting to this indicator would have saved a few grey hairs in the last few weeks.

The MTI indicator has also a predictive element. Over the years the education department at VectorVest have noticed very useful overbought/oversold levels on the MTI which can give traders like myself a heads up, when the trend is about to turn.

When the MTI gets down to 0.6/0.65 that’s a good place to expect the downtrend to change to UP. At a MTI of 1.6 then the UP trend looks mature and maybe it’s time for short term traders to take profits.

At present the UK VectorVest Composite has made a new low but I notice the MTI has made a slightly higher low. The MTI is sitting at a value of 0.66. This bullish divergence between the Composite and the MTI at a much oversold MTI reading makes me feel optimistic that there can be at least a rally soon.

Any such rally (which may have started today) needs to be confirmed before rushing into battle. I have spoken at length in this blog about the series of signals that occur at each turn and there is NO sign of these at present.

Although I am expecting a rally (which my cycles analyze reckons could last into May) the facts are saying strongly that the trends are down on all fronts. The support levels on the SP500 and the Ft100 are easy to see. If these obvious levels break then I fear a move down to the 2007 highs. At the 2007 high there is a confluence of this level and a FIB cluster of support. The monthly chart of the SP500 with support levels marked is shown above.

I won’t do anything in stocks myself until I get a signal from my preferred Market Timing System which is known as the DEW and there is NO sign of that at the moment.

David Paul

February 12th 2016