Louise Yamada, one of the most famous chart watchers to ever watch a chart, is not very optimistic about the stock market these days.
She warned at the beginning of August that equities were vulnerable to declines due to things like narrowing stock-market breadth, violations of trend lines and depressed volume readings. In her latest report today and in an interview with Tom Keene yesterday on the radio, she wasn’t any more optimistic.
And since even Keene hasn’t figured out a way to show graphs over the radio (yet), here’s a look at what she had to say and a few of the charts that have her spooked.
“We started to see deterioration in stocks earlier in the year. It’s been a little bit like crying wolf because we may have been a little bit too cautious by February. But more and more stocks started to break support levels. And the technical indicators also became more fragile,” she said.
One of the things that caught her eye: the number of New York Stock Exchange-listed stocks trading above their 200-day moving averages wasn’t able to get above 60 percent this year, even as major market indexes continued to move higher.
Another red flag was her own volume momentum indicator, which compares trading volume of rising stocks and falling stocks. It went into an oversold condition and has been there consistently for three months.
“I think it’s important to understand that when you’re in a bull market, an oversold situation can be a very temporary registration and people tend to say ‘buy the dip,”’ she said. “But when you start going into a weakening market, a bear market for instance, the oversold can remain oversold and it is the empirical evidence of selling pressure. So all of these rallies that we’ve had since June when this indicator went oversold have been evidence with selling into strength. So people were taking their money out on the rallies that we’ve seen over the past three months.”
While the financial media has fixated on the “death cross,” in which the 50-day moving average of an index falls below the 200-day average, Yamada says it can send false signals.
“I think the daily death cross is something that, in a market that’s more up and down than what we’ve had over the past six years, you get a lot of false crossovers,” she said.
She plots markets over a much longer period -- often by weekly or monthly moves.
“The monthly is extremely helpful in establishing what could be a structural trend from which you don’t recover for a period of time,” she said. “Even if you’re a trader, short-term, five-minutes, you want to know where the market is long term in its structural trend.”
She likes to watch 10-month and 20-month moving averages, pointing out that bear markets usually show a 10-month average going under a 20-month during the early days of the plunge, as was the case in 2001 and 2008.
While the S&P 500 isn’t quite there, it’s getting closer ...
... and the New York Stock Exchange Composite Index of all shares listed on the Big Board is looking even more perilous.
“We would not be involved here,” she said. “We think it’s time to preserve capital. Move to cash. Protect your positions.”
There are plenty of other charts that also caught her eye. But, well, you get the picture.