3 Ways to Identify a Market Bottom
The S&P and market inter-relationships
If the stock market is the dog, it might be said that the S&P 500 is the “tail that wags the dog”. The S&P appears to have put in a market bottom on March 6th at 663.00 basis the June 09 futures or 665.70 basis the prior March 09′ futures. While the jury is out as to whether this was merely another low within the cyclical bear market that began in October 2007, the market has rallied some 16% from the March 6 low to just above the 800.00 level and has only backed off slightly the last two trading days. (No doubt some profit taking before the weekend).
Besides the bigger question as to whether March 6 was just another low or might have been THE low, it is the market inter-relationships where I would like to focus your attention. In other words, how are the 30 Year Treasuries, the U.S. Dollar and Gold responding, and is there some early insight that we might glean from their relative price action?
Beginning with the Treasuries, the price break-out on 03/18 is noteworthy to say the least. Bonds had a meteoric run from November through December last year, then saw a near perfect 61.8% retracement. In fact, Bonds made a nice basing pattern that may now be seen as “complete” via the 03/18 bullish price move.
30 Year Treasury Bonds
The Stochastics clearly bottomed and MACD turned positive on the 03/18 break to the upside. Is this an early indication that Bonds will move with the S&P to the upside, or at least move sideways to up with the S&P 500? This would suggest that the two are “coupled” not “decoupled” as many analysts were predicting. And if this “coupling” does hold, does this suggest that Bonds might in the future turn down before the S&P makes its next major top? According to technical analyst John Murphy who wrote the landmark book on Intermarket Analysis in the early 1990’s, the Bond market will many times lead the stock market. In other words, while there is a lag factor, when the Fed “stops” lowering rates, the stock market will bottom and begin a rally. Conversely, when the Fed “begins” raising the discount rate, the stock market will shortly after such time- top and move down. While the mysterious “lag factor” is a function of the over-all phase of the market and investor expectations, the relationship is a marker to watch.
Given the inverse relationship between the U.S. Dollar and the S&P, it should come as little surprise that the rally in the S&P from the March 6 lows coincided closely with a top in the U.S. Dollar on March 4. After all, if investors are moving out of the safe haven of “cash”, they must be putting their money somewhere. That “somewhere” in the near term seems to be stocks and secondarily Bonds. The US Dollar is the world reserve currency. As such, it acts like the oil lubricant that greases all the other asset classes.
U.S. Dollar
While the U.S. Dollar made a multi-years top in August 2001 and put it a major bottom in July 2008, the rally off the July lows has been swift and impressive. The bigger question now is whether the U.S. Dollar will resume the larger secular down-trend and broadly move lower, or whether it will soon bottom and move higher. If there is not an immediate “flight to safety” as was the case from July 2008 to early March this year, then the Dollar will move sideways and down as the S&P moves sideways and up into the near future. The chart here is a weekly chart. This chart shows the Stochastics have topped and started moving down. The MACD histogram plot rolled over and turned negative as well. Also, the USD has broken the steeper trend line and is close to breaking the lower trend line as well. The other FX majors, (not pictured) have all rallied in relative terms to the present U.S. Dollar weakness.
Gold
The gold market topped on February 20 and moved down through March 18, then bounced upwards alongside Bonds from a low of 886.50 to 962.00, just over $75 in 2 days basis the June 2009 futures. While the “fundamentals” of this move may be debated, a $75 jump is no small deal. Whether this was a sudden bear run from the 02/20 highs to the 03/18 lows, or the start of a larger impulsive move up is not yet apparent. What is abundantly clear is that the inverse relationship between the US Dollar (a proxy for fiat money) and gold (a proxy for tangible wealth) is alive and well. Of more importance is whether gold (alongside Treasury Bonds) will trend sideways and up with a stronger S&P 500.
Conclusions
The S&P 500 is the main driver of various intermarket relationships. The price action of Bonds, the U.S. Dollar (directly influencing the FX markets and all commodities) and Gold will either move in direct or inverse fashion to the strengthening S&P. At this time, it appears that a stronger S&P 500 is producing a weaker U.S. Dollar as well as a stronger Long Bond and Gold market. Gold and Treasuries might be seen as the near term beneficiaries of the flight from cash. Whether this will remain the case for the coming months is not yet clear, but if the U.S. Dollar continues to weaken, gold will certainly continue to remain mildly bullish within its larger consolidating up-trend.
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David Wilder is the Chief Technical Analyst for the Delta Society International. He has been published in Futures Magazine, Trading Markets.com and gold-eagle.com. David may be reached at trenddw@triad.rr.com.