October 10, 2015Current market outlook

A wife asks her husband, "Could you please go shopping for me and buy one carton of milk and if they have avocados, get 6.

A short time later the husband comes back with 6 cartons of milk. The wife asks him, "Why did you buy 6 cartons of milk?"

He replied, "They had avocados."

Husband and wife had a tiff. Wife called up her mom and said, "He fought with me again, I am coming to live with you."

Mom said, "No darling, he must pay for his mistake. I am coming to live with you!

BOTTOM LINEThe stock market is still in a downtrenddue to last until next April. A minor top is due Oct. 12, which we figureshould be more like the edge of a cliff to fall down off of instead of the crest of a mountain peak. A cluster ofbottom signals is due Oct. 20-22, suggesting a dramatic event and on the week before the Oct. 27-28 FOMCmeeting. Bonds are in a sideways congestion zone, but should head lower in price (higher in yield) starting about 2 weeks from now, as an echo of the similar move we have just seen in crude oil prices. Gold has already seen a trendlinebreak in euro price terms, and the equivalent trendline on the dollar price plot should also get broken very soon.

What To Expect A new cluster of bottom signals forthe stock market now shows up as being due Oct. 20-22. This year, Oct. 19 is on a Monday, which may bringback ugly memories of 1987. With that cluster of bottom signals coming right on the heels of the bold-lettered Oct. 12 top signal (supported by the BC Indicator too), there seems to be good potential for a rapid drop.

T-Bonds interestingly have a pair of bottom signals in the same time frame of that stock market bottom cluster.Normally we expect stock and bond prices to move in opposition, so this is a little bit peculiar. Not to be left out, the gold table shows top signals for gold miningstocks bracketing the overall stock market’s bottom cluster. And all of this happens during the week before the Oct. 27-28 FOMC meeting, so it may be related to investors posturing ahead of whatever action on rates that they expect to get from that meeting.

Like a 6-Year Old At The End of a Sugar HighThe third year of a presidential term is nearly always an up year, regardless of whether one uses a calendar year (January to December) or the election years relative to the November elections. We have to go back to 1939, when theWehrmacht was marching through Poland, to find an instance when it did not work out.Now we are seeing 2015 at risk of being a down year, unlessthe SP500 starts to rally strongly. And if the SP500 in 2015 continues to follow the comparison to 2011 that is shown in the first chart, then the 3rd year’s bullish track record won’t have a problem. Thus far, the bounce out of the Sep. 28, 2015 bottom looks a lot like the bounce out of theOct. 3, 2011 bottom.

But here is the problem: our eurodollar COT leading indication says that the market should continue to trenddownward at least until April 2016, so to get a bounce like we saw in late 2011 and early 2012, the market is going to have to defy that leading indication.We should note that this leading indication did correctly say that the 2011 bottom should arrive as it did.And it correctly predicted the rally up into 2012. But it has a different message about what lies ahead right now,saying that stock prices should echo the downward movement of the commercial eurodollar futures traders net position ayear earlier.

We should further note that this leading indication relationship failed horribly in 2013, when the Fed started QE3. That was the program whichinvolved injections of $85 billion per month for several months, lasting all the way until October 2014. It was a huge supply of new trading liquidity that helped to boost stock prices, and in a way not modeled by what the commercial eurodollar futures traders had donea year before.

We think it is fair to say that had the Fed not made that big injection of liquidity, the market would have seen adramatic drop in 2013, so it can be argued that QE3 was a good thing. But it sure did screw up a lot of technicalindications. And this highlights the point that another potential round of QE from the Fed constitutes a big risk factor for using this leading indication.The chart here on page 2 zooms in on that same leading indication and shows what lies ahead in greater detail.Both the August 2015 mini crash and its subsequent retest in September were not really part of the pattern; the market has been acting much more volatile thandepicted

Generally speaking, when the market goes off track, it works extra hard to get back on track. We saw that lastOctober with the Ebola Panic, which was not part of the agenda but after which the market rallied strongly. Thecurrent hesitation in starting the called for downtrend should mean that the market plays catch-up once the downtrend gets itself started.Bottom Line: This is not a repeat of2011, despite the strong resemblance todate. The stock market has further yetto go down.

Coppock Curve Says More Decline AheadE.S.C. Coppock was a money manager many years ago. The “S” was short for Sedgewick, and so the nicknamehe went by was “Sedge” One of his clients was the Episcopal Church, and so in the course of his duties as money manager, he had the opportunity to chat with several Episcopal priests. One of the questions thatCoppock asked was how long it takes a person to grieve over the death of a love one. The answer he got was 11 to 14 months, and so he incorporated that into an indicator he called his Very Long Term (VLT) Momentum Index. Theidea was to find the moment when investors were over their grief about the past bear market, and ready to investagain. Other analysts gave it the more eponymous name “Coppock Curve”.

The idea was to hunt for those few instances when stocks were really cheap and starting to turn up. It was meant to be a long-term bottom-finding indicator, and it is good at that task. But that has not kept analysts from trying to use it for other purposes in the years since.In the top chart, we see that the Coppock Curve has been making a fairly characteristic pattern of tops in recent years. The first top is the momentum top; the second one is the more permanent price top, and the decline from top #2 is what leads to a significant down move.

The middle chart takes a longer look at the same indicator. What it shows is what Sedge Coppock wanted itto show, which is that when his indicator gets down to a really deep negative value and then turns up, those are thereally great all-time buying opportunities.It is true that waiting for the upturn means missing the absolute bottom, but that is no different from anyother trend-following indicator.An upturn in the Coppock Curve would mean an upturn in the stock market’s underlying trend. But there can befalse messages there, i.e. whipsaws, and so even if we had a concrete indication of an upturn we still would not knowfor sure whether it was a trend change or a whipsaw until months after.

The bottom chart provides a visual llustration of what it takes to achieve a reversal in the Coppock Curve. It ispossible to calculate the price level where a reversal would occur. The math behind that calculation is hard to explain in plain text. See the file at www.mcoscillator.com/images/uploads/Coppock.xls to get the raw algebra behind that idea.Basically, the DJIA would have to close back up above that number to turn up the Coppock Curve. That’s a prettytough standard at the moment, but it will get easier with each passing month. And even if the standard could be met,there is the possibility of whipsaws.When the Coppock Curve gets down to a really deep negative level and then turns up, those are the sweet spotswhich Sedge Coppock was looking for.We are a long way from having one of those yet.

Crude Oil Upturn Suggests a Yield Rise SoonCrude oil prices this week started an upturn back toward the $50 mark, which will no doubt make the North Dakota frackers and the Saudi sheikhs happy. But more important than their happiness is the message that such anupturn brings for bond yields.As we have been detailing a lot recently, the movements of the price of crude oil tend to get echoed about 3 weeks later in the movements of Treasury bond yields. The Treasury Yield Index (TYX) measures the current yield to maturity (YTM) of the most recently issued 30-year T-Bond. It moves in opposition to T-Bond prices.The upswing in crude oil prices this week means that we should expect its echo to appear in bond yields about 3weeks from now. But while we are waiting for that rise in bond yields to appear, we have to wait through a coupleof weeks of choppy sideways movement.

This is not a new relationship, as the middle chart helps to reveal. Neither is it a perfect one. Crude oil pricesare only an approximate guide for what the plot of bond yields should look like. Similarly, a dog at the end of a leash is only an approximate indicator for the location of the master. There is latitude for differences in how the actual plot of bond yields will actually look. But the correlation is still there, and so if we were to see a meaningful rise in crude oil prices, it would be fair to expect a meaningful rise in bond yields, after waiting of course for the approximately 3-week delay in the interest rateresponse.Adding support to the idea of bond yields (and prices) halting their recent trend and moving sideways is the indication in the bottom chart. Here we see that the declining tops line for bond prices which goes back all the way to early 2015 is still intact

We also see that there is a modestly overbought condition in the 9-day Up- Down Oscillator. This indicator simplymeasures the percentage of up days over the past 9 trading days, and then smoothes that with a 3-day simple movingaverage.It is possible for bond prices to continue higher in spite of such a high reading for this indicator, but the probabilities push against that outcome. There is also the resistance offered by the declining tops line to contend with. So if there are two conditions pulling bond prices back away from an upward continuation, that argues even more strongly against an upward breakout now for bond prices. Putting this all together, the message from crude oil is that bond yields should level off, and then head upward (prices downward) a few days from now. So that fits with the idea of having the rubber band get stretched for prices just as a downtrend line is encountered. In other words, it is not a good time to be a bond bull right now.