A major long-term momentum indicator is flashing, “sell.”
Based on the historical significance of this indicator we may be putting in a top and possibly THE top for the bull market that began 2009.
The indicator concerns the monthly moving average convergence divergence or MACD.
For those of you who like technical analysis, this indicator is formed by two interweaving lines.
The first line (usually black on the chart) is formed by subtracting the 26-month exponential moving average (EMA) from the 12-month EMA.
So if the 26-month EMA is 12 and 12-month EMA is 10, the black line would be at 2 for that particular day.
The second line (usually red on the chart) is formed by the 9-month exponential moving average.
The “signals” come when the two lines connect:
- Anytime the black line breaks above the red line, it triggers a “buy” signal.
- Anytime the black line breaks below the red line, it triggers a “sell” signal.
“Sell” signals usually coincide with market tops forming. They also trigger when bull markets END.
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I’ve labeled the “sell” signals on the monthly chart of the S&P 500 below. We are using the monthly chart because we’re most concerned with timing when a multi-year bull market ends, NOT intermediate swings in price.
As you can see, this signal has been fairly accurate for picking tops.
Of course it’s more of an art than a science when it comes to timing the end of a bull market (two of the “sell” signals hit on short-term tops in 1998 and 2011, as opposed to the ultimate market tops which came later).
However, it is worth noting that even during those periods in which “sell” signals only coincided with temporary tops (1998 and 2011), BOTH times stocks staged a dramatic collapse before beginning their next leg up.
In 1998, when the “sell” signal triggered, stocks dropped nearly 20%.
In 2011, when the “sell” signal triggered, stocks fell 17% and the Fed announced Operation Twist to try and prop the markets up.
Moreover, the other times that this indicator registered a “sell signal” (the times when it coincided with THE top for stocks) the markets fell 50% and 57% respectively.
So the fact a “sell” signal is hitting now is of massive importance. It tells us that momentum is falling and we can expect a sizable correction in stocks at the very least and a Crash at the very worst.
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Chief Market Strategist
Phoenix Capital Research