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This presentation is solely for informational purposes and not a solicitation to invest. Stonehenge Analytics offers and publishes forecasts of future likely price movements of various financial assets. These are opinions formulated from our cycles-based historical analytical research. They are not, nor are they represented to be investment advice. Individuals or institutions choosing to act on these opinions are doing so at their own risk. Stonehenge Analytics does not warrant or guarantee that acting upon its published opinions will produce financial gain. Past historical performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Individuals and institutions should consult a financial advisory professional before making any investment.Weekly Charts—Barron’s dataWeek Ending Sept. 9, 2016 A sell-off in global stocks that started on Thursday when the European Central Bank left its monetary policy unchanged and took no decision to either increase the amount of monthly bond purchases in its current “quantitative easing” program or to extend that program beyond its stated scheduled termination in March of next year accelerated to the downside on Friday when U.S. Federal Reserve Governor Eric Rosengren made a strong case for immediate resumption of “interest rate normalization” at the next FOMC policy meeting in a speech he gave in Quincy, Massachusetts. All Federal Reserve Governors are voting members of the FOMC and Rosengren’s remarks were interpreted by U.S. markets as a statement by him that he intends to vote in favor of an immediate hike in the Fed’s target rate for the overnight federal funds rate at the September 21 FOMC policy-setting meeting. Both stock and bond market reacted negatively and vigorously to Rosengren’s statements. The Dow Industrials fell by -394 points on Friday to close at 18,085 and put it down by -406 points for the week. The S&P 500 Index fell by -53.49 points on Friday to close at 2,127.81, lowering that index by -52.17 points for the week. The benchmark 10-year Treasury note yield rose by +6 basis points for the day to close at 1.67%, putting g it higher by +7 basis points from its closing level on September 2. For the S&P 500 it was the lowest weekly-close price since its July 1 weekly close at 2,102 when it was then on its way up from its “Brexit Vote” weekly-close low of 2,037 reached the prior Friday, June 24. The price momentum statistics and various moving averages of those statistics constructed by the Barron’s Data newsletter mostly did not confirm this week’s steep price drops by the Dow Industrials and the S&P 500. While both the 5-week and 10-week moving averages of weekly new 52-week highs on the NYSE recorded weekly declines they were the only two moving averages from 5-week through 240-week time lengths to do so. In addition and most importantly, neither the 5-week nor the 10-week moving average of weekly new 52-week lows rose this week. In fact, no moving average of weekly new52-week lows on the NYSE recorded a weekly rise, nor did any moving average of the weekly ratio of new 52-week highs divided by that week’s total of both new highs and new lows on the NYSE record a weekly decline. The only price momentum statistics that confirmed this past week’s steep price declines were the moving averages of weekly “percent of stocks rising” ratios derived from weekly advance/decline ratios on the NYSE. All moving averages with time lengths from 5-weeks through 40-weeks recorded declines. None of these moving averages are close to historically low and “oversold’ extremes and so have room to fall further in the future. However, unless and until their declines are confirmed by the statistical series constructed from new high and new low data the price declines of the major U.S. stock indices begun this past week are extremely likely to prove short-lived. This week’s S&P 500 long-term chart that uses only its weekly-close prices is also a comparison of the S&P 500 with the yield spread between the Barron’s High-Grade Corporate Bond Index and the comparable maturity 10-year Treasury note yield. On the chart below the yield spread has been multiplied by a factor of 4 for scaling purposes. We have been keeping a very close eye on the corporate bond/ Treasury bond yield spread since it equaled its lowest level reached in 2015 at +125 basis points on both August 26 (+124 basis points) and September 2 (+126 basis points). The upper horizontal line on the chart is drawn from its March 6, 2015 low of +125 basis points. The lower horizontal line is drawn from its lowest point reached since the stock market bottom in March 2009. It was recorded on September 12, 2014 at +111 basis points. The corporate bond/ Treasury bond yield spread rose this week to +131 basis points. As we reported earlier, the 10-year Treasury note yield rose by +7 basis points for the week to close at 1.67%. The Barron’s High-grade Corporate Bond Index yield rose by +12 basis points to end the week at 2.98%. A widening yield spread when both yields are rising signals a general contraction of credit availability as well as increasing aversion to taking credit quality risk by bond investors. Neither development is bullish for stock prices. We should expect that the S&P would fall in price as the yield spread rose. In fact, the entire history on the chart shows that this consistent inverse relationship has held true since mid-2008. As of today the rise in the yield spread is a one-week phenomenon. We have no evidence in hand that might lead us to conclude that a new and upward trend has commenced. Should that prove to be the case however then we should expect that the S&P price direction will be consistently downward for as long as the widening of the yield spread continues. The chart shows that this week’s closing price for the S&P 500 at 2,127 is almost exactly at the dashed horizontal line drawn across its twin weekly-close highs from 2015 made on May 22 and on July 17, 2015 at 2,126 on both dates. This is an important technical price support/resistance area where either a reflexive “bounce” upward by the S&P can take place or a damaging downside “breakout” can be the next move. If the S&P continues downward in the coming week the its next lower-down technical price support will be found at the solid horizontal dashed line drawn from its previously-mentioned weekly-close low made on June 24 at 2,037. Our lead chart this week is a comparison of 5-week and 10-week moving averages of weekly new 52-week highs on the NYSE. Both moving averages fell this week. For the short-term 5-week moving average this was a continuation of a downward move that began from its peak high at 585 new highs reached on July 29. The 5-week moving average fell to 446 new highs from 464 on September 2. It is likely to fall for at least one more week but, starting on Monday, September 19 weekly figures due to drop and be “replaced” in its calculation will average just 408 new highs/week for the next 3 weeks through Friday, October 7.This is a lower 3-week average than the current 5-week moving average and therefore we cannot count on this moving average continuing to decline for more than one additional week. For the short intermediate-term 10-week moving average this week’s decline to 511 new highs from 524 new highs on September 2 was a change of direction to falling from rising that was in fact foretold by the 5-week moving average making the same directional change in the first full week of August. This directional change by the 10-week moving average of weekly new highs puts its September 2 level of 524 new highs on the board as its peak high for its rise since its intermediate-term ow at 106.3 new highs was made on February 19 of this year and just one week after the major intermediate-term price lows were made by the Dow Industrials and S&P 500 indices on February 11 (at 1,810 for S&P). The cessation of rise by these two moving averages of weekly new 52-week highs does not in and of itself signal a change in the price trend direction of the major U.S. stock indices. It does signal that the breadth of the price advance is narrowing and that fewer and fewer individual stocks are continuing to rise to new 52-week highs each week. This is a loss of upward price momentum that leaves the broad stock market highly vulnerable to any selling pressure which might show up, as was demonstrated on Friday. We call attention to a very similar sequence of 5-week and 10-week moving average peaks and turns downward in 2014. The two peak highs were separated by 4 weeks of time with the 10-week moving average peaking on August 1, 2014. A broad and damaging market sell-off did not commence until 7 weeks later from jointly-made new highs by the Dow Industrials and S&P 500 on September 19, 2014. A 4-week sustained downward price move followed that lowered both indices by -9.85% into jointly-made price lows on October 15, 2014. This is a more or less typical sequence of events that follows sequential inflection point peak highs by these two moving averages of weekly new 52-week highs. With the 10-week moving average having now established its peak high on September 2 of this year it has peaked and turned downward 5 weeks after the 5-week moving average. If we apply the same 7-week time lapse to the final S&P and Dow price highs as occurred in 2014 then we should expect that the main U.S. stock indices will put final price highs into place in the close vicinity of the week of October 17-21 for their advances from their major intermediate-term price lows made on February 11. An intermediate-term sized downward price correction that lasts for a minimum of 4 weeks of time should immediately follow. Our next chart compares the two intermediate-term 10-week and 20-week moving averages of weekly new 52-week lows on the NYSE. While the chart above shows that upward price momentum is waning and the breadth of the advance is narrowing it gives little or no information about a potential building of downward price momentum. The chart below does exactly that and it shows that as of yet there is no such increase in downward price momentum. The 10-week moving average of new 52-week lows fell this week to just 31 new lows from 43.9 on September 2. The 20-week moving average has remained virtually unchanged and in a narrow range between 48.4 and 49.8 new lows since July 22. It ended this week at 49.2 new lows. The yellow horizontal line on the chart is drawn across the 10-week moving average trough lows made on November 12, 2010 at 29.9 new lows and on March 9, 2012 at 27.2 new lows. These two historical benchmarks are being approached today and will likely be at least equaled because the 10-week moving average calculation is due to “replace’ a figure of 62 new lows in the upcoming week. Starting on Monday, September 19 however the average weekly number of new 52-week lows due to drop from that calculation n and be “replaced’ will drop to just 15 new lows/week through Friday, September 30.This is an exceptionally low two-week average by historical standards and we should expect that the 10-week moving average will cease falling and produce a major intermediate to long-term inflection point low on next Friday, September 16. In November 2010 the S&P price response was to execute a mild downward price move between November 5 and November 26, 2010 that lowered the S&P 500 Index by less than -5.0%. In March 2012 both the Dow industrials and S&P 500 continued pressing upward after March 9, 2012 but neither added more than +3.8% to its March 9, 2012 closing price level. The S&P 50 peak high price of 1,422 was reached on April 2, 2012. The Dow Industrials peak high price of 13,338 was not reached until May 1, 2012. Sustained downward price movement did not commence until the Dow turned down on May 2, 2012 and then both indices fell by approximately -10.5% over the next 4 weeks and through June 4, 2012. The lesson for stock market investors from both prior historical examples is that S&P and Dow-type stocks should not be purchased after the 10-week moving average of weekly new 52-week lows puts in its trough low and turns upward because lower and better prices will be made available in the not-too-distant future. Whether or not the price decline that is 100% certain to follow a trough low made by the 10-week moving average of weekly new 52-week lows will turn into a significant and damaging intermediate-term correction depends upon the extent of rise by the 10-week moving average of weekly new lows. The black horizontal line on the chart is set at the 100 new lows mark. No S&P price decline of -7.5% or greater has taken place since the March 2009 stock market bottom without being accompanied by a 10-week moving average of new 52-week lows that has been greater than 100 new lows. It is therefore too early for us to make a forecast about the extent of expected price damage from a price decline that we know for certain will take place prior to the end of 2016. It is fair to say however that we should not expect greater price damage than the -10.5% decline that occurred in May-June 2012. Our final chart this week will show why we should not be expecting a major downward price move much greater than -10.5% out of the upcoming decline. It takes a look at the longer-term 40, 60, and 100-week moving averages of the weekly ratio of new 52-week highs on the NYSE divided by that week’s total of both new highs and new lows. These moving average time periods are approximately 9 ?-month, 14-months, and 23-months. As the comparison chart below shows all three moving averages are currently rising simultaneously and have been doing so since February 26 of this year. As of Friday the 40-week moving average was on the verge of pushing up and through its own long-term down-trend line of previous peak highs made on April 30, 2010, May 17, 2013 and July 25, 2014. Upcoming weekly ratios due to drop and be “replaced’ in its calculation will average just 21.5%/week for the next 10 weeks through Friday, November 18. The green horizontal line on the chart is set at its May 17, 2013 peak high of 84.3%. The 40-week moving average is currently at 70.0%. It will match its May 17, 2013 peak high by November 18 if the NYSE records weekly new high/new low ratios that average at least 75.0%/week over that 10-week time period. This is a figure that is well below the current 10-week average of 94.0%/week. We can be highly confident that the 40-week moving average of weekly new high/new low ratios will continue trending upward even if the S&P and Dow Industrials suffer a 4-week downward correction between today and November 18. Major downward price moves by the S&P and Dow Industrials in May-July 2010 (down -17.0%), July-October 2011 (down -21.0%) and July 2015-February 2016 (down -15.3%) were all accompanied by a falling 40-week moving average. As the chart shows, the May-1-June 4, 2012 price decline of -10.5% was not. This was the largest S&P and Dow price decline not accompanied by a falling 40-week moving average since the March 2009 stock market bottom. The longer-term 60-week moving average is on the verge today of executing a bullish crossing above the next-longer 100-week moving average. The former ended the week at 57.3% and the latter at 60.3%, with both rising. Upcoming weekly ratios due to drop and be “replaced’ in the 60-week moving average calculation will average just 18.5%/week through Friday, November 18, and even lower “replacement” average than that for the 40-week moving average. The 10-week “replacement” ratio average for the 100-week moving average will be a higher 59.5%/week that is still a low enough figure that it can be matched or exceeded over that time period. We therefore know for certain that all three moving averages will continue to rise simultaneously through November 18 unless the NYSE begins to produce weekly new high/new low ratios less than 59.5% each week and the two of the three moving averages will rise simultaneously unless it begins to produce weekly ratios that are less than 21.5%/week. The Barron’s Data newsletter possesses NYSE weekly new high and new low data all the way back to 1940. There has never, and we repeat and emphasize never, been an S&P price decline greater than -10.5% over that entire expanse of 76 years when all three of the moving averages of weekly new high/new low ratios shown below were in simultaneous rising trends. This week’s chart package shows that while a downward price correction taking place for the S&P 500 and Dow Industrials is very nearly a sure thing between today and the end of 2016 it also shows that a decline that produces price damage greater than -10.5% is exceedingly unlikely and would in fact be historically unprecedented. For longer-term investment-oriented accounts the investment action dictated by these two near-certainties should be obvious. Purchase of stocks for investment portfolios should be suspended immediately. Cash should be built in anticipation of these very same stocks being offered for sale at substantially lower prices a few weeks in the future. Thomas J. DruittFinancial Markets Research and AnalysisStonehenge Analytics ................
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