Our Primary Trend Indicator Generates A Long-Term Stock Market Sell Signal

For the first time in six years, our Primary Trend Indicator, a long-term trend stock market forecaster, generated a new signal, a Sell Signal on May 31st, 2016. The last signal change was a Buy in May 2010. These long-term Buy and Sell signals are rare, but have been very accurate at identifying the start of new long-term trends. This is a warning that stocks are about to enter a long-term Bear market, one that will likely be lengthy and deep based upon the market’s behavior after previous Buy and Sell signals from this indicator.

The most recent previous signal came on May 31st, 2010 when the PTI generated a Buy signal, and it remained on a Buy signal until May 31st, 2016. After that Buy signal six  years ago, the Industrials rose 8,152 points (an 80% gain).

The last time it generated a new long-term trend “Sell” signal was almost eight years ago, on September 30th, 2008, just as the autumn stock market crash started, when the DJIA closed at 10850. We saw a 4,400 point drop (i.e. 41 percent decline) after this sell signal was triggered.

The previous signal was a Buy signal on October 31st, 2003, which was followed by a 4,130 point rally. The signal prior to that was a Sell signal in March 2001, which was followed by a 2,462 point decline.

So you can see this is a very important long-term market trend forecaster with an incredible track record. 

Here is how the Primary Trend Indicator works: One of the tools we have in our arsenal to identify the status of a Primary Degree long-term trend is a simple analysis of the 14 month moving average versus a Slower moving average calculation, the 5 month MA of the 14 month. It has been terrific at identifying multi-year trends, both up and down. While it sometimes is a little late in generating the buy and sell signals, it triggered a “sell” near the start of Primary degree wave (4) down, in mid 2000. What followed was a two and a half year, 39 percent drop into the wave (4) bottom on October 10th, 2002. It took a while for this indicator to confirm that the rally that started on October 11th, 2002 would in fact be a multi-year primary degree wave up, wave (5) up. But in October 2003, this analytical tool did in fact trigger a Primary Degree “Buy” signal, which led to a four year further rally to new all-time nominal highs on October 11th, 2007 at 14,198.         

We require a 5 month moving average of the Spread between the Fast and Slow to reverse in a new direction for 3 consecutive months in order to declare that a new primary trend, a new multi-year trend, is underway. To generate the previous Buy signal back in May 2010, the spread between the Fast and the Slow went positive in January 2010 for the first time in 20 months. March 2010 generated the first of the three required consecutive positive readings in the 5 month moving average for a long-term Buy signal, April 2010 generated the second, and May 2010 generated the third, when a new Buy signal was triggered six years ago. However, the spread fell to negative – 49 on January 31st, 2016, and was followed by negative spread levels each month since, creating a new long-term Sell signal as of May 31st, 2016, when our PTI is now on a “Sell.”

There had been only four signals since 1997 before the Sell signal in May 2016, so this tool is useful for long-term investors, as it filters out the noise of up and down corrections of significance in favor of the primary trend. September 2008 was the third signal, May 2010’s was the fourth, and the May 2016 signal is the fifth. This Sell signal confirms that the Economic Ice Age is starting.     

This chart is useful for our Conservative Balanced Investment Portfolio since once we get a new signal, in the past we have been able to rely upon that signal for years. Further, it tells us which direction surprises are likely to occur, so when playing speculative options or futures, we will know the direction where a surprise trend turn is most likely. Knowledge of the primary trend is also useful for trading. In this case, we can be more aggressive when entering a position in the same direction as the primary trend, and less aggressive when entering a short-term trend play against the primary trend.

The May employment report was ominous, arguing that an economic decline is fast approaching. Let’s take a look at what that report revealed: The Bureau of Labor Statistics of the Labor Department reported the worst employment picture for a month since September 2010 on Friday, June 3^rd. First, they reported that 38,000 non-farm payroll jobs were created in May 2016. The truth is, the economy lost 186,000 jobs in May, instead of gaining 38,000. This is because the BLS fudged the number by adding 224,000 of fictitious new jobs they hope were created by new businesses they think may have started during the month of May. This CESBD adjustment is pure fiction, so the truth is the economy lost almost 200,000 jobs last month. It needs to create 150,000 new jobs each month just to breakeven with population growth. That is a 350,000 jobs deficit in one month.

The BLS also reduced the number of new jobs they previously reported were created in April and March by 59,000.

Then, as if to add insult to injury, the BLS had the audacity to report that the unemployment rate improved from 5.0 percent to 4.7 percent. What a farce, what a joke. The reason it improved was because the BLS ignored 500,000 people who dropped out of the workforce in May. These are unemployed people not counted in their unemployment rate calculation. Only 62.6 percent of all Americans who are in the labor force, defined as those eligible to work who are over 16 years old, not institutionalized, and not in the military, are employed, which means 37.4 percent are unemployed! Not 4.7 percent.

Here is another killer statistic gleaned from the June 3^rd report: The number of persons employed part-time (who would have preferred full-time employment but were working part time because their hours had been cut back or because they were unable to find a full time job) increased by 484,000 in the month of May, and now stand at $6.4 million! Try supporting a family with a part-time job. No wonder there is so much anger in the electorate this year.

What this tells us is the economy is falling apart right before our eyes and the Labor Department is doing its best to spin it into something completely the opposite.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2016, Main Line Investors, Inc. All Rights Reserved.