What Does the MACD Tell Us About the Risk of a Major Market Peak?

Fri, Jul 28, 2017 - 2:37pm

Risks to the market appear elevated over the next 1-3 months with a variety of sentiment readings edging into overly bullish territory (see Rydex Trader Bullishness Surpasses 2000 Tech Bubble). Longer-term, however, the yield curve and other leading indicators aren't suggesting the risk of an imminent major peak or recession.

Another important indicator that agrees with this outlook, which has been quite useful for identifying major trend changes in the S&P 500, is a trend-following momentum indicator called the MACD (in blue below).

We've shown green and red arrows on the S&P 500 corresponding to MACD buy and sell signals (when the blue line goes above and below the red-dotted zero line) and, though it has been less timely on market bottoms, following its advice on bearish crossover sell signals would've gotten you out near the very peak of the 2000 tech bubble, the 2007 top, and also at the intermediate-term 2015 market top.

If Barry Bannister's timeline for a possible market peak and recession in the 2018-2019 timeframe plays out, we should expect to see this reflected through a combination of one or more of the following: waning momentum via the MACD above, a flattening and eventual inversion of the yield curve, or a slowdown in a variety of leading indicators.

As Chris Puplava mentioned in today's podcast and recent quarterly newsletter, Preparing for the End Game, given the potential headwinds and current risk/reward setup, we believe Bridgewater's Ray Dalio has it correct when he wrote, "our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves."

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