Submitted by Eric Bush via Gavekal Capital blog,

Stock prices and oil prices have been moving in a more positive�correlated fashion recently than at any point since 1980. The 65-day correlation between Brent Crude Oil and MSCI World Index�peaked at 52%�on 11/13/2015 and has since fallen back a bit to 41%. The 200-day moving average is also at 41%�and continues to climb higher. The current correlation�of 41% is the highest correlation between stocks and oil prices ever over the history we have for both series.

Of course there have been certain sectors of the stock market that have been highly correlated to the price of oil for quite a while. And fortunately for investors, there have been sectors that have had a negative correlation. In the first chart below, we show GKCI Developed Market cyclical sectors (Consumer Discretionary, Energy, Financials, Industrials, Information Technology, Materials) relative to the overall stock market (blue line). The red line shows the 5-day moving average for�Brent Crude Oil. Over the past five years, these two series have had a�85% correlation. As oil has fallen, cyclical stocks have fallen with it.

In the second chart, we show GKCI Developed Market growth counter-cyclical sectors (Consumer Staples and Health Care) relative to the overall stock market (blue line). Once again, the red line shows the 5-day moving average for�Brent Crude Oil.

This time we have inverted�the right-hand scale so as to better illustrate the relationship. Here, we see growth-counter cyclicals have actually had a NEGATIVE relationship with oil prices. To the tune of a -84% correlation over the past five years. Consequently, growth counter-cyclical stocks have been the best way for investors to buck the drag that oil prices have had�on stock prices.

Submitted by�Tyler Durden�on 02/22/2016 10:27 -0500

“When it rains, it pours.”

That is most assuredly one of the most heavily used cliches in the history of the English language but a failure to understand it apparently causes Citi’s economics team to get it wrong when it comes to forecasting the depth and trajectory of recessions.

In a new note, the bank looks at what happens when mean reversion fails, pushing a struggling economy even further into the abyss. Here’s a list of some of the mean reverting forces that help economies to correct and pull themselves out of trouble:

“Both economic theory and practice establish that business cycles are self correcting. Of course, policies can help engineer a quicker recovery (and even altogether prevent a recession) but most economies and markets, under normal circumstances, eventually return toward mean growth. High unemployment puts pressure on wages which, in turn, reduce labor costs and eventually increase the demand for workers. Sustained low investment ultimately results in a low capital stock, which increases the return to capital, eventually driving up investment. Weak growth typically results in real exchange rate depreciations, which eventually increase net exports and aggregate demand.�These are some of the mean-reverting forces that ensure that a market economy will normally go through a business cycle, but that it will seldom face an economic depression.”

But an overreliance on the assumption that these forces will everywhere and always lead economies out of the recessionary doldrums has apparently caused Citi to be “too optimistic” in their forecasts on EM growth - and that’s putting it nicely:

In an effort to figure out why their forecasts have consistently missed the mark as multiple EMs head toward severe corrections, Citi took a look at 55 recession episodes in emerging markets during the last few decades and discovered a funny thing:�when things are going bad they tend to get worse, not better:

A first test of the nonlinearity hypothesis for recessions consists of estimating the probability of an additional decrease in output of, say, 2% or 4%, given the accumulated fall in output since the previous peak. Under the mean-reversion framework, this probability should decrease the bigger the cumulative fall is. Our estimates show that this is not the case. Once the cumulative decrease in output surpasses certain thresholds, the slope of the curves becomes positive. The Ushaped curve illustrates that the probability that output falls further bottoms out and eventually increases. As the output fall grows large, nonlinearities emerge, increasing the probability of another negative growth year.

As shown below in Figure 2, the probability activity falls an additional 2pp is decreasing for moderate declines in output, reaching a (local) low after an accumulated drop of around 4.5%.�For instance, after activity has fallen 6%, the Ushaped probability curve suggests that an additional 2pp contraction has a 67% probability. In the case of the probability of an additional 4pp drop, the curve reaches a low at around 6%, increasing after that. In the case of “very deep” recessions (accumulated falls in output between 9 and 10%), both curves are upward sloping.�This suggests that, eventually, after a certain threshold is exceeded, activity is likely to further contract quite meaningfully,�i.e., the probability activity falls by an additional 4pp after a 10% depression-like contraction is no smaller than in the initial phase of a recession.

Now to someone without a PhD in economics this would have been obvious, but as anyone who's ever done any academic research knows, the "very serious" people spend quite a bit of their time discovering things that largely belong in the realm of common sense.�

A slavish adherence to the notion of predictable business cycles has led professional economists astray on any number of occasions and indeed, the entire thesis behind the�machinations central banks are currently going through rests on the notion that these cycles can be smoothed and manipulated. Far from being able to successfully tinker with them, it would appear economists don't understand them at all.�

* �* �*

Below, find Citi's take on what the above means for Brazil, the poster child for EM malaise.

Take for instance the case of Brazil. When we use quarterly GDP data (available up to 3Q15), activity has shrank 5.8% from the peak. Thus, the country currently sits in the area where the blue line in Figure 2 has a positive slope. This means that the more output falls from this point (at the margin), the more likely it will contract by (at least) an additional 2pp. In other words, Brazil seems to have entered a stage where negative spillovers could offset mean-reverting forces. Given the preliminary Q4 data available, it seems that growth has remained negative. This could conceivably place Brazil beyond the trough of the light blue curve, indicating that even a 4% further contraction may be increasingly likely. In sum, this first exercise suggests that in Brazil, the accumulated fall in output may already be enough to trigger negative spillovers and nonlinearities.�

Submitted by�Tyler Durden�on 02/22/2016 09:53 -0500

On the heels of weakness in the rest of the world's PMIs, US Manufacturing just printed 51.0 (missing expectations of 52.4) and tumbling to its�lowest since October 2012... followed rapidly by Bernanke hinting at QE3. While Markit does 'blame the extreme weather', it notes however that�"every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices,�is flashing a warning light about the health of the manufacturing economy."

Not good...

Even worse...

Chris Williamson, chief economist at Markit said:

“US factories are reporting the worst business conditions for over three years.�Every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy.

“Output and order books are growing at one of their slowest rates since late-2012, with exports falling amid weakened global demand and the strong dollar.�Hiring has weakened as a result.�With�backlogs of work slumping to the greatest extent since the height of the recession in 2009�and inventories rising for the third successive month, it’s�likely that firms will come under increasing pressure to cut payroll numbers and production in coming months unless demand revives.

“Prices are meanwhile falling at the fastest rate since mid-2012�as firms compete to win or retain customers.

“The one caveat is that the survey was conducted in a month in which parts of the US suffered extreme weather.�However, few survey respondents reported that the weather had a material impact on business over the month, instead often simply observing a general slowdown in trade and the economy.”

And with Services now tumbling also, what excuse will the permabulls have next...

Charts: Markit and Bloomberg

Submitted by�Tyler Durden�on 02/22/2016 12:31 -0500

Earlier today, we highlighted the noticeable weakness in European PMIs which largely missed expectations on - what else? - sluggish global demand and generally anemic economic growth.

Specifically, Germany’s PMI fell for the second month in a row in February, declining to 53.8 from 54.5 the previous month. Worryingly, the manufacturing PMI slumped 50.2, missing estimates by a wide margin and hitting its lowest level in 15 months.

Services looked ok, but as anyone who follows global macro knows, it’s all about manufacturing for the world’s fourth largest economy. The health of Germany’s manufacturing sector serves as a useful barometer not only for the health of the European economy for the pace of global growth and trade in general. Indeed, that’s one of the reasons why the Volkswagen emissions scandal was (and still is) so troubling. It has the potential to dent Germany’s manufacturing juggernaut.

In the wake of Monday’s data, Goldman is out asking if perhaps German manufacturing “has lost its mojo.”

“German real GDP grew a moderate 0.3%qoq in the fourth quarter of last year, and by 1.5% for the whole of 2015,” Goldman writes, adding that “part of the relative disappointment can be located in the manufacturing sector, which has shown a sub-par performance since 2011.”

What’s to blame, you ask? Why sluggish global growth of course:

The relative sluggishness of German manufacturing can be partly explained by slower global growth, which has resulted in weaker German export growth (Exhibit 2).�In real terms, German exports have grown on average by only 3.5%pa over the past four years, compared with 8.8% in the four years prior to the financial crisis.

Using a model that explains German exports using global demand and Germany’s trade-weighted exchange rate, we find that German exports over the past two years have developed broadly as the model would have predicted.�This suggest that it is indeed weaker global demand�and not other, more fundamental changes in German manufacturing performance – such as a loss of international competitiveness – that lies behind weaker German exports.

�

Yes, "it is indeed" weaker global demand, a fact which underscores one of the key themes when it comes to assessing the state of the global economy. Depressed aggregate demand, anemic growth, and sluggish trade have become endemic.�It's now a structural rather than a cyclical problem.�

But everyone knows that by now (or at least they should). What puzzles Goldman is that manufacturing employment is on the rise and capacity utilization doesn't all that bad either.�

So what gives? When in doubt, just say the numbers are wrong. "Together with the relative strength of the employment figures we see a possibility that the price-adjusted figures under-report the strength of the German manufacturing sector," Goldman posits.

Perhaps. But if the problem is subpar global growth, then analyzing the sub-components is futile. Either aggregate demand and trade pick up or the German economy sinks with everyone else. "Barring any sharp slowdown of the global economy, we would expect a continuation of the solid, though not spectacular, growth of the German economy," Goldman concludes.

About that whole "barring any sharp slowdown of the global economy" thing...

...note the red arrows...

Submitted by�Tyler Durden�on 02/24/2016

Three weeks into January things were looking rather grim.

Plunging crude, jitters about the ongoing (and increasingly unpredictable) yuan devaluation, and spillovers to global risk assets stemming from an ill-fated attempt by Chinese regulators to implement a stock market circuit breaker got US equities off to one of their worst Januarys in history.

Compounding the problem, it seemed that the market had all of the sudden woken up to two very important (and very interconnected) facts: 1) central banks are desperate, and 2) sluggish global growth and trade look to have become structural and endemic rather than cyclical and transitory.

All of this weighed heavily on risk appetite and the bears stood by and watched as a kind of slow motion panic spread through markets. Since then, things have stabilized. Sort of. Oil is still a huge question mark and barring a Saudi production cut (which oil minister al-Naimi made clear on Tuesday isn’t going to happen) will likely continue to fuel the global disinflationary impulse. Meanwhile, markets are asking more questions about negative rates and central banker omnipotence every day.

For those wondering whether we’ll be riding the short squeeze euphoria wave higher, Goldman’s answer is definitively “no.” In a note out this morning, the bank says short covering and positioning have fueled the bounce and that a sustained rebound is exceptionally unlikely until either valuations get significantly more attractive or inflation expectations stabilize.

* �* �*

From Goldman

Over the past couple of weeks, it would appear that many of the worries that beset the markets through January have faded. But we think it is risky to read too much into price action currently. Volatility remains very high and�much of the moves may reflect positioning rather than a genuine change of view about fundamentals. Remember that at the heart of the correction there has been a growing concern about growth and, with it, the risks of deflation.

The rally in the equity market has occurred despite further declines in inflation expectations (and bond yields). In Europe�5 year-5 year forward inflation swaps (which Mr. Draghi has emphasized in the past) have recently hit an all-time low.

Even in the US the market is pricing core CPI inflation to turn negative in 1-years’ time, an outcome that did not occur even in 2008-2009; the 5-year/5-year inflation breakeven rate is only at 1.45% - well below the Fed’s target. Ironically the stabilization in oil prices and EM assets that has been at the core of recent short covering and recovery in risk appetite was probably explained initially more by the fear of weaker data than confidence in a genuine economic recovery.�Concerns about a broadening out of the manufacturing downturn in January to the broader economy, together with falling inflation expectations and tightening financial conditions, pushed out the expected timing of interest rate rises. This, in turn, has capped the rise in the US dollar thereby alleviating some pressure on commodity prices and EM currencies.

Another critical ingredient of the rebound in risk assets has been the strengthening of the CNY since February and the narrowing gaps between CNY and CNH. Some would also point to a more stable price for oil which likely led to some short covering and resulted in mining and oil moving to the top of the best performing sector list year to date. However, this may be premature. Hopes of an OPEC deal explained some of the stability in oil prices, but our commodity team expects oil prices to remain volatile and oscillate between $20/bbl and $40/bbl in the near term.

But there has been a roughly 8% rally since the trough – does this mark the start of a sustained recovery in the index?

On the valuation front the picture is complicated. Anything that compares equites to bonds makes equities look very cheap. But on the other hand absolute valuations are not yet cheap – prices have fallen but so have earnings expectations.

As a result, most valuation measures have increased in recent years, leaving equities vulnerable to perceived increases in risks. It is for this reason that�we think a continued meaningful rise in markets is not likely unless either valuations have fallen further first, or the macro data shows more meaningful signs of improvement and the fears about deflation shift towards fears of missing the leverage to inflation.

For equities to move meaningfully higher from here, we think�valuations would need to be cheaper first (around 11x or 12x forward earnings compared with 14x currently). Without this, the market is likely to remain volatile, but tread water until there is a clear shift in inflation expectations.

* �* �*

In other words, Goldman thinks stocks need to fall some 20% from here before the buyers come out in earnest.

Goldman’s conclusion: there will be no sustained rally until at least one of the following three things occurs:�1) Valuations become cheap; 2) The broad macro data stabilizes enough to shift up inflation expectations and/or; 3) Policy action becomes more supportive.

Put simply, number 2 isn't going to happen. At least not for the foreseeable future. Oil prices would need to rise dramatically, the global deflationary supply glut would need to moderate on the back of a sustained uptick in aggregate demand, and China would need to stop exporting deflation.

As for number 3, monetary policy can't get any more supportive. Literally. Rates are so low that the cash ban calls are rolling in and for a variety of reasons, policy makers across the globe have been reluctant to embark on massive fiscal stimulus programs.�

Finally, as for number 1, either earnings would need to rise or else stocks need to fall. Considering the fact that the world looks very likely to careen into recession just as primary market appettite for the bond deals that are fueling bottom line-inflating buybacks dissipates, we know which alternative seems more likely to us.

Submitted by�Tyler Durden�on 02/24/2016 10:56 -0500

In recent weeks Bank of America's new chief technician Stephen Suttmeier has been surprisingly bearish, predicting that the rally is over, as Tom DeMark cautioned yesterday, key support levels are not defended in which case the S&P 500 is looking at a substantially greater drop. Today, his skepticism reached new heights, when he warned that should the failure to break out higher persist then the market is facing a drop to as low ast 1575-1600, something which even Goldman now agrees with.

Below is an excerpt from his latest attempt at a diplomatic guide down:

The S&P 500 has not decisively broken down but the risk remains for a distribution top that goes back nearly 2-years.�Resistances are 1950 and 1990-2025, but we cannot rule out a tactical breakout above 1950 that would suggest an interim double bottom off 1812-1810 that favors a rally to 2085. Even this tactically bullish scenario would mark another lower high within the downtrend from last May. At this point, the pattern and longer-term indicators suggest selling into rallies.�Should the S&P 500 “The Generals” follow the weakness in the Value Line, NYSE, Russell 2000, and S&P Midcap 400 “The Troops”, there is risk below 1812-1810 toward 1730�(38.2% of 2011-2015 rally)�and then 1600- 1575."

Or just a breakdown in both 7 years of momentum and central bank credibility.

However, Buried just a little deeper in the note, is his far less politically correct assessment, one which suggests that with most indicators rolling over,�the last one to follow will be price, especially now that as Jack Lew explained there will be no surprise G-20 "rabbit in the hat" moment in Shanghai over the coming weekend.

Many indicators rolled over in advance of price, which is bearish

• New year-long+ lows for S&P 500 on-balance-volume�= distribution
• S&P 500 VIGOR broke the October 2015/October 2014 lows�= distribution
• The US Most Active advance-decline line has completed a top. Similar tops precede/coincided with S&P 500 breakdowns in late 2007 and 2000.
• Weekly global index-level advance-decline line remain weak
• The Dow Theory Sell Signal in late August was reconfirmed on February 11
• Monthly MACD sell signal last March and the first weekly MACD sell signal below zero since 2008 in early January. Bullish daily MACD & VXV/VIX support a tactical bounce.�
• A rise off extreme lows for net free credit�(free credit balances in cash and margin accounts net of the debit balance in margin accounts)�could exacerbate an equity market sell-off.
• The high yield market remains a risk with the US high yield index in a weaker pattern than the S&P 500. HY OAS has widened out of a 3-year bottom, similar to late 2007 / late 2008 – just before the financial crisis.
• Growth weakening relative to Value for large caps, small caps, and MSCI ACWI. Relative breakdowns for FANG (FB, AMZN, NFLX, GOOGL) and NASDAQ 100 leadership suggests that “Generals” have begun to follow the “Troops”.
• Bearish January Barometer and the S&P 500 is not following the normally bullish seasonal periods of November-January and November-April
• 2016 is a Presidential Election year.�The average return for an Election year with a non-1st term President is -3.2%�vs. 14.1% in an Election year with a 1st term President and 7.6% for all Presidential Election years

Looks like central planners are going to have their hands full to preserve years of a carefully, if artificially, erected "wealth effect."

Submitted by�Tyler Durden�on 02/24/2016 11:34 -0500

Via Dana Lyons' Tumblr,

The February stock market bounce has reached a crossroads – will there be another leg higher or has the rally run its course?

The rally in stocks has reached an key juncture it would seem in many of the major indices. That includes our favorite index: the Value Line Geometric Composite (VLG). Once again, the VLG is an unweighted average of approximately 1700 stocks. The calculation of the index amounts to essentially the median stock performance among that universe.�Thus, in our view, it is probably the best gauge of the true health of the broad stock market. If that is the case, the market’s health is truly up in the air at this point.

Consider first where the VLG is coming from. On�January 6, the VLG broke down from what we determined to be a pass/fail line of support around 436, based on key Fibonacci Retracement levels of the post-2009 bull market. Indeed, the index plunged immediately and severely upon breaking that level. The next support we earmarked below stood at 382, or about 12% lower. It took the VLG just 2 weeks to hit that level, which we noted on�January 20.

The index held that 382 level on January 20, as well as on a subsequent re-test on February 11. Since then, the VLG has bounced solidly, moving as high as 415 yesterday before encountering multiple resistance layers. Today, the VLG, settled at 409.85. As quant-oriented managers, this is an interesting juncture to us. To wit: a move from 409 back up to 436 would mark a rise of +6.6015%. Meanwhile, a drop back down to 382 from 409 would signify a loss of -6.6015%.�So which spot is the next destination? Or, in other words, is the rally glass half full or half empty?

First off, what sort of potential resistance are we seeing in this vicinity?�The layers of potential resistance are plentiful and formidable, enough to engender a “half-empty” attitude. Among others, they include

Price is truth, as they say, and the onus is certainly on the bulls to prove that they can vault the VLG over this area of resistance.�That said, there are plenty of clues to be found beyond price that often serve instructively in determining where prices are likely�to go. This includes price-based derivative indicators (e.g., Relative Strength Index,or RSI) that measure the degree of momentum within a move. While we do not typically use these classical technical analysis tools, they are very popular among traders and can prove useful at times.

For example, traders often use RSI to spot divergences in price vs. momentum. For example, note on the chart how the VLG made a lower closing low in February versus its January 20 low, while RSI held above that initial low. This positive divergence can (but not always) give a head’s up regarding a potential upside reversal. In this case, prices did indeed turn up, leading to this late February rally. Note also the post-December down trendlines on price and RSI. The VLG is bumping into the trendline while the RSI has broken above. This is another potential positive divergence that could be a harbinger of a trendline break in prices as well.�Mark one down for the glass�“half-full” crowd.

Lastly, while price is the final arbiter of market action, it is not exactly predictive. That is why we use a stable of indicators based on various measures of breadth and momentum of breadth, et al. to instruct us as to the likely course of future prices. While this approach does not always hold true, particularly for indices that are heavily weighted toward a relatively small number of constituents, it is especially helpful on a broad, equal-weight index like the VLG. Currently, we would assess the status of most of these proprietary indicators as�“constructive”. That is, they are positively oriented and supportive of potentially higher prices.

So where’s the next stop for stock prices, 6.6015% higher or lower? While the immediate resistance is considerable, there is ample evidence to suggest that prices could overcome that resistance eventually. We understand that a rally of that magnitude represents a fairly modest goal for investors. However,�if our longer-term assessment of the stock market is close to accurate, considering the likely potential range of prices over the next 6 months to several years, we would take that gain in a heartbeat.

Consider it a bearish “glass half-full” view.

*� *� *

More�from Dana Lyons, JLFMI and My401kPro.

Submitted by�Tyler Durden�on 02/24/2016 10:56 -0500

In recent weeks Bank of America's new chief technician Stephen Suttmeier has been surprisingly bearish, predicting that the rally is over, as Tom DeMark cautioned yesterday, key support levels are not defended in which case the S&P 500 is looking at a substantially greater drop. Today, his skepticism reached new heights, when he warned that should the failure to break out higher persist then the market is facing a drop to as low ast 1575-1600, something which even Goldman now agrees with.

Below is an excerpt from his latest attempt at a diplomatic guide down:

The S&P 500 has not decisively broken down but the risk remains for a distribution top that goes back nearly 2-years.�Resistances are 1950 and 1990-2025, but we cannot rule out a tactical breakout above 1950 that would suggest an interim double bottom off 1812-1810 that favors a rally to 2085. Even this tactically bullish scenario would mark another lower high within the downtrend from last May. At this point, the pattern and longer-term indicators suggest selling into rallies.�Should the S&P 500 “The Generals” follow the weakness in the Value Line, NYSE, Russell 2000, and S&P Midcap 400 “The Troops”, there is risk below 1812-1810 toward 1730�(38.2% of 2011-2015 rally)�and then 1600- 1575."

Or just a breakdown in both 7 years of momentum and central bank credibility.

However, Buried just a little deeper in the note, is his far less politically correct assessment, one which suggests that with most indicators rolling over,�the last one to follow will be price, especially now that as Jack Lew explained there will be no surprise G-20 "rabbit in the hat" moment in Shanghai over the coming weekend.

Many indicators rolled over in advance of price, which is bearish

• New year-long+ lows for S&P 500 on-balance-volume�= distribution
• S&P 500 VIGOR broke the October 2015/October 2014 lows�= distribution
• The US Most Active advance-decline line has completed a top. Similar tops precede/coincided with S&P 500 breakdowns in late 2007 and 2000.
• Weekly global index-level advance-decline line remain weak
• The Dow Theory Sell Signal in late August was reconfirmed on February 11
• Monthly MACD sell signal last March and the first weekly MACD sell signal below zero since 2008 in early January. Bullish daily MACD & VXV/VIX support a tactical bounce.�
• A rise off extreme lows for net free credit�(free credit balances in cash and margin accounts net of the debit balance in margin accounts)�could exacerbate an equity market sell-off.
• The high yield market remains a risk with the US high yield index in a weaker pattern than the S&P 500. HY OAS has widened out of a 3-year bottom, similar to late 2007 / late 2008 – just before the financial crisis.
• Growth weakening relative to Value for large caps, small caps, and MSCI ACWI. Relative breakdowns for FANG (FB, AMZN, NFLX, GOOGL) and NASDAQ 100 leadership suggests that “Generals” have begun to follow the “Troops”.
• Bearish January Barometer and the S&P 500 is not following the normally bullish seasonal periods of November-January and November-April
• 2016 is a Presidential Election year.�The average return for an Election year with a non-1st term President is -3.2%�vs. 14.1% in an Election year with a 1st term President and 7.6% for all Presidential Election years

Looks like central planners are going to have their hands full to preserve years of a carefully, if artificially, erected "wealth effect."

Submitted by�Tyler Durden�on 02/24/2016 11:34 -0500

Via Dana Lyons' Tumblr,

The February stock market bounce has reached a crossroads – will there be another leg higher or has the rally run its course?

The rally in stocks has reached an key juncture it would seem in many of the major indices. That includes our favorite index: the Value Line Geometric Composite (VLG). Once again, the VLG is an unweighted average of approximately 1700 stocks. The calculation of the index amounts to essentially the median stock performance among that universe.�Thus, in our view, it is probably the best gauge of the true health of the broad stock market. If that is the case, the market’s health is truly up in the air at this point.

Consider first where the VLG is coming from. On�January 6, the VLG broke down from what we determined to be a pass/fail line of support around 436, based on key Fibonacci Retracement levels of the post-2009 bull market. Indeed, the index plunged immediately and severely upon breaking that level. The next support we earmarked below stood at 382, or about 12% lower. It took the VLG just 2 weeks to hit that level, which we noted on�January 20.

The index held that 382 level on January 20, as well as on a subsequent re-test on February 11. Since then, the VLG has bounced solidly, moving as high as 415 yesterday before encountering multiple resistance layers. Today, the VLG, settled at 409.85. As quant-oriented managers, this is an interesting juncture to us. To wit: a move from 409 back up to 436 would mark a rise of +6.6015%. Meanwhile, a drop back down to 382 from 409 would signify a loss of -6.6015%.�So which spot is the next destination? Or, in other words, is the rally glass half full or half empty?

First off, what sort of potential resistance are we seeing in this vicinity?�The layers of potential resistance are plentiful and formidable, enough to engender a “half-empty” attitude. Among others, they include

Price is truth, as they say, and the onus is certainly on the bulls to prove that they can vault the VLG over this area of resistance.�That said, there are plenty of clues to be found beyond price that often serve instructively in determining where prices are likely�to go. This includes price-based derivative indicators (e.g., Relative Strength Index,or RSI) that measure the degree of momentum within a move. While we do not typically use these classical technical analysis tools, they are very popular among traders and can prove useful at times.

For example, traders often use RSI to spot divergences in price vs. momentum. For example, note on the chart how the VLG made a lower closing low in February versus its January 20 low, while RSI held above that initial low. This positive divergence can (but not always) give a head’s up regarding a potential upside reversal. In this case, prices did indeed turn up, leading to this late February rally. Note also the post-December down trendlines on price and RSI. The VLG is bumping into the trendline while the RSI has broken above. This is another potential positive divergence that could be a harbinger of a trendline break in prices as well.�Mark one down for the glass�“half-full” crowd.

Lastly, while price is the final arbiter of market action, it is not exactly predictive. That is why we use a stable of indicators based on various measures of breadth and momentum of breadth, et al. to instruct us as to the likely course of future prices. While this approach does not always hold true, particularly for indices that are heavily weighted toward a relatively small number of constituents, it is especially helpful on a broad, equal-weight index like the VLG. Currently, we would assess the status of most of these proprietary indicators as�“constructive”. That is, they are positively oriented and supportive of potentially higher prices.

So where’s the next stop for stock prices, 6.6015% higher or lower? While the immediate resistance is considerable, there is ample evidence to suggest that prices could overcome that resistance eventually. We understand that a rally of that magnitude represents a fairly modest goal for investors. However,�if our longer-term assessment of the stock market is close to accurate, considering the likely potential range of prices over the next 6 months to several years, we would take that gain in a heartbeat.

Consider it a bearish “glass half-full” view.

*� *� *

More�from Dana Lyons, JLFMI and My401kPro.