A study on intermarket relationships for market outlook

On last Thursday, the stock market was falling off at mid-day when I was watching it. The market had logged a few distribution days before that. There were other signs of weakening market as well. I was really inclined to declare market turning into bearish at the intermediate term (> 6 to 8 weeks). But I did not take any bearish trades in the end, because the intraday volume did not appear to be definitely higher than the prior day.

Since then, the SPX had re-bounced from its 50 day moving average. So what is my current market postures supposed to be? Today, I'd like to study the market at the inter-market relationship perspective for valid clues. I found this type of analysis had helped me before to determine the long term trend of the market.

Of the intermarket indices that I watch, SPX is of the most importance. In the last 6 to 7 months of the current uptrend, there were 2 times (marked on the chart above) of serious distribution days occurred. IBD declared market in correction at these two times. Note this time, there are quite a lot more bearish signals showing in the charts.

Currently, I'm waiting for the 3rd time to declare market in correction. In my past experiences with the IBD method, it's quite possible market does not turn in the first couple of times IBD declares market condition changes. But it's very rare that the 3rd time declaration is wrong. I have not planned to do any directional trades against the long term trend. But I consider the 3rd or 4th time of market weakening as higher probability trades. So if the market continues to demonstrate weakening signals, I will initiate some intermediate term bearish trades.

Other intermarket signals that I'm looking at are shown in my 4 page PDF file here. Most of them are now exhibiting market weakness. One thing to note is the behavior of US dollar. I think it restored it's long term (historical) relationship with the stock market in that the UUP rose along with SPX. It was not like this in the last couple of years though.

Another aspect that is noteworthy is the fall of bond, GLD & IYR. I consider them to be inflation protection plays in some degrees. They got hammered recently. It seems to suggest the next market upturn (after a correction) will be significant and I need to rebalance my long term portfolio at that time to align with the market force changes.

Lastly, the new high/low index is still in a nice uptrend. I consider it to be a long term indicator, signaling the long term uptrend is still intact.