Moment of Truth

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The moment of truth has arrived for the stock market. Either the top is in and this bear-market rally is about to roll over, or the past 10 months have been nothing more than a sharp correction in an ongoing bull market. We should find out soon enough. The Active Asset Allocator remains defensively positioned for now with an asset mix of 20% equities, 30% bonds, 30% gold, 20% cash.

 
 

We began 2016 with a waterfall decline in the stock market, the worst start to the year in recorded history. At the January 2016 low, stocks had declined -21% from their May 2015 peak. The market has experienced a powerful and impressive rally over the last 4 weeks, back to the now down-sloping 50-week moving average (50WMA). The FTSE All World Index, the global stock market barometer, closed the week just 6 points below the 50WMA. I am expecting stock markets to turn lower shortly but remain flexible to both bullish and bearish views. Stay tuned.

Path of Least Resistance

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Regular readers will recognise the following chart, the FTSE All World Index, a market-cap weighted Index that captures the aggregate performance of stock markets around the world. I have been tracking the potentially bearish pattern labelled on the chart for months now and remain concerned about the unfolding downward trend. Market breadth and relative strength continue to weaken and the path of least resistance remains lower for the vast majority of global stock markets.

 
 

The United States accounts for over 50% of the global equity benchmark, which is why I pay so much attention to the region. For a different perspective, I also monitor the Value Line Geometric Index, an equally weighted index of 1,700 US companies. Here, no single  stock dominates the Index, which has fallen -21% since peaking in mid-summer 2015. The deterioration in relative strength since 2014 is very similar to that which occurred just prior to the 2008 financial crisis.

 
 

The NYSE Primary Exchange Index captures the 3,000+ companies trading on the NYSE. This market-cap weighted index tells a similar story. Same pattern, same deterioration in the technical picture.

 
 

This analysis reinforces my current defensive positioning in the Active Asset Allocator. Opportunities will arise in 2016 and I expect to take advantage of them as they occur but for now, continued caution is advised.