Yesterday, I discussed the relief rally underway in stock markets, which was fast approaching overhead resistance. I expect the long-term moving averages that are now coiling lower will cap the recent run. We should now expect a re-test of the December lows in the weeks ahead. IF those lows hold, or are taken out but the market then recovers, we have a set up to get long equities again. If the lows give way, then the downtrend will resume and cash will remain the favoured position.
I monitor the number of stocks making new highs versus those making new lows on the NYSE each day. This helps me identify the strength of the overall trend of the market. As you can see in the following chart, the broad trend of the market has been deteriorating since 2017, even though equities continued to drift higher over that time, hence my caution. We were rewarded in Q4 2018, when equities dropped -15% and the Active Asset Allocator delivered a positive +3.4% return over the same period. No other strategy on the market did as well. Today, new highs and new lows are back in balance for now. I will be paying close attention over the next month to identify potential divergences happening when we head back down to re-test the December lows.
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