Game Time!

Game Time!

The S&P 500 broke below multi-year support for the first time in Q4 2018, which led to a sharp decline in stocks. The inevitable relief rally took place during Q1 2019 and the support trend line was re-tested, which often occurs during the initial stages of a bear market. Relative strength and momentum indicators made lower highs as the rally stalled. Now, we should expect selling pressure to rise and stocks to make lower lows. How far down we go, nobody knows, but it makes sense to stay cautious and prepared. The Active Asset Allocator delivered a positive +3.4% return in Q4 2018 when all of my competitors lost money. I expect to see a similar trend unfold as we move through the remainder of 2019. Stay frosty!

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On Borrowed Time

On Borrowed Time

I can’t get these two charts out of my head: Minor new highs for the S&P 500 on weaker relative strength and waning momentum… and lower highs for the broader NYSE Primary Exchange Index of over 3,000 stocks, again with weaker relative strength and waning momentum. Intel and Google reported this week and their stocks plunged. 3M also recently reported weaker than expected results in Q1 2019 and MMM shares have already dropped -15%. This kind of market behaviour does not tend to happen during bull markets. I continue to believe the stock market is running out of steam and is on borrowed time.

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Is the Top In?

Is the Top In?

Last month, I highlighted a potential topping pattern in the S&P 500 that I thought had a reasonable chance of playing out in 2019 (Scenario 1 below). Stock markets often make head-and-shoulders peaks, where the right shoulder forms a lower high before rolling over, as the market finally runs out of buyers. Over the last four weeks, equity markets have continued their run higher but the pattern is still in play. We are not far away from the S&P 500 making new all-time highs but the potential remains for stocks to roll over from here and a more severe correction to commence. Relative Strength and Momentum indicators are showing a negative divergence, making lower highs and lower lows.

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Running Out of Steam

Running Out of Steam

Following the sharp -20% decline in the stock market in December, we have experienced an equally dramatic rally back to the underside of the multi-year support trend line. Many of the technical indicators I watch have tipped back in to bullish mode. Trump and the Fed have done everything in their power to drive stock prices higher, but so far, new all time highs have proved elusive. I think the market has just about run out of gas now and if that is the case, and this bear market rally has ended, we should see lower prices in the months ahead.

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Calm Before the Storm

Calm Before the Storm

Calm has been restored. Following the sharp -20% break lower in stocks in December 2018, the rally that followed has recovered the majority of the decline. Volatility has abated and I get a sense that investor confidence has also returned. That is what happens during bear market rallies. At least, that is what I think is going on here. Check out the monthly chart below of the S&P 500. Relative strength as measured by the RSI indicator (top) is making a series of lower highs and lower lows, not confirming the recent rally. The S&P has also rallied back to test the underside of the multi-year support line that has been in place since the bear market lows of 2009, a decade ago. I expect the nest move in markets will be a resumption of the downtrend. If we break out to new all time highs, I will reassess but for now, patience.

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Head and Shoulders

Head and Shoulders

We are starting to see a deterioration in some of the technical indicators I follow. Relative strength indicators (RSI) for US markets are still holding just above 50% but the RSI for EU stocks has dipped below 50% again. MACD momentum readings are still negative for all markets. The S&P 500 has closed below the long-term MA (50WMA) again, joining the NYSE, S&P 100, NASDAQ and EU Stoxx600 Indices. Only in the tech sector are the majority of stocks still trading above their 200DMA. The NYSE A/D Line is still near the highs set in December but needs to see follow through or else we have a lower high in the A/D Line. The TTI remains 42 points above its long-term trend.

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Reading the Tealeaves

Reading the Tealeaves

I have outlined my expectations for the stock market in the chart below. In scenario one, the S&P 500 forms a head-and-shoulders top pattern, similar to the German Dax Index. For this scenario to play out, the S&P should peak in the region of 2,750-2,850 over the next three months. In scenario 2, the S&P tops out here, retraces 50-78% of the recent rally, forms a higher low with positive divergences in RSI and MACD and then resumes the bull market and breaks out to new highs later in the year. The continued recent strength in my TTI suggests that scenario 2 has higher odds of playing out at the current time.

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Resistance Ahead

Resistance Ahead

Following a-20% peak-to-trough correction in stock markets in December, we are now witnessing a powerful oversold rally. How far will it run? Is it a counter-trend rally in a new bear market or the beginning of a new leg higher in a still-ageing bull market? We are about to find out. Stock indices are approaching strong resistance overhead. The long-term 50-week moving average has started to coil downwards for all the major indices for the first time since 2016. This should cap the recent rally in stock markets. If somehow equities can power through the strong resistance overhead and turn the moving-averages back up, turning resistance into support, it will be some performance by the bulls. In that event, the Active Asset Allocator will return to a fully invested position. Until then, defense remains the priority.

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The Year of Divergence

The Year of Divergence

While the S&P has added +12% in local currency terms this year, the United States is the only major market in positive territory year-to-date. European stock markets are rolling over while many emerging markets appear to be grappling with developing crises. The technical indicators I follow are confirming the weakening trend across equity markets. Perhaps we are experiencing another correction before the bull market resumes…

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Stock/Bond Correlation

Stock/Bond Correlation

US equities and bonds have been rallying together pretty consistently since the 2009 lows. As long as the S&P 500 is rising and US bond yields are falling, this chart will steadily advance. Rising equities and falling bond yields (rising bond prices) are a boon to investor portfolios and balanced portfolios holding a mix of stocks and bonds have benefited handsomely over the last decade as a result.

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Equity Bull Markets Don't Die of Old Age

Equity Bull Markets Don't Die of Old Age

They say equity bull markets don't die of old age. Instead, they require an event or catalyst to prick the bubble. In July 2007, two Bear Stearns hedge funds imploded, which signaled the start of the Great Financial Crisis of 2008. The S&P 500 corrected sharply following the hedge fund collapse at Bear Stearns, then rallied to make one final new high before collapsing.

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