Value Line Index Diverging

Value Line Index Diverging

The Value Line Geometric Index (XVG) was launched in 1961 and is an equal-weighted index of almost 1,700 US companies. This means that, unlike the S&P 500 for example, each company holds an equal weight in the index and is not dominated by a handful of popular (FAANG) stocks as is the case with the S&P 500. After a long bull market, market-cap weighted indices tend to become distorted and dominated by the market leaders that have led the charge during the bull market cycle. Interesting divergences tend to crop up as the bull market ends. In the chart below, it is interesting that $XVG is showing substantial weakness when compared to the S&P 500.

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EEM Breakdown

EEM Breakdown

Following the breakdown in trade talks between the US and China over the weekend, a significant breakdown of another kind is taking shape in one of the charts I follow. EEM is the Blackrock iShares Emerging Markets ETF that provides investors with exposure to the stock markets of Asia. China has a 33% allocation in the fund. The heavy selling that occurred yesterday has done significant damage to the chart. In 2018, EEM broke out above decade-long resistance in what was quite a bullish development for the region. However, the breakout was short-lived and EEM spent the rest of 2018 falling sharply.

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Sox Turning Lower

Sox Turning Lower

The market-leading and highly cyclical semiconductor sector is turning lower after making a higher high on declining relative strength and momentum. These negative divergences are showing up all over the place on the charts I monitor. Confirming this potential change in trend, data and information service provider IHS Markit this week also lowered its global revenue growth outlook for the chip industry in 2019 to a decline of -7% year/year.

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Rounded Tops

Rounded Tops

The pattern of rounded tops continues to hold. As this bull market in equities continues to age, fewer stocks participate in each rally. Eventually, the majority of stocks start trending lower and a bear market takes hold. In the chart below, I show the percentage of stocks in the S&P 100 Index that are trading above their long-term 200-day moving average. (This is the broad definition of an uptrend). In 2018, 92% of the largest 100 stocks by market cap were in uptrends. By the end of 2018, that number had plummeted to just 13%. In Q1 2019, we experienced an aggressive 20% rally in the stock market, recovering the majority of the losses sustained in Q4 2018.

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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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Google and Intel Disappoint

Google and Intel Disappoint

Google and Intel both reported Q1 2019 earnings in recent days and both disappointed the market. Their stocks were duly punished. Google was hit for -8% while Intel fared even worse, declining -14%. Google makes most of its money from advertising while Intel’s chips are in a multitude of products used daily. As such, they are excellent barometers of the over health of the global economy. Signs point to a slowdown. Meanwhile, the stock market ambles higher without a care in the world, while the bond market is pricing in a recession/depression. One market is right and one is wrong. It is taking an age to find out the answer but I think we are getting very close.

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Can the Chips Hold the Break Out?

Can the Chips Hold the Break Out?

The Semiconductor industry is highly cyclical. Companies in the sector face huge swings in demand for their products in tandem with peaks and troughs in the broader economic cycle. From the depths of the bear market lows of 2009, the SOX Index, which comprises 30 semiconductor chip manufacturers, has rallied an incredible +840%. 2018 provided the first real test for holders of the chip stocks. The SOX Index peaked in March 2018 and then corrected -27% by December. The risk-on rally that followed in early 2019 has seen the chip-makers explode higher, rallying +48% in four short months.

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No Fear

No Fear

The total amount of assets invested in Rydex Money Market Funds hit $360 million last week, a new multi-decade low. When investors are in confident mood, they have little interest in holding cash and instead prefer to put capital at risk in the stock market. Only during periods of volatility are investors tempted to sell risk and move into cash. This was clearly evident during the fourth quarter of 2018 when the stock market corrected sharply. Assets in Rydex Money Market Funds jumped +64% from $415 million to $679 million over the same period. The recent surge off the December 2018 lows has certainly captured the attention of the crowd. As stock markets rallied, assets in the Rydex Money Market Funds have collapsed again. There is no fear today and little need to hold cash. Investors have placed all their chips on the table in anticipation of new all-time highs ahead.

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Volatility Edging Higher

Volatility Edging Higher

Yesterday, I noted some subtle internal weakness creeping in to the stock market, as fewer stocks have participated in each market rally over the last 12 months. The uptrend remains healthy, and it wouldn’t take much for the stock market to break out to new all time highs, potentially leading to more momentum traders chasing the market higher. However, there are signs of subtle deterioration under the surface. Today’s chart adds another piece to the puzzle. The Vix index in essence measures the level of volatility experienced by equity investors.

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Subtle Internal Weakness

Subtle Internal Weakness

At the lowest point of the December 2018 decline in the stock market, just 13% of the 3,000+ stocks on the NYSE traded above their long-term 200-day moving average. The recovery in the intervening months has been relentless; straight up without pause. Today, a much healthier 72% of NYSE stocks now trade above their 200DMA, a significant improvement. However, with each rally over the last 12 months, fewer stocks have been participating in the market advance.

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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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Ravencoin

Ravencoin

While the vast majority of crypto tokens, currencies and coins will go to zero over the next few years, digital currencies, in one form or another, are in our future. A cursory look at what central banks are doing today with the supply of the currencies they control and it doesn’t take a rocket scientist to figure out that a better alternative will surely evolve over time. Technological developments will make it inevitable. Bitcoin has first mover advantage and has a good chance of surviving and thriving over time. There is another innovative technology in early stage development that has a real chance of thriving in a digital world. That technology is called Ravencoin (RVN).

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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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Patience is the Name of the Game

Patience is the Name of the Game

The recent surge higher in stock markets feels powerful. Are the bulls back in control? For now they are, yet stock markets have just returned to the underside of the longer-term trend channels that had provided support for the bull market all the way back since 2009. A re-test of the upper trend line is a very common occurrence. What happens next is all important. If stock markets can power through overhead resistance and overbought conditions and go on to make new highs, then the bull market continues. If the rally ends here and reverses, markets could be in trouble. We just have to wait and see what happens. Patience is the name of the game.

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The Active Asset Allocator

I run an active asset allocation strategy for clients where I aim to invest with the primary trend of the market. When the stock market is trending higher, I want to capture that growth and want to be invested 60% in global equities, 20% in bonds and 20% in precious metals and cash. When the market is trending lower, my plan changes, as it should. During a bear market, my goal is to sidestep the trouble and be defensively positioned, 0-20% in equities, 40-60% in bonds and 0-60% in cash and precious metals. I use a number of tools to help me identify the market’s primary trend. I have my Technical Trend Indicator (TTI) and a range of additional technical patterns I pay attention to, which, when combined together, work very effectively. The Active Asset Allocator (AAA) returned +3.4% in Q4 2018 and +2.1% in December 2018 during a period when stock markets declined sharply. I know of no other investment strategy on the market that performed as well. The AAA is off to a good start in 2019 too, +2.1% in January 2019.

 
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The AAA doesn’t just do well in bear markets, as some of my competitors have recently suggested. There will be times when I am bullishly positioned. That will happen in bull markets. When the trend is down, it pays to be defensively positioned. Having a fixed allocation and hoping for the best isn’t a great strategy but that is what all of my competitors seem to do.

At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader  investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

Disclaimer

The information contained herein should not be taken as an offer of investment advice or encourage the purchase or sale of of any particular security or investment. It is provided for information purposes only. Secure Investments and its content providers makes no representation or warranty of any kind with respect to the services described, analysis or information obtained arising from use of the pages on this website. Information provided is obtained from sources deemed to be reliable and is provided solely on a best efforts basis. Secure Investments and its content providers do not guarantee the completeness or accuracy of such information and do not accept any liability for any loss or damage arising out of negligence or otherwise as a result of use or reliance on this information, whether authorised or not. The use of the website is at the user's sole risk. Not all recommendations are necessarily suitable for all investors and investment policy must be tailored to suit the circumstances of the individual. We recommend that readers consult their professional adviser before acting on any advice or recommendation on this website. The value of any investment may fall as well as rise and you may not recover the full amount originally invested. Past performance or simulated performance is no guarantee of future investment returns. The value of your investment may be subject to exchange rate fluctuations which may have a positive or adverse effect on the price or income or the securities.

European Resistance

European Resistance

European stock markets continue to trade in bearish mode. In December 2018, a key support level, which had held since the 2009 lows, was broken. The recent rally has made it back to that trend line, which is a common occurrence, but support has now turned to resistance. The STOXX Europe 600 Index closed on Friday at 358, below its long-term, downward-trending 50-week moving average, which closed on Friday at 372. The Relative Strength Index for $STOXX600 is still below 50, which only happens in bearish declines and momentum (MACD) is also clearly trending lower. Each of these metrics needs to reverse higher before I can take a position in EU equities.

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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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Assessing The Market's Technical Trend

Assessing The Market's Technical Trend

The Technical Trend Indicator (TTI) registered -6 on Wednesday. Industrials, transports, utilities and technology stocks closed lower on the day. There were fewer advancing stocks than declining stocks (A/D) on the NYSE. The largest market cap stocks (BMBI) closed lower on the day while the majority of stocks with the highest daily volume (MASI) on the NYSE also closed lower on the day. Bond yields closed lower on the day, positively impacting the TTI. The TTI registered 2,898 versus its long-term moving average of 2,852, +46 above trend.

There were no real changes in the technical indicators. Relative strength indicators (RSI) for US and EU markets have moved into positive territory above 50%. MACD momentum readings are still negative for all markets. The S&P 500 has edged above the long-term MA (50WMA) for the first time in months but the S&P 100 closed back below the 50WMA yesterday. The tech sector, S&P 500 and 100 indices in the US are showing readings with the majority of stocks trading above their 200DMA, but no confirmation yet from the broader NYSE index. The NYSE A/D Line is approaching the highs set in December while the TTI has broken out to new all-time highs.

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Overbought

Overbought

The stock market technical indicators delivered another improvement yesterday. Relative strength indicators (RSI) for US markets have moved into positive territory above 50%, now joined by the EuroStoxx 600 Index this week. MACD momentum readings are still negative for all markets. The S&P 100 and 500 have edged above their long-term MA’s (50WMA) for the first time in months. The tech sector, S&P 500 and 100 indices in the US are now showing readings with the majority of stocks trading above their 200DMA. Meanwhile, the NYSE A/D Line is approaching the highs set in December while the TTI has broken out to new all-time highs.

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