Market chop may signal trend change

 

Last Thursday’s blog contained a reprint of a commentary made by seasonal expert Brooke Thackray (https://www.valuetrend.ca/?p=2877)

The essence of Brooke’s message was this: Just because the last couple of years didn’t see a particularly weak “worst six month’s” seasonal period, doesn’t mean we can count on another stronger-than-normal summer this year. Brooke cited the tapering of current US Federal reserves stimulus measurement (QE) as one of the factors that might make this summer more of a traditionally softer period for stock markets.

I’ve posted an updated chart that I first posted two years ago on this blog. It clearly illustrates the relationship between Fed stimulus measurements and market movements. Given the Fed’s plans of complete withdrawal from the current QE plan – whether it happens a few months later than originally estimated or not – I’d be wary of the message of this chart.

 

QE pattern

 

My belief, like Brooke’s, is that we are setting up for a weak period over the coming months. One of the signs of transition that I noted on April 9th’s blog (https://www.valuetrend.ca/?p=2864) was the divergence in technical indicators. I’ve posted the updated version of this chart below.

Note the choppy activity since early March, which I’ve highlighted on the chart below. This up/down activity, in conjunction with recent technical indicator divergences, may be another sign of an upcoming change in trend.  As noted on last Monday’s blog (https://www.valuetrend.ca/?p=2871), volatility has also been abnormally low for the past year or so. Perhaps the past few weeks of chop will change the market’s volatility (VIX) profile. As noted on my BNN appearance last week – this setup reminds me of the period leading into 2011’s 20% correction.

s&p channel

If I may return to Brooke’s message of last week – I’d like to add that – even during the recent string of strong summer periods – there was a tendency for some type of summer selloff. Markets did peak and then proceed to decline to some degree during the summers of 2010, 2011, and 2012. The main difference between those years and “traditional” years was the tendency for the bottom, or trough to occur earlier than usual. Typically, markets show their worst performances leading into September or October low points. However, the trough low of 2010 occurred in late June, the trough low of 2011 was in September, and the trough low of 2012 was in late May.

Who knows when a trough low after a summer selloff might occur this year (assuming there is a summer selloff…). Guessing the timing of a market peak and trough is probably less significant than being aware of the increased potential for such an occurrence to occur. Right or wrong, I’ve positioned the equity platforms that I manage at ValueTrend (www.valuetrend.ca) defensively for the coming months.

 

Upcoming speaking engagements:

Cambridge, Ontario: Idea Exchange, 1 North Square, Cambridge, ON N1S 2K6. Tuesday April 29, 2014, 7PM

Guelph, Ontario: Guelph Public Library Main Branch, 100 Norfolk Street, Guelph, ON, N1H 4J6. Tuesday May 6, 2014, 7PM

Markham:Markham Public Library- Markham Village Library Branch, 6031 Hwy 7 E, Markham, ON L3P 3A7. Thursday May 15, 2014, 7PM

 

4 Comments

  • Keith – Long time follower, thank you for another excellent post.

    I’ve begun to slowly raise cash in my portfolio as well, but was wondering if there are any ETF’s/Sectors that you think may do well in such a downturn (I’m already monitoring the VIX ETF closely)?

    Reply
    • Sectors that may do well this summer: utilities, pipelines, consumer staples.

      Reply
  • Keith: You are being very candid about your strategy with respect to equities for the coming months. Could I assume you do not trade the fixed income portion of your model portfolio? If not how is it now positioned to reflect the coming trend(s)? Thank-you.

    Reply
    • We do some trading in our fixed income models–but far less than on equities. As a generalization, we are short duration in bonds, and hold some preferreds and high-yield ETF’s.

      Reply

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