Special report: Market madness

Let’s get right to the chase. Today’s big question seems to be…Are the US trade wars going to be the straw that finally breaks the bull market’s back?

That’s a big, big question, and of course—I don’t know the definitive answer to that. However, I CAN look at a few charts and reference some of the research I’ve done on past blogs to provide some level of insight on this question.

First…I want to bring you back to some big picture work that I have done on past blogs. You need to read these blogs to get a perspective on where we are in the investment cycle. I am no guru, but I do feel pretty confident that my bigger picture work is likely going to prove accurate.. Some of you know from reading this blog that my perspective is that we are due a 20%+ bear market correction – quite likely this year. These two blogs provide some insight:

How long can this keep going on?
Armchair Elliott Wave: The macro position of the market 

 

So let’s say that you will at least entertain the idea of a bear market correction happening soon (sometime in the next year – or less). The next thing we need to look at is whether NOW is that time. I’ll use daily charts for a neartermed view on the markets, and I’ll avoid the use of momentum indicators to keep things tidy and focused on trend.

 

SPX- broad market perspective

The S&P 500 is widely followed as a broad market indicator. While not perfect, it represents the trend of the overall market and US large caps fairly well. The recent uptrend on the daily chart since the February correction has been broken. Current support is coming in at around 2650. That level failed today, but it is only day 1 of a break. If it stays below 2650 we will likely test February’s main support low of  about 2580. The S&P is still above its vital 200 day SMA (red line). The picture is neutral to bullish for the index. A break of the Feb lows could put the S&P 500 below its 200 day SMA. This would be a major concern if such a break lasted more than a few days. We’re not there yet, but keep an eye on this potential.

 

NASDAQ- leadership in a “risk on” index

The NASDAQ contains a greater proportionate weighting in the market leaders (FANG’s) than the S&P 500 does. Market leadership by the FANG’s will keep this bull market intact. A rotation out of that leadership will likely be the beginning of a bear market correction. Yes, you may see some rotation into defensive sectors, but the influence of the market leaders will put enough pressure on the broader sectors to cause an avalanche. Currently, the NAZ is above its last low of 7100. Rising highs and lows indicate the index is on target to recover from the Feb lows. The technical picture of this index is, so far, better than the S&P 500. It’s well above the 200 day SMA. No signs of breakdown at this point.  But that will change if 7100 is taken out by more than 3 days (its floating around 7100 as I write). Keep an eye out!

 

Russell 2000 – another “risk on” index

 

The short termed trend for the RUT is intact. Higher highs and lows suggest it is on track to recovery from Feb’s selloff. The old high hasn’t been taken out yet, thus forming a bit of a triangle. Its above its 200 day SMA. Obvioulsy, the market still favors “risk on” – given the superior charts of the NAZ and the RUT. So far, anyway!

 

Bear-o-meter – a current risk/reward indication

The Bear-o-meter read “6” on March 7th. I blogged on that reading here.

It remains at “6” – which is a bullish reading insofar as risk/reward trade-offs. Recall that risk and reward are always present. A high Bear-o-meter merely tells us that ratio is skewed favorably towards reward – although risk remains present. The higher the reading, the higher the potential reward in light of the ever present risk. And vice versa.

 

Interestingly, despite the similar readings from 2 weeks ago, there have been a few shifts within the positive/ negative readings of the indicators that comprise the Bear-o-meter. For example, the Smart/Dumb money confidence spread (sentimentrader.com) has declined from positive to neutral. But the NYSE Advance Decline (cumulative breadth indicator) is positively diverging vs. the S&P 500. The chart below, courtesy of freestockcharts.com, shows us that the AD line (black) has flat peaks  vs the S&P 500’s recent lower high. So that’s a positive for the market.

There has been some shift into underperforming sectors of late to keep the AD breath indicator on track. One such sector that is seeing some inflow is the utilities sector (XLU). Note the comparative relative strength vs. the S&P 500 (bottom pane) on the XLU chart.  I’ve put a box around the point of outperformance –which is in line with the recent corrective action on the S&P, and the flat AD line indications. Horn-blowing time here: I noted that sector as a potentially positive chart on this blog a few days ago.

 

Conclusion

There are signs to be cautious about, but the bull is not rolling over just yet. That can change, so keep an eye on key support levels.

 

Keith on BNN

I’ll give you another heads-up on this later in the week, but FYI I’m on the afternoon (1:00pm) MarketCall show next Monday April 2nd. If you have questions you would like addressed on the show regarding specific stocks, I might suggest you email them in ahead of time to [email protected].  Or you can phone in with your questions during the show.

Call Toll-Free 1-855-326-6266

Of note: whether you email or phone in with questions, I do my best to move those who mention they read my blog to the front of the line.

10 Comments

  • I am keeping an eye on the US Financials. They have come down hard the last two days. For now I will stick with them. I do not think they have broken any major support levels.

    Reply
  • keith, i have been reading your blogs for about a year— lots of good stuff -thanks for posting. starting to see some info on the $libor rising —do you see this as a problem or how much higher would it have to go to be a problem ?
    ed

    Reply
    • Ed–that is one very difficult question, and one that I am not the best guy to ask. I have read that rising LiBOR has been a long termed trend : https://www.investing.com/analysis/libor-rising-200148238
      KISS rule:
      The beauty of what I do (technicals) is that it is trend and crowd behavior based. I am more interested in the “what the market is doing” question vs. the “Why” – and further to that, I am less interested in surmising on the future effects of fundamental factors. As such, I can change my mind and go with the flow at any time.

      Reply
    • Joe–Dow theory has a few tenants including an almost Elliott-Wave like view of the market cycle (3 main stages of a bull), and some trend following rules including volume confirmation. Yes, I do place some faith in those rules.
      I use the tenant that states that the averages must confirm each other in my Bear-o-meter. I look for confirmation of TRIN (Industrials) vs TRAN (transports) as one of my Breadth indicators.
      Insofar as “do I place much faith in Dow Theory”–I must say that much of the theory on trend is standard technical analysis- so in that, I do place faith in his broad trend following rules. As far as my usage of confirmation by TRIN/TRAN–it is one of 11 factors within the Bear-o-meter. So I don’t place faith in it extensively, other than it being one more data point towards my ultimate desire to get a broad indication of potential risk/reward on the markets.
      Hope that helps!

      Reply
    • Re KRE–yes it does.
      BTW–It will be interesting to see if the Feb lows hold for the major indices. If so, “double bottom” potential. If not watch out below!

      Reply
  • Keith – thank you for another excellent article. I have read many expert opinions but yours is the one I trust the most given your track record and in depth understanding of what goes on in our complex markets. With today’s huge recovery in the major indices – what would you look for to go long? 3 days above the supports you mentioned?

    Reply
    • Hi Wanda
      Thanks very much for the kind words.
      As far as going long–I am fully invested and have been since late Feb. so like it or not, here I am! My view is that the Feb lows and 200 day SMA must be held. Given the push off that approximate level on Monday, I would say so far so good. Assuming you have new money to go in, and want to be cautious, I would wait until Thursday to confirm (3 days) but of course, if it does keep going up you miss some upside. Them’s the breaks I guess–but its the safer route.
      Part two of the trade is my “prediction” (I hate that word, because truthfully who can predict anything???)–lets call it my outlook. It is for a second rally into or below the old highs. So that’s really not a heck of alot of upside for someone with new money–but if you are a shorter termed trader willing to sell in the 2800-ish area (S&P) it is probably a worthy trade should I be correct in the outlook.
      We expect to pull some cash out in or around 2800–caveat being the closer to May the better. From there, we will let the Bear-o-meter dictate the amounts of cash we hold–the lower the score, the more cash we will hold–and we will leg out as the score changes.
      Readers of the blog will be privy to my Bear-o-meter readings. I will post them regularly.

      Reply

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