Watch these 3 signals to spot the market turnaround

October 20, 20224 Comments

You’ve probably heard the expression “Risk-on” vs. “Risk-off”. When markets are risk off, as they have largely been this year (with the exception of the rallies in April & August) – market players go to cash, short termed bonds, and low beta stocks. When risk is back on, they favor NASDAQ, high yield bonds and small caps. Today, I’ll take a look at these three “Risk-on” sectors to determine what we need to see to spot a more permanent return to a bull market.

If you’ve taken my Online Technical Analysis Course, you know that the two indicators of a trend are peaks & toughs (higher or lower consecutively)  and the 200 day/ 40 week Simple Moving Average. A cross over both the last peak AND the 200 day SMA indicates a bullish trend is born. However, early stage buyers can enter  with one leg of cash when one of those two conditions are crossed. Do keep in mind that moving averages are moving targets, so you need to watch the chart rather than a specific level. You move in with the rest of your cash in stages as the second condition (last peak taken out) arises.

I’d also suggest that you watch for a change in Comparative Relative Strength (CRS) vs the S&P 500 as another sign of rotation back into risk. In fact, an early rise in the CRS may be a key leading indictor to the return of the  “Risk On” environment. Also – check to see if moneyflow is returning – which can be measured by the Accumulation/Distribution (A/D) trend.

I’ve charted all of these indicators on the charts below.

NASDAQ

The NAZ is the classic growth stock index. Filled with technology stocks and biotech – its all about optimistic views of the future. Stocks are often valued well ahead of broader index PE’s on the hopes of growth and development will offset that premium over time.  The NAZ currently sits with its 200 day SMA near 12,500, and the last peak in the downtrend near 13,000. A move above those levels indicates a commitment by investors to the growth side of the market. No early signs of life in the CRS or A/D lines.

 

High Yield Bonds (JNK ETF)

Conservative and less sophisticated  investors avoid high yield bonds until very late in the investment cycle. Interestingly, its “Smart Money” (institutional investors and pro traders) that tend to play in the “Junk Bond” arena early in the cycle. They can employ sophisticated analysis of the viability of these distressed companies. They look for spread’s off of the yields of investment grade bonds as a sign of upside opportunity. Too much spread indicates a panicking market that might be overdone. Because its more of a Smart Money market, buying after a long bear market can identify when institutions are beginning to scoop up oversold risk assets. Using my trend rules, watch if price breaks the 200 day SMA (95 currently) and the last peak ($97) on the chart. Note that I have circled the early signs of strength vs the SPX on the CRS line. Very early, but interesting. Keep an eye…

 

Small Capped stocks (IWM/ Russell 2000 ETF)

The Russell 2000 is the index for smaller capped US stocks – and the IWM ETF is popular with investors to trade the index. Smart Money isn’t quite so concentrated in this arena as they are to junk bonds, given that its hard for institutions to trade some of the lower volume, smaller capitalized stocks. However, they do trade the index via financial derivatives. A final washout can be a sign of small investors capitulating. A revival in the index can suggest more savvy investors are beginning to step in.  Currently the IWM has a 200 day SMA near 195 and its last peak near $200. Note that the last low was not lower than the prior low seen in the summer. Meanwhile the SPX did put in a lower low recently. Furthermore…As seen with the JNK bonds, there are early, signs of CRS trending in a gentle up-trend. Hmmmm….

 

Conclusion

Clearly, we’re still in a larger Risk-off environment. And yet, some “green shoots” may be appearing via the technical notes I’ve observed under the JNK and IWM charts. Keep an eye on the tools noted above to spot a return to risk by investors. Remember, as increasing appetite for risk is necessary for a sustainable bull market.

Happy trading!

4 Comments

  • An equity for generating cashflow needed for retirees to spend.
    Is there such a concentrated fund or etf to accomplish this using buy and hold method to ensure continued monthly dividends?

    Reply
    • there are many dividend paying etf’s Ronald. Cant say I can recommend one. Especially for buy n’ hold. Dividend Aristocrats is a category of funds that hold firms that have a proven record of maintaining and increasing dividends, if thats what you are wanting–but they go down with markets like everything does.

      Reply
      • A good etf is eit.un, keeps paying the dividend while the market goes up and down over the past five years. Long term it is just like getting paid every month. As long as you are holding those that do not cut their dividend. Is this style not ok for those seniors seeking cash flow to live on?

        Reply
        • Ronald–good input
          I haven’t looked at that ETF, but you are correct in that its volatility has been relative to market low. I cant say I have researched it enough to offer input but can’t argue with its success.

          Reply

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