INVESTMENT EDGE
Ripping through the charts this weekend drew a pretty clear picture, the current weight of the evidence says risk is on and you should adjust your portfolio accordingly. The contrarian in me knows that most times when everything is pointing in one direction its time to look the other way. Will this time be different?
Q2 2019 Charts on the Move Video link
The latest market statistics posted by Sentimenttrader in his “The Everything Rally” were very revealing and encouraging if you are a stock market bull. Here are some of the highlights from his post
Total return stock and bond indexes are hitting all-time highs at the same time. They cover an array of stocks and bonds, suggesting extreme breadth of buying interest, as noted by Bloomberg.
When they’ve all hit records together, it has been an especially good longer-term sign for stocks. They rallied almost universally after these signals and over the next 2-6 months, there was only one date that showed a loss of more than 1%. For bonds, it wasn’t quite as consistently positive, but all of them showed gains most of the time across all time frames, with returns mostly above random.
Quick cycle
Yet again, stocks showed a tendency to cycle quickly from a selloff to new highs. For the S&P 500, it went from a 50-day low multi-year high in less than three weeks, nearly a record going back to 1928.
The median cycle from low to high has taken 34 days, so this was nearly three times faster than usual. Over the next month, it seems like sellers had a strong tendency to give up. From 1-4 weeks later, there was only a single loss, and the risk/reward was impressively skewed to the upside.
Dollar downtrend
The U.S. dollar’s 200-day average has been rising for a year, but the late-week selling has pushed the buck to a multi-month low and below its average. This has led to a rebound in the dollar in the past, but half of them didn’t last.
It’s important to temper any giddiness just because you are investing with the higher probability outcome. It does not always turn out in your favor as we so aptly learned during last December’s market double bottom expectation. There are never any guarantees when it comes to investing but it appears as the higher probability resolution of the current consolidation and test of prior highs should end with stocks continuing to push on to further new highs and remain in its long-term uptrend.
The dollar statistics are anything but compelling or confidence building so any investment you own that is strongly correlated to the dollar’s movement (commodities, interest rates, FX currency trades) should be viewed as suspect (guilty until proven otherwise) and as such, managed with a tighter leash.
Since late last year, the bond market has gone from expecting 2-3 Fed rate increases for 2019, to now expecting 3-4 rate cuts. How quickly things changed. Like most every other big change, the experts failed to see it coming and the majority got it wrong. Accurately and consistently forecasting the future is impossible and why one should only pay attention to price. It’s never wrong.
As you can see in the 20-year treasury bond ETF, TLT below, its price has risen ~20% from last October’s support test to last week’s prior-high resistance challenge. That’s a big move. A 20% move in bonds usually takes 3-5 years, not 7 months. As of now this move is nothing more than a reflection in the market’s expectation of those rate cuts. It should come as no surprise the places TLT found support/resistance (hint …. look left). But now that last week’s attempt to move above was rejected, as investors, we all want to know what’s in store for the future.
The cop-out (but honest) answer is no one knows, especially me. But I do know that as a minimum I would expect the bond rally to cool off here and consolidate before they show their hand. Continued weakening in global economic indicators would likely push bonds well beyond the upside breakout level. A trade agreement and economic expansion would bring a high probability they retest the green support line once again. The problem with trying to determine the highest probability next move is the fact treasury (sovereign) bonds are driven less by the market and more by Central Bank action. And unless you are on their email list or can tweet your frustration with their leader and threaten firing him, you should be prepared for anything and in the words of the FED, be “data driven”.
I can hear the giggles and scoffing starting already. It always does when you bring up the idea of commodity prices rising. Every discussion for the past umpteen years that we have had regarding inflation being something investors need to watch out for has been the little boy crying wolf. Will this post be just one more added to the list of failed breakouts in the commodity space? Could be, but this post is not about all commodities, just corn.
Taking a look at the long-term (15 years) chart of corn below you can see it has a tendency to base and then rise strongly. As we have learned, it’s not just corn that does this, it is every investment. Looking to the far, left-hand side of the chart you can see the price of corn went sideways for more than 2-years before it broke out and climbed more than 310% before peaking in the middle of 2008. Once again in late 2008, corn started to consolidate sideways, lasting for 2-years before finally breaking out and climbing more than 175%, peaking in the middle of 2012. Fast forward to current and we see a huge, 5+ year base that corn broke out from. Notice how in all cases, buying volume (lower pane) spiked at the breakout levels which is the confirmation of the breakout and the potential for healthy gains.
While the first upside target based upon the rectangle pattern breakout is up at T1, I would assume the next run in corn could be as large and long as those seen in the past. Because the current base is more than 2x the prior two, a 1.5-year climb with gains exceeding 100% are conceivable.
Gold had been in a 6-year downtrend since peaking in 2011 until breaking free in August 2017. Just because something ceases being in a downtrend does not make it a good investment because it could, like gold did, consolidate for many months or years after breaking its downtrend. But downtrends, followed by consolidations are usually the sign of a new uptrend …. You just need to be patient, wait for the opportunity to come to you and dont chase.. Oh, did I mention the need for patience? In the case of gold, it is on that cusp as you can see in the chart below.
For investors, gold becomes an interesting asset to own if it breaks above its 1370 resistance (neckline) as its first upside target is at T1, around $1600. Those astute observes will also notice in the bottom pane, the increase in green (accumulation) volume bars is the confirmation we want to see if it eventually breaks out. With global stocks stuck in a sideways consolidation (at least for now), finding a non-correlated asset that is potentially embarking on a new uptrend is all we could ask for.
