The Bottom Line
Long-Term Positive and Short-Term Negative for Stocks.
Positive for Treasury Prices and Other Interest Rate Sensitive Bonds.
- The stock market is in a short-term corrective pullback. Odds favor more stock market weakness in the near-term.
- Long-term, the stock market looks strong. As long as the S&P 500 does not fall below about 2180 (6.8% below today’s close and 9.1% off its peak), any weakness in stocks that we see in the coming weeks should be viewed as a buying opportunity once market internals turn positive.
- Treasury Yields topped out Mid-December and have been oscillating between support and resistance ever since. If yields fall below support, it would be positive for Treasury prices and other interest rate sensitive bond prices. Any further weakness that we may see in the stock market could be enough to push yields below support as investors move money out of stocks into the relative safety of US Treasuries.
Client accounts are about 65% – 80% invested. Accounts are mainly allocated in Preferred Income Funds and Interest Rate Sensitive Bond Funds. We do not currently own any Equities. If Treasury Yields fall below support, I will probably increase our Bond Fund allocation.
I am looking to increase market exposure once the stock market bottoms and market internals improve.
In last week’s newsletter I wrote:
“While long-term the stock market looks strong, short-term technicals have continued to deteriorate, but not to the point that has resulted in stocks gaining any downward momentum. Instead, they have leveled off over the past few weeks.”
“The metrics that I will be monitoring to alert me that a short-term correction has begun are: price action, a strong advance in the VIX, a deterioration in market breadth, and falling momentum indicators. Any weakness that occurs should provide an opportunity to increase market exposure.”
Over the past week, all the metrics that I listed above have been met and thus the overdue short-term corrective pullback is underway.
Stock Market Price Action – Positive Long-Term & Negative Short-Term
The S&P 500 is above both it’s 50 and 200-day moving averages, and both those averages are trending higher. This is characteristic of positive long-term stock market price action.
Short-term, price action is negative. Stocks are in a short-term downtrend, defined by lower highs and lower lows. In addition, the 8-day exponential moving average has crossed below the 21-day exponential moving average.
Stock Market Momentum – Negative
I monitor numerous momentum indicators, and all of them are negative and signaling that short-term momentum is now to the downside.
One of those indicators is the Rate-of-Change Indicator. When the indicator drops below zero it is a signal that short-term momentum has turned negative. Conversely, when it crosses up above zero, it is suggesting that short-term momentum has turned positive. Notice in the chart below, the Rate-of-Change Indicator turned negative recently.
Stock Market Breadth – Negative
Below is a chart of the NYSE Summation Index along with the S&P 500 in the panel below it. The Summation Index is trending down, which signals that market breadth is negative and deteriorating.
Market Sentiment – Negative
The main ingredient that had been absent this market was investor fear, which can be measured using the VIX (commonly referred to as the fear index). Historically low VIX levels are common at market tops and high VIX readings are seen at market bottoms.
The VIX has been bouncing around at very low levels which is a warning sign, not a sell signal. This is because the VIX can continue to reside at depressed levels for extended periods as stocks grind higher.
As I mentioned in last week’s newsletter, for stocks to gain any traction to the downside, I am looking for the VIX to advance above about the 13 – 14 level, and it’s moving average to start trending higher. As you can see in the chart below, the VIX closed today at only 12.5 so on a closing basis it is still below that 13 – 14 level; however, it did advance above 15 on an intraday basis and it’s moving average looks like it is starting to trend higher.
I believe that it is very bearish that sectors like Financials, Transportation, Metals & Mining, and Industrials are exhibiting relative under-performance and leading the market down.
Below is a relative strength chart (bottom panel in the chart below) of the Transportation sector relative to Treasury Bonds. When Transportation is outperforming, as it should during market strength, the line is advancing. As you can see, after forming a wedge, it has broken to the downside signaling relative weakness in the Transportation sector which is bearish.
The Metal and Mining Sector has been a good leading indicator of the market as can be seen in the chart below. In the upper panel is a chart of the S&P 500 and in the lower panel is a Metal and Mining ETF. As you will notice the Metal and Mining ETF has led the market at both tops and bottoms. Currently it is in a step downturn.
Treasury Bonds and Other Interest Rate Sensitive Bonds – Positive
After advancing strongly, Treasury Yields have trended sideways since December 2016, fluctuating between support and resistance.
Given that the next level of support is all the way down at about the 18 level, there is a good amount of upside for bond prices if yields break below support.
If you have any questions, please feel free to contact me.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.