As we wind down 2018 (where did it go?) with global stock markets struggling, I am beginning to wonder whether the normal positive seasonality tailwinds will show up and bring investors some year-end joy. Regardless, the markets have been sending some real clear messages on how best to invest. Were you listening? My take can be viewed in November’s Charts on the Move video link below
I have found models are a key component of managing money in the markets. Not only do they keep it very mechanical and easily manageable, they help to keep a human’s natural biases out of the financial decision-making process. For client portfolios, I have created a couple of models that attempt to strike a balance between risk/losses and trading activity. The shorter term your timeframe the more trading activity will occur in the account (more signals). Whereas longer term timeframes help reduce the trading activity, but opens an account up to much greater drawdowns (signals are fewer and slower). And then there is the fact that no model is always correct which brings in a whole new set of problems but those are worthy of their own separate blog post and won’t be addressed herein.
My two longer term client models (one based upon weekly price movement, the other on monthly) are both within a cat’s whisker of providing a US stock market sell signal. Europe, Asia, the emerging and frontier markets all triggered sells much earlier in the year so the fact the US has held up this long is a testament to its strength. It appears as if we are finally looking at the potential for substantially bigger move to the downside.
My weekly proprietary model, Sightline, triggered last week but is waiting for a final confirmation before it becomes an official sell signal (a key rule within the model). With respect to the monthly model, I thought it worth posting the chart for review.
All 4 components of the monthly model, RSI momentum crossover and negative divergence, price moving average crossover, PMO and MACD moving average crossover have all occurred, the confirmation needed to reduce exposure to US stocks. While the trigger for each component is currently in place for a sell signal, one of model’s rules require that they all have triggered at the end of the month (intra month does not count). Since we have a few more days left in November (and a chance for the expected year-end rally to reverse and put this model on hold) we need to provide both models a bit more time to activate an “official” US stock sell signal.
Classic charting 101 shows an almost ideal (too perfect?) head and shoulders reversal pattern that has developed on Goldman Sachs, GS. When patterns are this obvious, watched by so many traders/ investors, I have found they usually don’t work. Usually ….
It’s important to note the pattern has not yet triggered so until it does, it is nothing more than a picture of beauty and something that “could be”. If, on the other hand, it does trigger and play out
1) The pattern’s target is down at “T1”.
2) The target decline is ~32%.
3) It would likely occur very quickly as there is little support until you reach the $165 level.
4) The financial sector would be in a world of hurt as it would likely mirror GS’ decline.
5) The US stock market would likely have a much, much further fall in store as its, arguably most important sector, would be falling precipitously.
6) It couldn’t happen to a nicer company (the “evil squid”)
In spite of strong US auto sales this year (annualized yearly sales > 17M), the President’s imposed automobile tariffs has had a direct impact to their stock prices. So far, only Tesla is positive for the year.
The average country ETF is now down over 10% year-to-date. US large caps continue to mask global equity weakness as you can see in the chart below. Diversified global investors are likely down for the year.
If the take-away from this chart is a snapshot of investors global appetite for risk, what are the numbers telling you? Risk on or risk off? Do you think there is a higher probability to turn 41 countries into positive returns or 4 countries negative? With that in mind and in spite of the US holding on to year-to-date positive equity returns, this chart should be telling a tale of caution, at least for investors outside the US.