Market’s Weekly Bill of Health

Wed, Dec 12, 2018 - 4:10pm

Volatility is the word of the week in looking at the market’s overall trend and momentum. Headlines across the world are driving market sentiment. Markets spiked on the news that the Huawai Executive was released on bail. All the market volatility appears to be weighing on investors’ attitude as seen by the increase in news story references to “Winter Is Coming” (see chart below). Tomorrow we might find ourselves asking, “Is hell indeed freezing over, or are investors gearing up for the next and final season of Game of Thrones?” Who knows? Today, stocks pushed higher at market open with global markets rallying as well. The market wanted to pounce on any news regarding the China and U.S. trade negotiations, but maybe ANY headline will do.

Number of News Story References for “Winter is Coming (white line) and the S&P 500 (orange line).

Source: Bloomberg

S&P 1500 Member Trend Strength

It is not unusual for long-term price trends to become threatened when short and intermediate term price trends break down. Over the last few trading sessions we’ve seen exactly that— a sequential breakdown in short and intermediate price trends for the overall stock market. The key long-term support for the bull market's price trend is being tested this week ultimately putting the bull market in jeopardy of rapidly diminishing.

Note: Numbers reflect the percentage of members with rising moving averages: 200-day moving average (or 200d MA) is used for long-term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short-term outlook. Numbers as of 12/12/18.

In the chart below, less than half (45 percent) of stocks in the S&P 1500 have rising 200d SMAs. A measly 30 percent of its members are above their 200d SMA. It only gets worse in looking at the intermediate and short-term data. More than half of the sectors show long-term bearish trends which once again highlight a less than mediocre outlook for the overall market. Going on a month now, the weakness in the long-term S&P 1500 came primarily from cyclical sectors in which financials and consumer discretionary all showed losses. Gains in uptrends once again came from the more defensive sectors such as utilities and healthcare.

Source: Bloomberg. All indexes are unmanaged and cannot be invested into directly.

The stock market has historically peaked six to nine months in advance of a recession and should the market’s long-term trends continue to weaken we may experience a recession sooner than most expect. The Fed is still tightening but the big question is how many rate hikes should we expect in 2019. In addition, we are also dealing with a rising Federal budget deficit, something very atypical near the latter stages of an economic expansion that the bond market will have to contend with next year.

Over the past two months, the stock market has burned through short and intermediate term support levels. The final weeks of the year will be instrumental for the stock market one way or another. It will come down to either an overall rally, or we see the bull market rising price trend coming to a halt and eventually an end. If we see the bull market price trend halted or ended, then we are likely to see a bear market that leads to the Fed producing counter measures.

S&P 1500 Market Momentum. Beware of the BEAR.

Most S&P 1500 index stocks are in a downtrend, with half down at least 20 percent from their highs. That's an obvious bearish trend.

Overall, the market is facing weak momentum across the board. As shown in the table below, the momentum for the S&P 1500 is bearish in the forward-looking outlook with all three signals calling for a SELL.

Source: Bloomberg. Forward looking outlooks may not develop as predicted.

Intermediate momentum is where we see the percentage of the market in bearish territory (30 percent). The market’s long-term and short-term momentum both sit at the neutral-bearish territory with a rating at 40 percent and 42 percent respectively.

Source: Bloomberg

Shown below, the financial sector continues to pull the main average down. The financial sector’s weight is again an issue given that it represents over 14 percent of the S&P 1500 and possesses the most bearish short and long-term momentum, weighing on the overall market. Technology and financials together continue to have the greatest overall impact, comprising roughly 34 percent of the S&P 1500. What is perhaps the most concerning is the financial sector’s long-term momentum isn’t likely to improve anytime soon given its short-term momentum remains incredibly weak.

Source: Bloomberg

Will the economy will slow in 2019? In 2018, the market has been engulfed by the question of how much profit growth will decrease. Would too much tightening by the Fed put us on the fast track to the end of the business cycle? Since President Trump took office, strong buybacks, great credit markets and 20 percent earnings growth gave just enough optimism to ease concerns over an international tariff impasse and the conflicts between the White House and Congress. Ultimately it might not matter, but when it seems the bear is near, investors always find reasons to worry.

About the Author

Brent LaBounty

Associate Wealth Manager