Weekend Strategy Review July 14, 2019
Posted by OMS at July 14th, 2019
There was a lot of cheering on Wall Street this week as the Dow moved above the 27,000 level for the first time ever. At 27,332, the Dow is now slightly above my target zone of 27,000 to 27,200. Students should remember that cheering usually happens after a significant event happens, not before. So, the question we should be asking ourselves this weekend is what happens next? Hmmm?
When I look at the odds for the market going higher vs. lower, I must consider several items. The first is the inverted yield curve that is staring me in the face. In almost all cases I’ve researched, an inverted yield curve usually leads to a recession within 6 months. So, we’re about 2-3 months into the 6 month window. This is occurring at a time when Bonds just generated a Sell Signal, meaning that long-term interest rates are rising, something not good for the Home Building and Auto Sectors.
Another factor I must consider is the Volatility Index (VIX). On Friday, the VIX fell to 12.28. The last time the VIX was this low was back in mid-April. That was just before the Dow dropped over 2,000 points in May. So even though stocks could push slightly higher, the VIX is suggesting that the odds are not favorable.
Then there’s the Transportation Index. I like to use IYT to track the trannies. When I look at a chart of IYT, I see a clear Head & Shoulders topping pattern forming. Friday’s rally could have been the top of the right shoulder of the pattern. If this is the case, the transports should begin to decline and test the neckline of the pattern near 175. If this neckline is broken, the trannies could go into free fall.
The reason I’m watching the trannies so closely now is because they are an excellent measure of the overall economy. If the economy is stable and growing, transportation stocks like FedEx (FDX) and United Parcel (UPS) should be moving higher as consumer spending increases. But they’re not! Right now, FDX and UPS are still well below their April highs, which tells me that consumers are not spending.
This is Classic negative divergence and is what the Dow Theory is all about. Back in 1889, when Charles Dow, the father of technical analysis, founded the Wall Street Journal, one of his principles was that the transports MUST confirm what Industrials are doing. When they don’t, as is the case now, it’s cause for concern. On Friday, when the Dow made its all-time high, IYT was still well below its April high.
If you own transportation stocks, like many of us do here In Jacksonville, after Friday’s session you’re probably asking, ‘What rally?’ On 3 May, CSX, the local railroad was trading at 80.52. On Friday, after jumping 1.33 points, CSX closed at 78.58.
I see the same thing when I look at the Retail Sector which is the second weakest sector on the Weak List. This should be troubling to students as consumer spending represents over 70 percent of the American economy. If the economy was really booming, the retail sector should be near the top of the Strong Sector List. But it’s not. A retail stock like Nordstrom (JWN) was trading at 45 in mid-April. Now it’s at 36. GameStop (GME), a measure of millennial spending, was trading at 9.01 on 24 April. On Friday, it closed at 4.91.
What about energy? In a booming economy there should be an increasing demand for energy. But we’re not seeing this. A widely held stock like Exxon Mobil (XOM) was at 81 on 22 April. It closed at 77 on Friday. If you look at a few other energy stocks like OXY, APA, and HAL and you’ll see my concern.
Same for semiconductor stocks like Intel (INTC). On 17 April, INTC was trading at 58.56. It closed at 49.92 on Friday. Technology stocks like Intel usually lead the market higher. But not now. The current market is being led by toilet paper and toothpaste stocks…all defensive issues.
So just by looking at these four important sectors, transportation, retail, energy, and semiconductors, you’ll start to get a feeling for what’s really going on in the U.S. economy and the markets. You will also see that that unless you were in the right sector, you were probably one of those wondering ‘What rally?’ BTW, all four sectors have been on the Weak Sector List for weeks, some for months.
On the other hand, if you paid attention to the Strong Sector List and bought stocks in the Household Products Sector like Proctor & Gamble (PG), Colgate (CP), and Clorox (CL), you were probably not only among those doing the cheering on Friday, you were probably one of the cheer leaders. All three stocks have had nice gains since mid-March. Same for stocks in the Telecom and Insurance Sectors, which have been near the top of the Strong Sector List for months. Stocks like AFLAC (AFL) and American Tower (AMT) have seen nice moves up since mid-March. AFLAC went from 49 to 57. AMT went from 190 to a high of 215. So, it PAY$ to be in the right sector.
Bottom Line: Now that the Dow has reached its theoretical target zone, I believe the odds for a significant advance from current levels are not favorable. Yeah, the market timing indicators remain positive, which means the Dow could push slightly higher. However, with the Dow now at all-time highs, with a pattern that suggests significantly lower prices in the months ahead, supported by an inverted yield curve, a diverging Transportation Index and a VIX trading near worry some lows, I believe students should be asking themselves if the risk of having a lot of money in the market is worth the reward.
I don’t think so.
Have a great weekend.
That’s what I’m doing,
h
P.S. There were NO CHANGES to the market timing signals or the Model Portfolio after Friday’s session.
P.P.S. Students should also note that several on the European Country ETFs are no longer on the Dean’s List. This is a major change from last week and tells me Europe is starting to weaken. EWG, the country ETF for Germany moved to Sell Signal on Friday. Hmmm? Can the Dow continue to move higher when European stocks appear to be weakening? This will be an interesting development to watch. Pay attention to what’s happening in Europe, especially Germany. Remember, the DAX usually leads the Dow.
Market Signals for
07-15-2019
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 10 Jul 2019 |
NASDAQ | POS | 13 Jun 2019 |
GOLD | POS | 03 Jun 2019 |
U.S. DOLLAR | NEG | 03 Jul 2019 |
BONDS | NEG | 11 Jul 2019 |
CRUDE OIL | POS | 26 Jun 2019 |
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Category: Professor's Comments, Weekend Strategy Review