Weekend Strategy Review March 31, 2019

Posted by OMS  at March 31st, 2019

Most U.S. markets staged a mild rally on Friday, with the Dow leading the way higher and reaching the upper trend line of its large triangle pattern.  The question for this weekend is ‘Was Friday’s rally a breakout from the triangle or was it just rally to overhead resistance that will be stopped early next week?’  At this point, that question is still unanswered.

While the Dow gained over 200 points on Friday and moved slightly above the upper trend line of the triangle, the other U.S. markets did not.  Small cap stocks on the Russell 2K and the broader S&P500 are still struggling in their attempt to break out, as are technology stocks on the NASDAQ. The QQQ is still below its 21 March high of 182.83, and even though the index remains on a Buy Signal, the momentum portion of my VTI-volume indicator is clearly weakening.

In other words, my indicators are still showing mixed signals. 

One of the reasons for this is because two key factors that impact these signals are mixed.  On one hand, the Presidents vindication of his involvement with Russia appears to be boosting the markets, especially the large caps.  But will this boost continue before the next political hammer drops?  Hmmm?  On the other, there is the larger issue of the inverted yield curve, something that probably won’t go away anytime soon.  Of the two the inverted yield curve is a much bigger issue for the overall economy as it usually leads to a recession within 6 months.  History shows that while political popularity can boost markets over the short-term, a slowing economy caused by an inverted yield curve, has much more lasting effects.  

Anyhow, with mixed signals I always like to step back and take a broader look at how a some of the global markets are reacting to what’s happening in America.  Global markets are interrelated and what impacts one market usually impacts the others.

I found it interesting that the European markets were relatively flat on Friday.  Clearly these markets are more concerned about the inverted yield curve than U.S presidential politics.  EPV, the ProShares Ultra Short Europe ETF remains on the Dean’s List and is on a Buy Signal.  Same for FXP, the Ultra Short China ETF.  So, two of the largest markets in the world, China and Europe are on Sell Signals.  BTW, both inverse ETFs for these markets have formed positive Hockey Stick patterns that suggest higher, not lower prices.

Looking at individual country ETF, EWG, the positive ETF for Germany has also formed a negative Hockey Stick Pattern that suggests lower prices.  And closer to home, EWC, the positive ETF for Canada is also on a Sell Signal.   So, with all this negativity on the international markets, is it realistic to assume the U.S. will go it along and move higher?  I think not.  And that’s the reason why I’m still being cautious as we move into next week.

Last weekend I talked about how the yield curve inverted in the summer of 2006, just before the equity market began to crash in 2007-2008.  I also mentioned how the yield curve inverted in 2000, just before the market crashed in 2001-2002.  So, the real question we need to ask ourselves this weekend is ‘Can the U.S. market move higher in this environment?’  Or more specifically, can the Dow rally to 30,000 before it begins to crash 6 months from now? It doesn’t have to as the final wave of the current pattern can easily truncate. Remember, the current triangle pattern on the Dow does suggest higher prices…if its a triangle. So, IF the Dow begins to break out from the triangle, I will have to go with the breakout.  On the other hand, the current pattern can also be associated with the completion of Wave 2 up, with Wave 3 down just around the corner. If this is what’s happening, we need to be concerned that the next move could easily drop the Dow down to the 24,500 level with 23,000 possible.

Given the mixed signals on the cockpit and the fact that most international markets appear to be respecting the inverted yield curve, I believe that a cautious approach to trading is justified.  At this point, I don’t see any compelling reason to become aggressive with my money.  A friend once gave me some advice…Act in haste, repent at leisure.  Because of this, I want to wait a few more days to see what happens with the signals.

The Dean’s List remains Neutral.  BTW, students should look at the low RS numbers of the equities on the List.  The top ETF on the List has a RS of 4.  The next three have a RS of 2.  All the rest, 57 issues, have RS ratings of 1 or Zero.  In other words, this is NOT a very strong Dean’s List.

The Sector Ratio decreased to 18-6 positive after Friday’s session.  Very interesting!  The Ratio decreased after a 211 point rally on the Dow? How did this happen? The Strong List continues to be led by Household Products, Semiconductors, Utilities, Computers and Retail. The six Weak Sectors were Banks, Food Drugs, Media, Consumer Products, Energy and Financials. So now, both the Banks and Financials are on the Weak Sector List.  Do you think they’re worried about an inverted yield curve?  You can bet they are.

Model Portfolio:  There were no changes to the Model Portfolio after Friday’s session.  The Model remains mostly in cash and is holding a small position (645 shares) in SKF, the inverse Banking ETF. The Model is current up $2,296 since inception.

Have a great weekend.

That’s what I’m doing,

h

BTW, Marcia and I will be going on a 11 day Southern Caribbean Cruise next week.  I will have full internet capability aboard the ship, not like in the old days when internet at sea was a problem.  However, because this cruise is supposed to be a vacation for me, I will be switching to my vacation schedule which is to post comments on Tuesday, Thursday, and the WSR on Saturday.  I will also try to post any changes to my market timing signals or changes to the Model Portfolio as soon as they occur.  I appreciate your support and understanding while we try to relax. 

Market Signals for

04-01-2019

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.