Oct 6 HeadlineCharts - Saturday's Random Thoughts

The Medium-Term Trend

We have a medium-term downtrend. It was a long time coming.

It felt like a really bad week, but then Saturday morning browsing the charts, there actually hasn't been a lot of damage.

However, the 52-week new highs/ new lows, went net negative, and that is usually a sign of significant weakness that exceeds the average short-term decline.

Random Thoughts

There is a lot to discuss about stocks right now, but here are some random thoughts.

We are in the period before elections when the market often is volatile. Personally, I think that is an overlooked factor in all the discussion I have read about this market sell off.

Because the seasonal November-December period is traditionally so strong for stocks, my guess is that we get a rally regardless of the election results. It is probably best to focus our market analysis on what happens after the new year?

Higher rates are definitely a negative too, and, again in my opinion, higher rates are primarily responsible for the weakness in the FANG stocks.

I am one of those people who think stocks have reached such extraordinary heights because rates have been kept so low. A lot of people say this, but do they really think it? Or have they forgotten it after so much time has past?

I hear people saying that such a strong economy should be able to handle tiny rate increases. It is a good argument, but maybe the market is reacting to direction of rates more than the actual increase?

And, side note, I worry a lot about the huge federal deficits. Tiny rate increases mean huge increases in interest payments on federal debt. I just don't how to factor the federal debt into an assessment of stocks.

Another issue. The market has climbed and climbed this year on very weak participation, and the stocks that got us to these heights need a break.

The weak market participation has perplexed me and undermined my investing, but then again my bias was to be negative towards stocks and I followed my bias instead of following the charts. My bad.

The weak participation is still an issue, but I have to follow stock prices first and remind myself that market internals are secondary.

Below are the summation indexes. The rule is to stay cautious while they register under the zero-level, and then get optimistic on stock prices again when the indexes spring back above zero.

Small Caps are usually the first to break down at a market top. So when you see a break this, then at a minimum you have to be aware of the possibility that the top is near.

The Semiconductors looked like they were gathering strength a few weeks ago, Now they are pointing lower and hanging over the edge of a cliff.

If the market rallies in the last two months of the year as I expect, and this group doesn't lead the advance, then I would be tempted to think that the market is on its last legs.

Here is a look the 30Y yield (the 10Y is a very similar looking chart). This is quite a break out, and no wonder the market sat up and took notice.

It isn't surprising anyone that home sales are weak while rates are going up.

The ECRI is warning that its home price leading index is pointing towards a weak home sales market in the months ahead. Click on the link for the story.

How long before we start to hear someone, anyone, in DC start to talk about how our debt is on course to destroy our way of life?

Below is the yield curve and the stock market in the lower panel. (The inversion and the market corrections don't line up perfectly.) The curve has a ways to go before inversion, but I can't help but think that the eight years at zero rates, along with the blast off in stock prices, will change this relationship.

And now what? Short-term rates are rising, but as shown in this past week, so are longer-term rates. That means it will take longer for rates to invert. Does that prolong the bull stock market or shorten it?

Outlook Summary:

The long-term outlook is cautious. 
The medium-term trend is down as of Oct-4.
The short-term trend is down as of Sep-21. 


The medium-term trend for bond prices is down as of Sep-7 (prices lower, yields higher).

Investing Themes:

Technology

Medical Products

Cyber Security

Payment Processors

Gaming 

Strategy:

• Buy large cap stocks and ETFs at the lows of the medium or short-term trends.
• Buy small cap growth stocks on breaks to new highs in the early stages of short-term up trends.
• Stop buying when the short-term trend is at the top of the range.
• Take partial profits when the uptrend starts to struggle at the highs.
• Never invest based on personal politics.