Long-Term Vs. Intermediate-Term

A little after noon Eastern time on Sunday, President Trump shifted the odds related to this week’s scheduled trade talks between the United States and China.

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LONGER-TERM OUTLOOK REMAINS FAVORABLE

Given the look of the chart below during Monday’s session, it is fair to say the market’s longer-term trend remains favorable, something that is reflected in our current mix of stocks, bonds, and cash.

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SHORT-TERM EVIDENCE OF WARNING MOMENTUM

The market has moved a long way since making a V-bottom late in 2018 and is starting to show some signs of slowing momentum on shorter-term timeframes.

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Under our approach, the million dollar question is:

Are we allocated properly based on the evidence in hand?

After making one minor chess move to lock in some gains in SCHB during Monday’s session, the answer is yes. Our exposure to cash and bonds takes into account the increasing odds of a 4%-10% pullback. Our exposure to stocks takes into account the term “odds” in the previous sentence and reflects the still favorable long-term outlook.

It is possible the waning momentum above will be followed by a pullback. It is also possible the market is simply pausing to digest the previous gains before pushing higher. In any event, the market’s intermediate-term risk-reward profile is not as favorable as it was a few weeks ago.

FIRST SET OF GUIDEPOSTS

Given present-day facts, we will most likely be able to sit tight should the market decide to revisit the gap and or 50-day moving average shown in the chart below. Hypothetically, a move back toward the gap could represent an opportunity to redeploy some of our cash. As always, we will see how things unfold on the data front over the coming days and weeks. We are simply outlining one of many possible outcomes. As long as the USA/China trade meetings remain on the docket, it is easier to sit tight and respect the still-favorable long-term outlook. A cancellation of the trade talks could bring stronger selling pressure and lead to a decline of greater duration and magnitude.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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