Charts Hinting At Direction Of Next Breakout

Is The Economy On The Ropes?

If we felt the U.S. consumer and economy were in big trouble, we rationally could surmise that (a) the economy was not on the verge of major improvement, and (b) the Fed was not on the cusp of raising interest rates. Under those less-than-perfect circumstances, we might expect to see a chart like the one below, which shows consumer stocks significantly underperforming 1-3 year Treasury bonds.

The exact same chart looks much better in May 2015 (see below). The XLY:SHY ratio remains in a bullish uptrend on a weekly chart.

Economic Confidence vs. Volatility Fear

If you believe foreign economies are on solid footing, foreign stocks (VEU) might be appealing to you. If you felt stock market volatility and uncertainty were just around the corner, you might prefer to own the VIX “fear index”. The 2008 version of the VEU:$VIX ratio has a fearful and pessimistic look.

The same ratio has been making a series of higher highs and higher lows in 2015 and looks quite a bit different than the 2008 chart.

Will Greece Spoil The Fun?

As you might guess, European stocks (FEZ) got hammered relative to a basket of diversified bonds (AGG) during the financial crisis, allowing us to get a good handle on what “max fear” looks like.

The 2015 version of FEZ:AGG has a confident, rather than fearful, look. The weekly chart recently made a new closing high in favor of European stocks.

Technology vs. Municipals

If you owned tax-free bonds (TFI) in 2008, you slept quite a bit better than someone loaded up with technology stocks (XLK).

The same chart looks quite a bit more promising for tech aficionados. The XLK:TFI ratio recently printed a new weekly closing high.

Investment Implications – The Weight Of The Evidence

Could the recent trading range in U.S. stocks break in a bearish manner? Yes, any outcome is possible in the financial markets. However, the weight of the evidence tells us the odds continue to favor bullish outcomes over bearish outcomes. The previous sentence is based on the data we have in hand. If the evidence changes, then the probabilities will change as well, which speaks to the need for unbiased observation and maximum flexibility. If you want to dig a litter deeper, this week’s stock market video expands on the concepts presented above.

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Disclosure: This post contains the current opinions of the author but not necessarily those of Ciovacco Capital Management. The opinions are subject to change ...

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