Foreign Markets To Lead In 2020?

As we reach the culmination of the holiday season and as the Santa Claus rally continues, greed has replaced fear in the markets. Will this continue into the new year? The Financial Sense Newshour talked to John Kosar of Asbury Research to find out what’s in store for 2020. He looked at the broad swath of rising indexes not just in the U.S. but around the globe. Kosar also explained how rising interest rates are hinting at a stronger 2020 economy. Danielle DiMartino Booth discussed two industrial recessions we’ve had, the Fed and what she sees in 2020. Financial Sense Wealth Management’s CIO, Chris Puplava looked at what’s happening in foreign markets.

Risk-on Mode

Risk appetite has substantially shifted, and markets have given up on fear. Kosar uses Asbury Research’s correction protection model and the Asbury Six model to provide an accurate reading of market conditions. The Asbury Six has been positive since Oct. 15, and CPM went to risk-on Oct. 17. Both caught the market coming out of a period of congestion around May 1.

This strongly suggests we have moved into a risk-on phase. After choppy August market conditions, the S&P 500 sat on its 200-day moving average. Steel and copper prices were both down, along with commodity prices. Energy has also been weak. However, in the middle of October, Kosar saw his models turn. Both steel and copper turned on a dime, and foreign markets have shown signs of improvement. The U.K., South Korea, Taiwan, Brazil, China and Russia are all improving, among others.

“From the end of September to the middle and latter part of October, things turned,” Kosar said. “There's an undergirding here that has taken place. It's not just a Santa Claus Rally or the market getting happy in the fourth quarter. Something tangibly changed, and the risk appetite globally made a noticeable shift during that period.”

What’s Up With Treasury Yields?

Ten-year Treasury yields have headed lower to 1.4 %, almost back to the lows of August 2016, though they’re now close to two percent again. Rates have behaved unusually over most of 2019. Kosar uses several strategic indicators—including break-evens and relative performance between Treasury bonds and Euro bonds—to track rates out one to two quarters, but these have not worked well as indicators in 2019.

Instead, 2019 rate movements were driven more than usual by Fed watching, Kosar said. The Fed has put its thumb on the scale more than usual to keep rates down, which is continuing now. Since Aug. 30, 10-year rates had been near 1.70, and they’re creeping higher, currently at 1.91. This is an indicator the market has stabilized. We seem to have a sense of what the Fed is doing now, he added, and it appears it will be on hold for much of 2020.

The next move higher may see rates fall between 2.05 to 2.16, which is the big level to watch in the next one to two quarters. Kosar’s next target is 2.60 on the 10-year. Alternatively, if rates head lower—which Kosar does not think is likely right now—his target range is between 1.50 and 1.37.

“I think in order for us to get that high, globally I think the economy would have to get even stronger,” Kosar said. “I think interest rate markets have stabilized. They're starting to go higher... It just looks like the world has stabilized and is starting to improve economically.”

Strength in the Tech Sector

The tech sector has been a juggernaut through much of 2019. Kosar has been watching Apple, with a target of 291 on the stock. His 291 was a technical target based on the resumption of Apple's larger trend that started years ago. Now, Apple is trading near 284, as of December 24, 2019. Also, the PHLX Semiconductor Sector Index has taken off, as has biotech.

While Apple broke out at the end of August, biotech only broke out a few weeks before the Christmas season, Kosar noted. It’s now up nine or 10 percent, both of which signal less fear of risk.

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