Technically Speaking: Monthly Chart Review Yields Bearish Signals

With the month of February now officially in the books, we can take a look at our long-term monthly indicators to see what they are telling us now.

Is the bull market back?

That’s the answer we all want to know.

However, as longer-term investors and portfolio managers, we are more interested in the overall trend of the market. While it is fundamental analysis derives “what” we buy, it is the long-term “price” analysis which determines the “when” of the buying and selling aspects of portfolio management over the long-term.

For us, the best measures of the TREND of the market is through longer-term weekly and monthly data. Importantly, when using longer-term data these signals are only valid at the end of the period. It is not uncommon for signals to be triggered and reversed during the middle of the period which creates “false” signals and poor outcomes. Since we are more interested in discerning changes to the overall “trend” of the market, we find monthly indicators, which are slow-moving, tend to reveal this more clearly.

In April of last year, I penned an article entitled “10-Reasons The Bull Market Ended” in which we discussed the yield curve, slowing economic growth, valuations, volatility, and sentiment. While volatility and sentiment have gone back into complacency, the fundamental and economic backdrop has deteriorated further. Had you heeded our warning then, you could have saved yourself some pain.

As of February’s end, despite the recent rally over the last two months, the market is still 4.8% lower than the previous peak. It also remains marginally lower than the January high. Despite the 12.5% rally over the last two months (open to close), the rally has only repaired the damage of the December decline.

(Fun with numbers: it took a 12.5% advance to repair a 10.2% decline. This is why measuring performance in percentage terms is deceiving.)

More importantly, note the MONTHLY SELL SIGNAL registered in the bottom panel of the chart above.

Given that monthly data is very slow moving, longer-term signals can uncover changes to trend which short-term market rallies tend to obfuscate.

The next chart shows the monthly buy/sell signals stretched back to 1999. As you will see, these monthly “buy” and “sell” indications are fairly rare over that period. During that period, only the 2015-2016 signal didn’t evolve into a deeper correction as Central Bank interventions flooded the markets with liquidity to stem the risk of a disorderly “Brexit” and slower economic growth.

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