E What To Make Of The Recent Market Losing Streak & Market Positioning

Last week, most every index and index ETF was expressing overbought conditions. With all the major indices falling greater than 2% to complete the trading week, indices and index ETFs have now worked off some of their overbought conditions. (Table from Bespoke Investment Group)

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You’ll notice within the table that all index ETFs are presently expressing a Neutral trend while still trading above their 50-DMA. Recall, algos are level seekers and can be key-word triggered. It has been anticipated and/or forecast that the S&P 500 (SPX) would find resistance at the 2,800 level and retrench thereafter. This forecast proved prescient during the trading week. The S&P 500 proved incapable of holding above this watermark level that has been resistance on 3 other occasions in late 2018. 

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With the aforementioned in mind and the major indices working off their overbought conditions, investors should remain with the following considerations for the coming weeks and months.
  • The current set up suggests that the correction that started last week is not yet complete and any bounce will likely be a good opportunity to reposition portfolios in the short-term until a better entry point to increase market exposure is delivered by the market internals. 

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  • Despite the strength into the close on Friday, ‪SPX still put in a weekly engulfing candle, erasing 2 weeks of gains and more follow through is possible (last 2 weekly engulfing candles were Oct 1st & Dec 3). Looking higher to 2770’s first for a back test is possible before downturn resumes.
  • As an investor desiring to see invested capital grow over time, we have a duty to exercise discipline to “when” and “how” we are allocating capital.  This can be characterized by using a baseball metaphor: "Wait for a good pitch to hit. A baseball player must exercise patience at the plate, waiting for just the right pitch to hit.  In that metaphor resides the art of patience. As an investor, the fat pitch is based on valuation. Know what something is worth, and wait for the opportunity to buy it at a lesser value than what it is worth. 
  • Managing a portfolio is largely about measuring risk vs. reward and measuring allocation to risk, but primarily when reward outweighs the potential risk. 
  • With everything up to this bullet point considered, the risk is presently higher than the potential reward in the major indices and index ETFs.  In other words, there is the likelihood of better entry points in the near future. 
Looking beyond the simplicity of overbought conditions, expressed across many indicators that included the NYSE A/D Line hitting an all-time high, one of the more pressing reasons a pullback was likely this past trading week was the trend in the Dow Jones Transportation Index (DJT).  Coming into the trading week, DJT had logged 6 consecutive days of losses. By Friday of this week, the DJT produced its lengthiest series of losses since 1972, 11 consecutive trading days.  The 135-year-old index has only logged 5 periods in which it declined for 11 consecutive sessions, and five points where it has registered a 12-day drop, according to Dow Jones Market Data and S&P Dow Jones Indices.

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Unfortunately, as it pertains to the modern economy and markets, historical statistical probabilities about what this could possibly mean for the market going forward is more conjecture than it is reliable.  Nonetheless, here are some of those statistics from when the DJT has expressed 11 consecutive sessions of losses. (Statistics provided by OddStats)

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The Macro Bleakness
What the Dow Jones Transport Index is reacting to is related to the macro-headlines that ultimately underline the macro-fundamentals.  Last week some of these macro factors came to the forefront in a big way, a way that reminded investors about the weakening global economy. Much of the macro-headlines that rocked markets this past week occurred Thursday and Friday.
First, the European Central Bank extended its so-called forward guidance on ultra low interest rates, saying it doesn’t expect to begin lifting them until at least early 2020.  This was a reaction to a weakening Eurozone outlook.
The ECB slashed their macroeconomic forecasts, including reducing the outlook for 2019 gross domestic product growth to 1.1% from a previous 1.7% and signaling that inflation will take even longer to reach the central bank’s target of near but just below 2 percent. On top of this, or second, the ECB launched its 3rd iteration of a program of cheap loans, known as targeted long-term refinancing operations, or TLTROs, to Eurozone banks.

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From Thursday night to Friday morning, the next piece of global economic uncertainty was raised from China’s economy.  The news out of China showed that the economy reported a 20% drop in February exports on the heels of a 9.1% gain in January.  The disappointing trade data reflect weaker global demand and distortions from the Lunar New Year holiday, said economists.

Beijing earlier this past week lowered its economic growth target this year to between 6% and 6.5 percent. In a sign of worsening domestic demand, imports fell 5.2%, extending January's 1.5% drop. Imports fell 3.1% over the first two months.

Analysts have cautioned that the data from China at the beginning of the year may be distorted by weeklong Chinese New Year public holidays, which started in early February this year. In 2018, Chinese New Year holidays started in mid-February. China is currently in the midst of a two-week annual parliamentary meeting, the National People’s Congress, which kicked off on Tuesday and ends next Friday (Mar. 5-15).
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