Is the tide turning?
According to our methodology, the primary uptrend on Wall Street is still intact; however, we are starting to observe some troubling signs which suggest that we may be in the final innings of this bull market.
You will recall that for several months now, we have been stating that this remains a very split market with only half of the sectors participating in the ongoing advance. Accordingly, we have been suggesting that our readers only stay aligned with the leading stocks in the strongest areas and sectors. Given the price action of the past few trading sessions, we feel it is now absolutely essential to stay extremely disciplined and promptly eliminate any laggards from one’s investment portfolio.
Looking at the technical picture, it is notable that even though the NASDAQ Composite recently climbed to a record high, the Dow Jones Industrial Average and the S&P500 Index did not confirm this move; thereby setting up a negative divergence. More importantly, it appears as though the NYSE Advance/Decline Line peaked in April and even though the S&P500 Index closed at a record high in May; this breadth indicator continued to decline; thereby setting up another negative divergence. Remember, during each of the previous stock market cycles, the NYSE Advance/Decline Line always peaked a few months before the bull market top, so if this breadth indicator continues to languish during the next stock market rally attempt, it will be bearish.
In addition to the poor market breadth, it is worth noting that the number of 52-week NYSE lows has expanded significantly and it is now greater than the number of 52-week NYSE highs. Moreover, this number has stayed elevated for several days now and this shows that more and more stocks are breaking to new 52-week lows (not a healthy sign). Elsewhere, only 40% of the NYSE stocks are currently trading above the 200-day moving average which is another sign that the market’s internals have deteriorated. Last but not least, the energy, materials, industrials, transportation and utility sectors seem to have rolled over.
At the time of writing, only the consumer discretionary, consumer staples, financials and healthcare sectors are performing well and due to the recent earnings misses/poor forward guidance by Apple, IBM, Microsoft and Qualcomm, even the technology sector has run into some turbulence!
As you can see from the above, we are dealing with an extremely tricky market and it is imperative that our readers only stay invested in the strongest areas and sectors.
Make no mistake, when the market is healthy, every sector participates in the festivities. However, as bull markets progress and mature, individual sectors start topping out along the way and in the final innings of the game, the leadership narrows to only a handful of sectors. Eventually, the primary uptrend exhausts itself and in the very end, the generals of the bull market (stocks with the biggest gains) are shot down.
At this stage, we cannot guarantee whether Wall Street is simply consolidating or topping out; but if this is just a pause in the primary uptrend, then the major US indices will soon need to break out to new highs on heavy volume. Moreover, after breaking out, these indices will need to move away from the multi-month trading range. Conversely, if the S&P500 Index takes out its early July low, it will increase the odds of a rolling top.
For our part, given the weakening market, we have recently liquidated some equity positions and re-allocated capital to long dated US Treasuries and ‘short’ positions which will benefit from a downtrend in the stock market. However, since our primary trend filter is still in ‘confirmed uptrend’ mode, we are staying invested in stocks in the strongest areas and sectors. Even if the broad market tops out here, based on historical evidence, it is possible that the leading sectors may continue to rally for several months. So, until our primary trend filter goes into ‘correction’ mode and our trailing stops are triggered, we will remain invested and in any event, our ‘short’ positions will hedge our book.
As far as sectors are concerned, it is notable that consumer discretionary (apparel, auto dealers, discount retailers, footwear, home builders, home furnishing, home improvement retailers and restaurants), consumer staples (brewers and food), financials (asset managers, banks, broker dealers, credit cards, insurance, regional banks) and healthcare (pharmaceuticals, select biotechnology stocks, medical devices) are still performing well and we recommend exposure to these areas. Conversely, energy, materials, industrials, technology and utilities are showing signs of weakness and these securities must be avoided.
In terms of our performance, we are pleased that since inception (1 January 2013), both our Equity and Fund portfolios have outperformed the MSCI AC World Index. Moreover, on 1 August 2014, we launched our Blue-chip portfolio and this strategy is also performing well.
Below is the performance summary of the various strategies:
Turning to commodities, the primary downtrend is playing itself out and the CRB Index is trading just above its March low. Elsewhere, the price of copper has now fallen to a 6-year low and crude oil has slipped below US$50 per barrel. The path of least resistance is clearly down and our readers should either be ‘short’ or out of this sector.
Over in the precious metals patch, as per our expectation, both gold and silver have now sliced through the lower boundary of their multi-month trading ranges. Furthermore, the Gold Bugs Index is now trading at levels not seen since 2002! The miners tend to lead the metals, so it is conceivable that both gold and silver may deflate over the following weeks.
In the currencies arena, the US Dollar has not moved since the last Weekly Update and a close above the 98 level will confirm the next up leg. In our view, the world’s reserve currency remains in a primary uptrend and over the following months, it should appreciate against the Australian Dollar, British Pound, Canadian Dollar, Euro and Japanese Yen.
Finally, over in the debt market, it seems as though long dated interest rates in the US have commenced a topping process and they should not rise much from these levels. If anything, a stock market downtrend may drive capital to long dated US Treasury Bonds. Over in the corporate debt space, the daily chart of the high yield bond ETF reveals that junk bonds have topped out and our readers should be out of this vulnerable sector.
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.
Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
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