Sections
- Overview
- Global Markets Primary Trends
- Performance chart of world markets
- Performance chart of major US market sectors
- Summary
1. Overview to Date: An intermediate-term rally started in early October 2019 continued into the new year. The markets had rallied strongly into January. A short-term correction was expected from the overbought levels that built up since the October lows. The potential world health and economic impact from the China virus outbreak finally rattled the US and world markets. What started as a minor correction, has become a major short-term correction with concerns over the economic impact of the virus outbreak. China’s economy will take a hit as travel and economic activity is restricted.
Important to note, the long and intermediate-term trends Risk signals remain ON as the long and intermediate-term trends remain intact. The Short-Time RISK is OFF until correction over signals are generated (i.e. strong upside buying by investors). Until then, caution is advised in adding to new or existing positions.
Over the last two weeks, there have been three ‘distribution’ days where the down volume exceeded 80% of the volume traded on the NYSE, and total NYSE volume is above average. The markets have quickly become oversold. The number of stocks above their 10 DMA (day moving average) has reached an oversold level. The correction only started two weeks ago and could take multiple weeks before selling is exhausted.
What is needed now? For the markets to decide the virus threat is contained. Investors will view the correction as a buying opportunity. To signal correction over, there will be multiple ‘accumulation’ days where the up volume is 80% or at least one 90% up volume day. Investment money will be seen moving back into growth from defensive assets
One other consideration to keep in mind, this is a ‘re-election’ year. Historically after a January rally, the markets trade sideways in a period of consolidation until approximately July. After a snap-back rally when the current correction is over, expect side-ways markets, driven as much by the news.
2. Global Markets Primary Trends: Primary Trend Signal remains UP (green) for eight of the market indexes. The impact of the sell-off over the last two has pulled the Short-Term Trend down for six markets. Over the short-term, the markets are in Risk-Off status.
3. Performance comparison of the major world markets to S&P 500: All of the world markets in the table above were down last week. The strongest markets, down the least, were Nasdaq 100 (QQQ) down 1.63%, Russell 1000 (IWB) down 2.05%, and the Russell 3000 (IWV) down 2.09%. The weakest markets were the China Index (FXI) down 6.16%, Emerging Markets (EEM) down 5.58%, and the Vanguard World Fund x/US (VEU) down 3.57. The Chinese markets were hard hit again last week and closed through support at 40 (see the chart below). The problems in China impact China and the world markets.
4. Relative Performance in the US market sectors: In a move to defensive assets, the only US Market sector up last week was Utilities up 0.91%. Though down, the next strongest sectors were Consumer Discretionary down 0.50% and Consumer Staples down 0.64. The weakest sectors were Energy down 5.62%, Materials down 3.53%, and Health Care down 3.24%. The Utilities sector index made another new all-time high last week.
5. Summary Recap: The markets remain strong with the continued uptrend and a bull market confirmed by strong long and intermediate-term market internals. The virus scare has triggered a short-term correction, and the markets have quickly become oversold.
Summary of Risk Signals: Long and intermediate-term risk signals are ON. The short-term risk signal is OFF until market correction over signals are generated. (see comment in the fourth paragraph at the beginning this newsletter).
It is the institutions and big money investors that move the markets. The sectors and sector groups the institutions drive-up are where the investment profits are to be made. My scan shows the top five US Sector Groups over the last month have been Automobiles, Home Construction, Water, Software and Specialty Finance. These are investment groups to be watching. Worst performing groups over the last month have been Aluminum, Marine Transportation, Tires, Nonferrous Metals and Steel. Economic sensitive groups like Marine Transportation and Transportation Services that had been strong, have weakened over economic concerns.
The purpose of this newsletter is to identify the primary trend of the major global markets. Good market investment returns are made by investing and trading with the primary market trend. US market internals and worldwide markets trends point to a continued positive investment environment in 2020. Conditions for support for continued uptrend: 1) Federal Reserve continues to be accommodative; 2) improvement in the Chinese economy and continued fiscal stimulus (the virus is hurting Chinese economy); 3) positive resolution of the US/China trade deal (Phase One deal has been signed, now onto Phase 2); 4) broader participation and strength in the small-caps (small-cap stocks had been rallying), 5) No hard BREXIT (British exit has happened and its impact will be felt over the coming years as EU and Britten sort out new arrangements).
Note: the above are not trade recommendations, but possibilities to watch. The market is volatile and can swing sharply.