Global Markets Trends and Review Week Ending June 14, 2019
- Review of global markets starting with the US
- Performance chart of world markets
- Chart of China Large-Cap (FXI)
- Performance chart of major US market sectors
- Where is the money going Non-Defensive (Growth) vs. Defensive
- Sector highlight, US Rails Index, Software Index, and Consumer Specialized Services
Overview To Date: Since the December 2018 lows the S&P 500 had rallied about 26% making a new all-time high on May 1. May started with a minor correction as has been seen multiple times since the December 24, 2018 lows. There were correction-over signals on May 13th. Investors were rattled by negative news, and there was no market follow through confirming the signals. Markets continued to sell-off, making another low on June 3. This low was accompanied by correction over signals on June 4 with confirmation signals followed by a strong market rally across most market indices and sectors. This turned the short-term risk signal back to ON.
This is a nervous market easily rattled by the news. Primary concerns remain the same; US/China trade deal, the economic impact of tariffs and possible deceleration in world economies, BREXIT, interest rates.
Last weeks market action was on lower volume in a relatively tight trading range. The markets are waiting on the US Federal Reserve meeting this coming week. The expectation is either a rate cut is coming, or most likely coming soon. Anything less than that could cause another sell-off.
The nervousness of investors is shown in the continued strength in defensive sectors and stocks.
Seven out of the ten markets have primary trend up. Four US markets and three world market indexes.
Performance comparison of the major world markets to SP500: After the strong rally since the June 4 low, this last week was relatively flat. On a week to week basis about half of the markets were up less than 1% and the other half down less than 1%. Plurality across the markets indicates likely continuation of the rally.
China market index (FXI) Bellwether Market; Continue to watch the China market as a bellwether indicator. After being down 13% since it’s April high, the Chinese market has found support at 40. Important to see if 40 will hold. Ongoing weakness in the China markets impacts world markets and adds to concerns about world economies and trade.
Relative Performance in the US market sectors: For the week, eight of the US market sectors were up. Again we saw a split market with the leading sectors both growth and defensive sectors. Consumer Discretionary (Growth) up 2.34%, Utilities (Defensive) up 1.25%, Communications (Growth) up 1.16% and Consumer Staples (Defensive) up 0.78%. Over the last 200 days as seen in the chart below, defensive sectors Utilities, Real Estate, and Consumer Staples remain the strongest and show the defensive caution by investors.
Non-Defensive (Growth) vs. Defensive Sectors: This is an interesting chart, courtesy of SentimenTrader.com. I have highlighted two sections with additional detail. The chart covers the period from January 2018 to June 2019. The red line is the percentage of stocks making new highs in non-defensive sectors (i.e., growth), and the blue line is the percentage of stocks making new highs in defensive sectors. Through 2017 into early 2018, non-defensive stocks dominated. After the sharp sell-off in early 2018, the number of new highs for both did not regain their 2017/18 strength. Starting in September 2018 new highs for non-defensive stocks started declining, a signal of weakening market and probably correction. The shift into defensive stocks by the institutional investors is seen by an increase in new highs by defensive stocks confirming the market correction.
Where are we now? The increase in new highs in non-defensive and defensive stocks confirms the rally from the December 2018 low. Yes, the dominance of new highs in defensive stocks vs non-defensive is a concern and reflects the nervous of large investors. At the same time, the overall percentage of new highs for both groups has reached the highest level since early 2018 and supports a continuation of the bull market and a long-term risk ON signal.
Sector highlight, US Rails Index, Software Index, and Specialized Consumer Services Index. When the markets are in a correction, it is valuable to see how different sectors respond. The review can indicate what investors think about the health of the economy and where the next investments opportunities are.
Products are shipped on railroads and railroads do well in a strong economy. Investor concern has been shifting to a possible economic slowdown. The Dow Jones US Rails Index was down waiting on news from the Federal Reserve.
The Dow Jones US Software Index has been one of the stronger sectors but had sold off with the Technology sector. Software Index rallied with Microsoft leading the way making a new all-time high on good volume.
US Specialized Consumer Services Index made another new high. There are some strong stocks in this group to watch.
Summary: From the December 24th low, the world markets started a strong rally. The market strength in US markets was confirmed by positive market internals not seen since the low in 2016. Long to intermediate-term risk signal is ON projecting a continuation of the long-term bull market started in 2009.
The extent of May correction was sufficient to turn the short-term risk signal to OFF. The sharp rally starting on June 4 was broad-based and turned the short term risk signal back to ON. However, the risk ON should be viewed with caution. This is a news driven market with nervous investors. Defensive sectors and stocks still lead growth sectors, showing big investors concerns. A wrong word from the Federal Reserve or unexpected tweet could start another sell-off.
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 2019. Conditions for support for continued uptrend: 1) Federal Reserve continues to be accommodative; 2) improvement in the Chinese economy and continued stimulus; 3) positive resolution of the US/China trade deal; 4) broader participation and strength in the small-caps. 5) No hard BREXIT (British exit from EU) where a hard exit is becoming more likely.
Note: the above are not trade recommendations, but possibilities to watch. The market is volatile and can swing sharply.