Global Markets Trends June 7, 2019

Global Markets Trends & Review Week Ending June 7, 2019

Global Markets Trends and Review Week Ending June 7, 2019

  1. Review of global markets starting with the US
  2. Performance chart of world markets
  3. Chart of China Large-Cap (FXI)
  4. Performance chart of major US market sectors
  5. Charts of the S&P 500 vs. S&P 600 small-cap index
  6. Sector highlight, US Rails Index,  Software Index, and Consumer Specialized Services
  7. Summary

Overview To Date: Since the December 2018 lows the S&P 500 had rallied about 26% making a marginal 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 was correction-over signals on May 13th, but there was no market follow through confirming the signals. Instead, after a few weak up days, the markets continued to the selloff after a series of bad reports and news.  The continued sell-off was substantial enough to signal a short-term risk signal to OFF. Especially hard hit was technology, but also sensitive economic stocks.

What a difference a week makes. Signals from the Federal Reserve about possible Fed Funds rate cut and other positive news were enough to turn the markets around.  Last weeks rally was strong and broad-based. Indicators turned up changing the short-term risk back to ON. Such is the nature of news driven markets in a late-stage bull market and economic cycle. Volatility swings are to be often expected flipping risk signals off and on. It is important to note the intermediate to long term trend risk status remains ON. After last weeks strong rally, the primary trend for seven out of the ten markets have turned up sharply, for most US markets and three world market indexes. I have included the table from May 31 to illustrate just how dramatic the change has been.

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Performance comparison of the major world markets to SP500:  All world markets snapped back last week. The strongest was SP500 up 4.50%, Euro STOOX 50 (FEZ) up 4.49%, and Russell 1000 (IWB) up 4.37%. Even Chinese Index (FXI) managed to squeeze out a gain for the week. Strong 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, all eleven US market sectors were up across all groups. Growth sector Technology (up 5.98%), economic sensitive Materials (up 9.06%) and defensive Consumer Staples (up 5.43%). Short of bad news, the strong plurality across all sectors shows the rally could continue.

Large Cap (SP500) vs. Small-Cap (SP600).  The rally from the December 2018 lows to the high on May 1 was a 26% gain. This is one of the strongest gains in an ongoing bull market. The correction since May 1 has been 7%. With last week’s strong action the S&P 500 has recovered much of that loss and is down now less than 3% from its May 1 high. In the second panel below, the S&P 600 Small-Cap index showed some strength as well but is still weak relative to the large-cap S&P 500. In this market environment, there is definitely a defensive preference by large investors for the safety of large-cap stocks.

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 up on Federal Reserve actions to help the economy (i.e. rate cute).

The Dow Jones US Software Index has been one of the stronger sectors but had sold off with the Technology sector week before. Last week Software Index was up strongly 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.  The market correction and sell-off in May had many analysts talking bear market even after last week’s strong rally.

In last week’s review,  I summarized the five conditions for a resumption of the bull market. All were coming together badly to form a perfect storm that led to a sharp sell-off and tripping the short-term risk signal to OFF. With the Federal Reserve signaling probable rate cut, and other favorable news, there was a strong rally last week. The rally was broad-based and flipped the short term risk signal back to ON.  Important to note; this is a news driven market with a lot of nervous investors. While the outlook has turned positive, it is still important to be cautions. Defensive sectors and stocks still lead growth sectors, showing big investors 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 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.

Posted in Global Markets Trends.