December Strategy Session: 3 Key Takeaways

Steve Strazza
December 13, 2022

From the desk of Steve Strazza @Sstrazza

We held our December Monthly Strategy Session last week. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Trend Following System Flashes Buy Signal

Utilizing a long-term moving average to determine investment exposure is one of the oldest and most popular market-timing strategies. 

The chart below illustrates this simple trend-following system, using a 10-period exponential moving average on a monthly chart of the S&P 500.

When SPX closes the month above the moving average, the strategy tells us to be long. When it closes below, we should be on the sidelines. 

As you can see, the system would’ve had us invested from May 2020 through April of this year, capturing the meat of the rally off the covid-crash lows. After being in cash for 6 months, it just flashed a buy signal as we closed the month of November back above the moving average.

While we’re obviously not determining our outlook for equities based on a simple moving average system, this is a bullish development, and we’re paying attention to it. We want to see the S&P and other indexes reclaim and hold above the 200-day and 10-month averages as this would suggest the primary trend is, once again, pointing higher for stocks. Right now, the evidence is mixed as the Dow is above it, the Nasdaq is below it, and the S&P 500 is right there. 

2. Bonds Break Out

The five-, 10-, and 30-year Treasury futures look almost identical. And all three carry the same implications for rates. As bond prices rise, their associated interest rates fall.

All three have reclaimed their October pivot highs as of this writing. Besides flashing tactical buy signals, these base breakouts raise an important question.

How do we want to position ourselves in an environment where rates begin to fall or at least stop rising? 

For starters, stocks worldwide will benefit from a lack of bond market volatility. And if rates do fall, we like owning bonds. But even if they stay where they are, the simple fact that bonds have stopped collapsing should prove favorable for risk assets.

3. China Reclaims Former Lows

We've been pounding the table about the relative strength out of China for the past several weeks. These stocks stopped going down in October and have been ripping higher in a nearly vertical line ever since.

Two of the most popular ETFs for these stocks are the China Internet ETF $KWEB and China Technology ETF $CQQ. As you can see, both are currently trying to reclaim a critical level of former support.

As long as KWEB and CQQQ hold above these key polarity zones, it’s safe to say the bottom is in, and the squeeze is likely on for Chinese equities. 

China is one of the most important players in the global economy. If they can put in a durable low and reverse higher it would mark an incredibly bullish development for global equities and risk assets around the world. There is still work to do, but bulls have made a lot of progress in this direction recently. 

Those are some of the main takeaways from this month’s strategy session.

Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team

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