With global equity markets looking poised for a tactical bounce in the week(s) ahead, one market in particular looks ripe for a potential squeeze higher.
South Africa has been in a strong downtrend since breaking down from a symmetrical triangle late last August. Selling quickly accelerated after a major support level near 51-52 broke shortly after the breakdown from, and retest of, the symmetrical triangle. Last week prices traded through another major support level near 40 and swiftly reversed to close the week back above it while momentum diverged positively.
On Monday afternoon I was over at the Bloomberg West headquarters as a guest on their 4PM show "What'd You miss?". This is a show that I've appeared on a few times from New York, so it was cool to see their San Francisco studios. My take is that the snack bar in the Lexington Avenue building in New York is much better, but the view of the Bay in San Francisco beats the view of Queens, NY all day. So we'll chalk it up as a tie.
Anyway, last time I was on the show back in December we wanted to be short the S&P500, Apple and Emerging Markets while simultaneously buying U.S. Treasury Bonds. This has worked out very well over the past month as stocks got crushed to start the year, so we couldn't be happier. Now, although a lot of our tactical downside targets were hit last week, including Apple into the low 90s, structurally things have actually gotten worse. I think going forward, any strength should be used as an opportunity to sell into and much lower prices are coming for U.S. Stocks.
This is a great piece from the desk of Tom Bruni @brunicharting
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Approaching Tactical Bounces In Bear Markets
During market corrections, correlations tend to go to one across asset classes, but more specifically global equity markets tend to move together. Throughout the global equity markets and U.S. sectors I follow, many tactical downside targets were met with momentum diverging positively, suggesting a relief-rally may occur over the next few weeks. Many of these markets followed up their mid-week reversals with follow through to end the week, which adds to the case for additional upside over the short-term. It's important to realize though that most of these moves are occurring within the context of structural downtrends / bear markets, which means this bounce is just that for the time being. Significantly more time will be needed to repair the long-term structural damage these markets have experienced.
After doing my U.S. Sector and Sub-sector review, there is a common theme that I think is worth pointing out. Structurally speaking, things now look worse. The best sectors that had been leading are now breaking uptrend lines and key support. Meanwhile, the laggards continue to hit new lows. Things overall have worsened in my opinion.
Now, short-term we had a lot of very specific downside targets in most sectors coming into the new year. Over the past week and a half I would say that a very large majority of the S&P sectors and sub-sectors have now achieved those downside objectives. I've been very clear about where we want to cover tactical shorts and they are detailed in the Chartbook. Going forward we would much rather be sellers of strength, than buyers of dips, although there are a few exceptions.
Going country by country all over the world is one of the best tools that we have as market participants. The value that I’ve gotten over the years from looking at the behavior of all of the countries, instead of just the U.S. is a huge factor in why I am such a top/down weight-of-the-evidence guy. There are signs of strength and weakness that we see from international markets that might not be so obvious in the S&P500, for example.
Last September, I promise you that the reason I got bullish tactically was not because of what I was seeing in the United States, but what was happening around the world. There were simply too many bullish momentum divergences and downside objective achieved internationally to ignore. Something was up, and in fact, the counter-trend rally that we got in the U.S. actually exceeded my expectations.
Momentum is a word that is used an awful lot when referring to public markets. You hear people talk about "momentum stocks" or how they're seeing a "momentum shift". Unfortunately most of these references are just off-the-cuff sort of statements that don't have any real meaning. "It sounds good, so let's use it", kind of mentality. For me, it is a really important part of my process and I want to explain to you how I use it.
First of all, I am not an oscillator junkie. We all know that guy with 27 indicators plotted beneath the price on a chart. That isn't me. I like my charts clean. It's amazing how much you can see when you just get everything else the hell out of the way. My preference is a 14-period Relative Strength Index, otherwise known as RSI. Don't confuse this with
The big level that I've been watching in S&Ps has been that 1880-1890 area representing support in August and September, which was also resistance back in early 2014. To me, this has been the big line in the sand. I see no reason to be short this market if prices are above those levels, and we're finishing up the week above it. So now what?
Structurally speaking, I don't think it changes anything bigger picture. We are still in a downtrend in U.S. Stocks as the weight-of-the-evidence suggests that we ultimately head much lower. We saw more new 52-week lows on the NYSE this week than we did at the August lows, an expansion in weakness, in other words. Financials have collapsed on a relative basis, hitting fresh multi-year lows
When we talk about leadership in the market, I think it's important to go sector by sector to see where the leaders are and where the laggards might be. To help with this study, we take a look at each of the 10 S&P Sectors and compare them to the performance of the S&P500. This Relative Strength Analysis is one of the best ways to see sector rotation and changes in market leadership.
I have just updated all of the Sector vs S&P500 charts in the ChartBook and here are some of my notes:
A big reason why I've been bearish towards the U.S. Stock Market is because I'm in the weight-of-the-evidence business and globally stocks have been getting crushed. It was only a matter of time before the selling came to the United States Index. A good example of a broken market making new lows is India's Nifty Fifty Index.
That was fun wasn't it? S&Ps lost a cool 13% since the last week of 2015. You think that's a lot? Emerging Markets lost 16% during that period. The Russell 2000 Small-cap Index lost over 17%. Micro-caps lost over 18%. 13 is nothing. And get used to it, because I think there is a lot more selling coming.
Today, we're going to focus on what the S&P500 looks like because that is what all of you keep asking me about. I like to look at stock markets from a more global perspective, taking into account what other asset classes are doing like commodities, currencies and interest rates. Remember, I'm in the weight-of-the-evidence business. I believe that in order to navigate through what is a constantly evolving global marketplace, taking the weight-of-the-evidence is the best approach. But today, we'll take a deep dive look at S&Ps on their own.
