From the desk of Tom Bruni @BruniCharting
I received a ton of great responses via Twitter and email for this week’s Mystery Chart, so thank you for that.
A lot of you were leaning towards the short side, with different approaches and stops. Some were neutral, but very few of you were leaning long.
What we’re looking at is the US Minimum Volatility Factor ETF (USMV) breaking down relative to the S&P 500 after 9-months of basing in 2018 led to strong outperformance in the fourth quarter. We were writing then about how prices were extended, but that the new trend was intact and weakness toward former resistance should be bought.
Click on chart to enlarge view.
While that worked and we saw buyers step in to defend that level, they were unable to bring prices back (or even close) to their December highs. Sure USMV’s performance on an absolute basis continued to work, but its trend of outperformance was in question.
In addition to this data point, we’ve seen additional signs of rotation out of defensives and into more offensive areas of the market slowly emerging over the last two months.
Utilities, REITs, Staples, High Dividend/Dividend Appreciation, and High Dividend ETFs peaking on a relative basis. Consumer Discretionary breaking out to new all-time highs (and Equally-Weighted Consumer Discretionary breaking out to 6-month highs relative to Equally-Weighted Staples). The High Beta / Low Volatility ratio breaking out to six-month highs.
Major trends like this are not speedboats that can change directions overnight, they are whatever type of ship is between a speedboat and a cruise ship. Esssentially, they take a decent amount of time to turn and often travel in one direction for a while before changing course again.
The weight of the evidence continues to suggest that’s what we’re seeing in the market right now. Defensive areas failed to make new highs on a relative basis several months ago and are now breaking to new lows. We’ve even begun to see that weakness spread to these areas on an absolute basis, with Utilities and REITs getting hit this week.
In the Fixed-Income Report we’re putting together for our Institutional Clients this weekend, we’re highlighting the fact that many Bond Futures and ETFs are at key levels of support on an absolute basis. The big question remains whether this is a successful retest and Bond prices continue higher or if they fail and settle back into a wider, long-term range.
Given the signals we’re seeing in the stock market, it’s looking more and more like the latter. With that said we’re also watching the action overseas, which gave us a great signal in the fourth quarter to be buying bonds. Yields tend to move together, so if that was the top in bond prices (and bottom in Yields) then we want all the 10-Year Yields in these Developed Markets to break the downtrend line from their Q4 2018 highs.
The Bond picture is a lot less clear than it was 6-7 months ago when the 10-year broke back below 3% and we were buying Bonds hand over fist. Based on the intermarket signals above, it appears we’re in the midst of a trend change and that a more neutral approach toward Bonds is appropriate.
Given our bullish intermediate-term outlook for Equities, the rotation out of Bonds and defensive sectors and into more offensive areas of the market makes a whole lot of sense.
We’ll continue watching, but the next few weeks should tell us a lot about how we want to be positioned going forward.
Thanks for reading and let us know if you have any questions!