The trend for stocks is down. When they do rally, they scream dead-cat bounce. And bonds keep going out at new all-time highs every week. Gold is at its highest prices in 7 years and Interest rates are in free-fall along with bank stocks. What type of environment does this appear like to you? Is it the kind of market where we want to be buying stocks aggressively, or is this the type of market where we want to be smaller, cash heavy and more defensive?
Let’s try to figure it out together.
First of all, Industrials historically have the highest correlation with the S&P500 of all the S&P Sectors. This is what that group currently looks like. One of our most basic technical principles is that former support turns into resistance. We call that Polarity. You can see this taking place in this sector index:
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So if we’re below those late 2018 lows in Industrials, I see little reason to be optimistic about higher stock prices in general.
Here are Communications, which have been the worst performing sector in the U.S. since the recent lows. Take note that Consumer Discretionary and Technology are the next worst performing sectors. I’ve tried to stress that this is classic dead-cat bounce behavior. Check out $XLC flirting with those 2018 lows. If Industrials are any sort of road-map here, lower lows are most likely:
There is no evidence yet to suggest otherwise. The saving grace will be if $XLC can hold above those late 2018 lows. It’s not the bet I’m making, but I’m always open-minded. Just remember that some of the biggest components in this sector are Facebook, Google, Netflix and Disney.
Consumer Discretionary is therefore the next obvious group to include in this conversation. This one is already below those 2018 lows and working on breaking below those former 2015 highs and key extension level around 80. If you’re wondering how this market can get worse? Here’s your answer. Discretionaries taking out 80 to the downside would do it.
Financials are one of the most important groups, of course. To me that 20.75-21.25 area is the big one. If we’re below that, then that’s a big problem. Not only is that the 38.2% retracement of the entire 2009-2020 rally, but also former resistance in 2015. If we’re below those, I see little reason why we don’t see 15 next for $XLF:
And with Regional Banks continuing to break to new relative lows, what’s there to like about this sector? If we’re going to buy anything, why would they be banks? We most certainly will not based on the evidence that we have today.
If you recall, Regionals breaking was one of the many signs that suggested selling stocks well before any “crashes”. The internals were already rolling over. We’re going to continue to monitor these same leading indicators for evidence that things are now improving. In case I wasn’t clear enough above, we have not seen any evidence of that at all.
Finally for stocks I want to leave you with this guy. Both the Dow Jones Transportation Average and Small-cap Russell 2000 are below both their 2014/2015 highs AND former support from the late 2018 lows. How can we be bullish stocks with a straight face with that going on?
For me anything from the long side needs to be a trade, particularly if it is at all positively correlated with the overall market, which many stocks are. Treasury Bonds went out at new all-time highs the past 2 weeks. Why is that happening? Interest rates went out at new all-time lows last week. Why is that happening? Is it because stocks just started a new bull market, like the Wall St. Journal, CNN & Barron’s told us last week? My bet is no. My bet continues to be that the bond market is taking the risk in owning stocks much more seriously than most investors.
And speaking of taking things more seriously, how about those Gold bugs huh? I gotta hand it to them, they got my attention recently. You guys know how much I love it when continuation patterns do not resolve in the direction of the underlying trend! Those are fantastic signals. Well, that’s precisely what I saw happen in the Gold vs Stock ratio here below:
This was a classic continuation pattern. They don’t get more clear than that. A beautiful symmetrical triangle below all that former support. Come on, what more can you ask for? And the Gold bugs pulled through. That’s something that would be irresponsible not to take note of.
Now here is Gold itself. Notice how we’re above all of that former support from 2011 and 2012:
If we’re above 1580-1600 in Gold, I see no reason not to own it. I think a retest of those former highs is inevitable.
It gets trickier, however, when we’re talking about Silver or Gold Miners.
First, here is Silver recently breaking below all that former support from 2015, 2018 & 2019. It’s ability to quickly get back above it is worth noting for sure. 14 is my level here. We can only be long Silver if $SLV is above 14 and all that former support. I think 18 is a fair target for now, and then we can reevaluate to see if we can make a run back up towards 30.
But until Gold Miners can take out 31, which we have been pointing to forever, I don’t think we can claim that a new secular bull market has begun for precious metals:
Notice how Gold Miners get hammered every time they get near 31. Until that changes, why do you want to be involved in that mess?
There will be plenty of time to buy gold mining stocks once $GDX is above 31. I think we stick with the metal for now.
This will be a big week. We’re going to get a lot of information. And I don’t mean about a virus or about unemployment. We’re going to start to see why they’ve been buying bonds so aggressively. I’m expecting massive swings in the stock market in April.
Where do I have this wrong? Let me have it!