Three Charts That Tell The Risk Story

October 2, 2019

Stocks are still trying to break out of this massive range since early 2018. After some selling early this week, the range is still intact. I think this chart of the Global 100 Index tells the story best:

Click on Charts to Zoom In

For me, the big question is whether this is just further consolidation before we ultimately do break out to new all-time highs, or if this the start of a more significant decline.

While I'm in the camp that its the former, I have 2 charts here that will likely warn us of a more serious decline in equities. The first is the Russell2000 overlaid with the Dow Jones Transportation Average, two of the big underperformers in US markets. If we're going to roll over hard, the ones underperforming this whole time are likely to be the leaders to the downside.

In August, both of these Indexes were able to hold their early June lows, as we discussed here last month. If we're going to break down in US Stocks, those lows will likely be taken out soon and then down we go. We do not want to be long US stocks if we're below the June & August lows in Russell2000 and Dow Transports:

The next chart shows the S&P500 relative to its alternatives: Gold and Bonds. If stocks are going to do well, we are likely to see Stocks outperforming Gold and Bonds. If stocks are heading lower, expect to see the S&P500 break down here relative to both of these alternatives.

If we're below the December lows in these ratios, that is NOT an environment where we want to be buying stocks: