Market Bottom – XJO 5550 points?

Despite the turmoil on Wall Street this week, we’ve seen home-builders, autos and a handful of other companies deliver positive returns of 5%+.

Money is rotating out of technology, (down 12% this month) and into the over-sold sectors and stocks from the past 9 months.

So where is the bottom in the XJO?

As illustrated in the chart below, the 50% retracement level in the XJO is  approximately 5550 points.

Whilst there’s no certainty that buying support will build at this level, history suggests that investors should be watching the short-term momentum indicators closely for an inflection point.

In Monday Morning’s “Opportunities in Review” webinar, we’ll identify the corresponding price levels within the ASX 100’s “biggest and best” companies.

The NASDAQ and Dow Jones Index have further downside before finding their respective 50% retracement levels.


Share Buybacks Underpin US Stocks In August

This month was the best August for the NASDAQ index since the Dotcom bubble 18 years ago.

Both the SP 500 and the DOW Jones 30 indexes posted their best August performances since 2014.

More specifically,  Apple shares gained 20% and Amazon shares rose 12.5% during August. Together, these two names accounted for 25% of the entire NASDAQ gain last month.

It’s worth noting that share buyback programs for US listed stocks have increased over the last three years and are on track to reach $800 billion this year.

As illustrated in the chart below, August is usually the busiest month of the year for repurchasing stock and the pace drops off during September and October.

With US stocks at record highs and the local ASX index near a 10-year high, we urge investors to approach the market with caution at the current valuations.

Using our ALGO engine, we employ technical indicators to identify stock specific opportunities across a broad market spectrum during all market conditions .

Give us a call on 1-300-614-002 to discuss our current model portfolio holdings.






US Equities Build On “Higher Low” pattern

After falling 10% from the January highs, the leading US indices are again exhibiting strong technical momentum, largely supported by bullish earnings outlook and PE expansion for the large technology names.

In Saturday’s post, we looked at the “higher low” formation in the Dow Jones and the need to stay long the index whilst the low of 24,247 remains in place.

We now include an up trending support line and re-affirm  the long side positioning, with a trailing stop loss below the up trending support.

Dow Jones




Dow Jones falls 11.6% – Where is support?

The Dow Jones Index dropped 724 points on Thursday and another 425 points in the overnight session to close at 23,533.

The benchmark index has now declined more than 3,000 points, or 11.6% from its high on Jan 26th, at 26,616.

We’ve been warning about the stretched PE valuations in US markets and we forecast further selling in the tech-heavy NASDAQ, which will drag markets lower.

The Dow closed at 19,827 on Inauguration Day, 20th Jan, 2017, which means it has about 3,700 points further to go before the Trump rally gains disappear.

22,000, or a 50% retracement of the breakout rally which began in late 2016, provides a reasonable downside target where buying interest is likely to provide support for the index.

The NASDAQ is 10% above the 50% retracement price target.



US Payroll Data Triggers Wall Street Rout

U.S. stocks fell sharply on Friday after a stronger-than-expected Non-farm payroll report pushed interest rates higher.

The U.S. economy added 200,000 new jobs in January versus expected growth of 180,000. Weekly average earnings rose 2.9% on an annualized basis and the unemployment rate was unchanged at 4.1%.

The Dow 30 index dropped 665.75 points (2.8%) to close at 25,520, which is the index’s sixth-largest points decline ever.

The broad-based SP 500  fell 2.1% and finished at 2,762, with energy as the worst-performing sector.

The NASDAQ 100 plunged 1.96% to 7,240 as declines in Apple and Alphabet offset a strong gain in Amazon shares.

The combination of extreme valuations and increased leverage in the market could see US equities extend today’s losses into next week.

We suggest cutting high PE names from portfolios and looking for “stock specific” opportunities on the long side. SP 500 Index



The US Government Is Back Open………….Until February 8th

The US Senate was able to agree on a short-term resolution to allow the Government to reopen until the 8th of February.

The US has not had a properly ratified budget since 2009 and these “stop-gap” agreements are now getting shorter in duration.

The DOW, S&P 500 and the NASDAQ all responded by making new all-time highs.

Interestingly, as illustrated in the charts below, not only are the 2-yr Treasury notes now yielding more than the SP 500 in the last 10 years, but the Index itself is the most overbought in history.

We suggest that the extreme valuations on Wall Street will soften US yields over the medium-term.

As such, we would expect to see buying interest in the ASX yield names such as TCL, SYD and WFD .

Our ALGO engine currently has flagged buy signals in TCL and SYD at $11.70 and $6.80, respectfully.

2-yr versus SP 500 yields

SP 500 Sentiment Oscillator






US Jobs Outlook Weakens, Debt Ceiling Concerns Continue To Grow

There were no bright spots in yesterday’s US Payroll report.

The 156,000 growth in jobs disappointed and is well below the recent averages. The back two months were revised lower by a total of 41,000 jobs.

The unemployment rate ticked up to 4.4% even though the participation rate was unchanged at 62.9%. Weekly average earnings fell from .2% to .1%.

This was enough to lift US Stock Indexes higher into the weekend.

The NASDAQ had it’s best week since December 2016, finishing 2.75% higher, and the S&P 500 rose 1.5% for its best weekly performance in 4 months.

However, as illustrated in the chart below, the shortest end of the Treasury curve remains troubled as the debt ceiling panic continues to build.

And while the US 10-yr yields rose modestly to 2.16% after the payroll data, the T-Bill yield dislocation has extended out to 32 .25 basis points.

This  indicates that the market remains extremely nervous about a debt ceiling crisis over the next month, which is not bullish for US equities. 

September 21st versus October 5th T-Bill yield spread


Dark Clouds Forming Over Wall Street

Up until last week, US Stocks had spent the last five months gradually moving higher, without many big daily gains or losses.

They had drawn strength from rising U.S. corporate profits and continued growth in the economy, along with recoveries in Europe and other EM regions.

It’s clear that investors still believe that if the global economy or equity markets ran into serious trouble, G-7 central banks would step in to help, just as they did after the 2008-09 global financial crisis.

Given the historically low volatility measures in the markets, it’s not surprising that on August 7th, a small 52 point rally  (essentially all from Apple Inc) brought the Dow Jones 30 Index to its newest milestone of 22,062.

But this new record high belies the growing unevenness of the index.

Shares of Boeing, McDonald’s and health insurer United Health have contributed more than 700 points of the 1,000 points the Dow has gained since March 1, when the index topped 21,000 points for the first time.

This means that 10% of the components of the Dow index have been responsible for 70% of the overall gains over the last five months.

Meanwhile, Goldman Sachs and IBM, which helped lead the Dow’s surge in late 2016 and early 2017, have come crashing back to earth and are currently the worst performers in the Dow index this year.

A 1,000-point rally in the Dow 30 isn’t what is used to be a few years ago. As the index trades higher, each round-number milestone represents a smaller percentage move.

When the Dow advanced from 10,000 points to 11,000 points in early 1999, it was a 10% rally. By contrast, the move from 21,000 to 22,000 translates to a gain of just 4.8%.

The Dow index is more than 120 years old, and experts and market-watchers constantly debate how accurately it represents the overall health of the market. With only 30 companies in the index, the Dow reflects much less of the broad economy than the Standard & Poor’s 500 index, the NASDAQ or the Russell 2000, which institutional investors pay more attention to.

From a technical perspective, Dow points are also based on the individual stock price instead of the relative value of the company.

So a 1% move for an expensive stock like Boeing or Goldman Sachs, both priced well above $200 per share, will move the Dow Index more than Microsoft, worth around $70 per share, even though Microsoft has a capitalization of more than $550 billion compared to about $90 billion for Goldman Sachs.

This type of internal price dispersion is not limited to the narrow Dow 30 Index. Internal price dispersion has now become apparent in the SP 500 Index, which, as a much broader index, has much more significant ramifications for future share price valuations.

For example, a growing proportion of individual stocks in the SP 500 are now priced below their respective 200-day moving averages, with just a handful of names carrying the index higher over the last few months.

 This widening divergence in leadership, (as measured by the proportion of individual stocks hitting  new highs versus new lows), is not a bullish indicator for US stocks going forward.

The chart below illustrates the percentage of U.S. stocks above their respective 200-day moving averages, compared with the S&P 500 Index. The deterioration and widening dispersion in market internals is no longer subtle and points to price momentum turning lower.

Further, this degree of dispersion suggests that not only is risk-aversion rising, it is also picking up pace.

Across history, this sort of shift in individual share prices, coupled with extreme overvalued P/E’s and over-bullish sentiment, has been the hallmark of major price peaks and subsequent market corrections.

Looking across the financial landscape, we see several other potential triggering events which could signal a material correction in global equity markets. Of these potential market inflection points, five stand out as troubling and worth noting.

  1. Debt Ceiling
  2. Bubble level PE’s
  3. Maximum Financial Engineering
  4. China Asset withdrawal and structured product issues
  5. US credit cycle deteriorating – credit cards, autos.

Within this list, the most severe market event would be the failure of the US Congress to raise the debt ceiling in time to prevent a shutdown of the US Government: this event caused 16% drop in the US SP 500 in 2011, as referenced in our August 14th blog report titled “Black Monday 2011, revisited.”

On August 1st, the US Treasury Department announced that the debt ceiling, (the statutory limit of outstanding debt obligations that the federal government can hold),  must be raised by September 29th.  After lawmakers return from their summer break, that will give Congress 12 working days to pass legislation to get to President Donald Trump’s desk.

If this deadline is breached, it could lead to disastrous consequences for the Federal government, the US economy, and the global financial system. If the debt ceiling is not raised, the US government would lose the ability to pay bills it already owes in the form of US Treasury bills and could lead the US to default on some of that debt.

The possible fallout from a default, according to a recent study by the Treasury Department, would include a meltdown in the stock and bond markets, a downgrade of the US’s credit rating and the undermining of the full faith and credit of the country.

It’s our base case that despite the potentially dire consequences, there is some confidence but no guarantee that factions in Congress, with a variety of competing interests, will be able to come together on a deal to raise the limit.

And even though the US Government has raised the debt ceiling 78 times over the last 57 years, the political uncertainty in Washington is making investors realize that the chances of successfully negotiating the debt ceiling legislation without a Government shutdown are dwindling.

Institutional investors in the US Credit markets have already started pricing in a Government financial disruption as illustrated in the spike in US credit default risk and the inversion in the US T-Bill curve.

Unfortunately, based on recent  negotiations for Health Care and Tax reforms, the Congress has not proven that it’s lawmakers are motivated to do what’s best for the American people, or that it can get anything done.

What’s more, the debt ceiling debate is likely to become ultra-politicized with special interest spending provisions attached to the final legislation.

This confluence of internal share price dispersion, combined with the backing up of risk aversion in the short-term credit markets, alerts us to a market condition which could lead to profound disappointment for investors.

All of our key metrics of expected market risk/return prospects are unfavorable at current market levels.

Some market commentators have projected that the SP 500 will complete the current re-pricing cycle at an index level up to 60% lower, or in the low 1000 handle. Our research doesn’t point to a level that low, but we do believe the market has scope for a 20% correction over the next three months.

As such, we strongly urge our clients and subscribers to examine all of your investment exposures, and ensure that they are consistent with your actual investment horizon and tolerance for risk.



Black Monday 2011, Revisited

Just over  six years ago, August the 2nd 2011 to be exact, the US Congress avoided a Sovereign default and finally reached an agreement to raise the US debt ceiling from $14.29 trillion to  $15.77 trillion.

The legislation was called the “Budget Control Act of 2011”, and was signed on the same day by President Barack Obama.

During the negotiations, credit agencies, Moody’s, Fitch and Standard and Poor’s all advised lawmakers that the US AAA credit rating was going to be reviewed regardless of the debt ceiling legislation.

After the market closed on Friday, August 5th, several rating agencies downgraded the US credit rating to AA+ .

This triggered a massive selloff on Monday, August 8th,  where The NASDAQ Composite Index fell 174.72 points (-6.90%), the SP 500 Index shed 79.92 points (-6.66%), and the Dow Jones 30 Index lost 634.76 points (-5.55%).

The aggregate loss on the day was over $1 trillion.

As the chart below illustrates, the fall out from the 2011 debt ceiling crisis led to the SP 500 losing 208 points, or 16.1% in just 6 trading days.

The US Congress and the White House have already commenced discussions about raising the debt limit from the current level of $19.80 trillion, with a September 29th deadline.

Considering the market’s inflated valuations based on tax cuts and infrastructure spending, domestic issues with consumer credit and autos loans, and the escalation of geopolitical risks, we suggest caution that this time the US equity market sell off could be much greater.


SP 500 August 2011.


ETF Watch- NASDAQ Sell-Off

The NASDAQ stocks rebounded last night with Facebook, Google and Amazon all trading over 1% higher after the two day sell-off over the weekend.

According to several “high frequency” analytical reports, it’s too early to step back into the FANG stocks. Of the four times that a similar high volume sell-off has occurred since 1999, tech shares have needed several weeks to find a bottom.

In addition, as shown in the chart below, the last few days have seen the largest capital outflow since 2007 from the QQQ: the NASDAQ based ETF.

Our ALGO engine created a buy signal on the ASX BetaShare NASDAQ ETF on February 8th, 2016.

That ETF, with the symbol: NDQ has gained over 32% since then. Should the recent sell-off in the NASDAQ turn into a deeper correction, we will watch for the next ALGO buy signal.



BetaShare ETF: NDQ