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.


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 Breaks 16-Month Winning Streak

The Dow Jones 30, along with the SP 500, has posted its first monthly loss since October of 2016.

This has been the longest monthly winning streak since 1959.

However, over the last two days, the DOW has lost over 700 points, or 3%.

And while these headlines will get the attention of investors, it’s the technical significance which should have investors concerned.

Both the DOW and SP 500 dipped below their respective 50-day moving averages, which opens up the probability of range extension to the downside.

As illustrated in the chart below, investors should be prepared to employ defensive strategies and take advantage of stock specific opportunities.

Dow Jones 30




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 Debt Crisis Averted………Until December

US Stock indexes may have dodged a bullet today when President Trump defied his White House advisors and sided with Democrats to defer the debt ceiling debate until December.

Using the legal structure of a “continued resolution” linked to emergency aid to victims of hurricane Harvey, the proposal would suspend the borrowing cap, currently at $19.9 trillion, until December 15th.

And while this manoeuvre calmed the nerves of T-Bill investors into the October maturity, the fear premium of a government shutdown has just been transferred to the December maturity.

Over the next few days we expect to hear more about how this political tactic will impact the administration’s legislative goals on tax reform, infrastructure programs and border security.

The prime risk to US equity markets is that credit agencies view this failure to address the debt ceiling as cause to downgrade US Sovereign debt ratings.

In short, “kicking the can” down the road has not made US assets less risky at current levels.

December T-Bill Yields




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


US Labor Day Preview

During yesterday’s Asian session and into the London time frame, investors were anxious about North Korea’s provocative missile launch, the flooding disaster in Texas, and the looming US debt ceiling debate.

However, once the US session opened, investor’s attenton  turned to preparing for the Labor Day long weekend, which marks the end of the Northern Summer.

The NYSE will close early on Friday and will remain closed all day next Monday.

Volume on the Dow Jones 30 was barely 220 million, down 25% from the 3 month rolling average of 310 million per day.

As the chart below illustrates, the SP 500 remains below the 30-day moving average with a downward bias.

S&P 500 Index


NYSE Internal Indicators Weaken Further

As the major US stock indexes gyrate on fundamental economic reports and political developments relating to tax reform and debt ceiling legislation, many technical indicators are reflecting the deterioration of upside price momentum.

The chart below illustrates that the percentage of NYSE stocks trading above their 200-day moving average has decreased at a brisk pace over the last month.

When this indicator moves below 50%, it is saying that fewer stocks are supporting the overall index price level.

Historically, this has resulted in at least a 5% correction in the SP 500 over the near-term.

On that basis, the 4-week target for the SP 500 would be in the low 2300.00 area.

NYSE Breadth



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.