Happy Memorial Day! I hope you’ve enjoyed the long weekend so far.
I thought it might be a good idea, as we get back into what’s been a wild market lately, to think about one of the hardest things to do in life – and especially when it comes to markets.
That’s to admit, “I don’t know.”
Look, we’re in the market for one reason: to make money. Saying “I don’t know” – especially when you’re losing money – is often the best answer. It might be the only answer.
That’s the point of pieces with headlines like “Relative Confusion,” which I happened to post on Wednesday. When we go through our chartbooks, we see extended themes that aren’t offering great risk-reward opportunities right now.
At the index level, U.S. stocks are still a mess. Cash has been working since the beginning of the fourth quarter of 2018. Bonds are working too. And the market has given us no indication yet that this will change soon.
Let’s take advantage of the day off to identify some things we’d like to see before we get more aggressive on either side of the market…
First, we need to see an increase in the number of global markets and U.S. sectors and subsectors above their 2018 highs.
Or, we start to see a sector take leadership to the downside, which I still haven’t found yet. Energy and materials – even biotech if it gets hit – aren’t going to move the needle in the major indexes due to their small weightings.
Until either of those things happen, the trend is “sideways,” at best.
The next thing to look at is the direction of crude oil, which has been moving in lockstep with the S&P 500 Index since October. I’m watching this $55.50-to-$64.00 range. How it resolves and in which direction should have implications for U.S. equities.
Intermarket-wise, let’s watch the Japanese yen and bonds to see whether they hold above their March highs. If they do, that would signal a continued defensive posture from market participants.
The same can be said for all the equity market risk barometers we track, including consumer discretionary versus consumer staples, high beta versus low volatility, and staples/REITs/utilities relative to the S&P 500. We can’t ignore the fact that REITs and utilities are among the few areas of the market still above their former highs.
We also want to keep eyes on small-cap and mid-cap performance, too.
U.S. stocks are finally experiencing the weakness we’ve seen in global markets over the last few weeks. Look at the Value Line Geometric Index making 14-week closing lows, the Russell 2000 Index clinging to support, etc. It’s prudent to watch those markets for signs of a bounce and to see what develops from there.
We’re already starting to see some bullish momentum divergences form as prices make new marginal lows. I don’t see enough to suggest we’re there yet… but I don’t see a great reason to be short on an absolute basis, either.
It’s just messy. And messy environments have a habit of destroying your physical and emotional capital, making it harder to capitalize on the trends that do eventually develop.
Let’s say it together: “I don’t know.”
As we come out of this long weekend, remember that cash works… if you let it.
Have a great week.
To good trading,
Editor, Big Market Trends