• Global: While the U.S. equity markets continue to exhibit the dominant price trend (trend followers remain over-weighted the U.S.), the near-term performance gap between the U.S. and select overseas markets may narrow as the 4Q progresses, especially if the U.S. dollar weakens further. In other words, short-term “reversion to the mean” proponents who will manage risk and accept volatility may want to look at China.

    • Trend followers who want to look for overseas opportunities may want to look at Japan and Canada.

  • Domestic: Over the past three months I have preferred Large Cap stocks over Small Caps. Until the relative strength trend between these two asset classes changes or the U.S. dollar starts to strengthen again, I will continue to hold this opinion.

    • As noted in my Technical Analysis webinar dated 9/18/18, “upside participation within the Small Cap universe is narrowing!” Besides the charts shown during the webinar relative to this observation, the Small Cap A/D Line I monitor is far below its late-August all-time high, while A/D Lines for the Large and Mid-Caps, along with the NYSE Common Stock Only A/D Line, recorded an all-time high last week. Consistent with this, please be vigilant in managing downside risk, especially in the small cap arena. Please refer to chart below.

  • Tactically: In my Tech Talk report dated 8/28/18, I noted the following: “Given the advent of instant news, it’s easy to get caught up in the day-to-day activity of the market and to integrate short-term ‘noise’ within the primary trend. Consequently, pay attention to the primary trend and realize that short-term market reactions are simply interruptions to the primary trend.” In other words, please incorporate an investment style that emphasizes risk management yet remains objective and unemotional in its approach. Please refer to the chart of the S&P 500 shown below, for a key area of short-term tactical support.

Shanghai Stock Exchange Composite Index. Shanghai versus S&P 500. “Close” to levels which in the past, produced a period of outperformance by the Shanghai. Shanghai Stock Exchange Composite - late ‘94 to present (log chart). This is where an aggressive “mean reversion” proponent would get excited. But a violation of the secular trend line should also be used as a stop loss point.
Tokyo Nikkei Average - Nikkei 225 (EOD) Index. 3-year weekly chart with rising 40-week (200 day) moving average. Both charts may be interesting to a “trend follower.” TSX Composite (Canada) with rising 40-week moving average.
Russell 2000 Small Cap Index. S&P 500 Large Cap Index.
S&P Small Cap Advance-Decline Line Chart.
S&P 500 Large Cap Index. S&P 500 with 50-DMA (green), 200-DMA (blue) and Overbought/Oversold indicator (top fram). Prior OB readings (red circle) produced consolidation/pull back - I think it will be the same here.

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Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 09.24.2018. (Happy 35th anniversary, Elane) Chart sources: Stockcharts.  

PDF Copy of Article: Day Hagan Tech Talk October 23, 2018 (PDF)

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