AS WE MOVE INTO THE FOURTH QUARTER, PART 2

 

In my Tech Talk report dated 10/17/17, I discussed a number of price charts and equity market measuring tools that I felt were worthy of following as we moved into the fourth quarter of 2017—please let me know if you would like a copy of the report.

To further those thoughts, I want to highlight two additional charts I believe are worthy of following as we move towards the end of 2017 and into 2018. Specifically, the Dow Jones Transportation Average (TRAN/9802.70) and the yield curve. The yield curve, in this case, is defined by the spread between the 30-Year U.S. Treasury Yield and the 3-Month U.S. Treasury Yield.

Dow Jones Transportation Average (shorter-term observation): Wall Street has focused on the fact that most domestic large-cap equity market indices are at or near record highs. Yet the TRAN has struggled over the past two weeks, and very few have noticed. While I don’t believe this is a function of the economy (see comments relative to the yield curve), I do believe it is a function of a bifurcated equity market backdrop and one in which tactical portfolio management coupled with a discipline to manage risk makes sense.  

Dow Jones Transportation Average: I think short-term support between 9800 and 9763 is critical because the next significant level of support is in the vicinity of the rising 200-DMA and long-term up trend line, both show in "green". 

Yield Curve (non-trading equity market observation): The chart below shows the yield curve defined by the spread between the 30-Year U.S. Treasury Yield and the 3-Month U.S. Treasury Yield. Generally speaking, the yield curve is supportive of equities when the spread is positive, meaning long-term yields are above short-term yields. When the yield curve inverts and short-term yields move above long-term yields, the spread turns negative. A negative spread usually corresponds with an economic recession and a period that is not supportive of equities.

Why am I showing the 30-year/3-month spread, as opposed to another time frame (10-year/2-year)? As seen in the chart below, the blue zones show when the yield curve inverted over the last 30 years. The troubles for the equity market start with an extended inversion (1989, 2000 and 2007). The current spread between the 30-yr Yield and 3-month yield has fallen for a number of years, as it did between the early and late 90s, but isn’t yet close to inverting. This is supportive of the current intermediate-term equity market uptrend. Unless a series of divergences develops between price and breadth, the odds favor equity market weakness will be contained. Regardless, please respect the “tape” by discussing risk tolerance levels and then identify stop-loss points that are consistent with said risk tolerance levels.

30-Year U.S. Treasury Yield (EOD) 3 -Month U.S. Treasury Yield (EOD) Index

NEAR-TERM TACTICAL LEVELS TO WATCH INTO YEAR-END

S&P 500 (SPX/2572.83) – Support [level(s) where buying interest exists]: 2557 (very short term—20-day moving average) and between 2544 and 2534. Resistance [level(s) where selling pressure exists]: Between 2580 and 2583. 

 Russell 2000 (RUT/1490.90) – Support: Between 1490 and 1482. Resistance: Between 1508 and 1515. 

Have a wonderful rest of your week. Please know that Day Hagan Asset Management appreciates your support and hard work!

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 10.30.2017. Chart sources: Stockcharts.com.

PDF copy of article: Day Hagan Tech Talk 10.31.2017 (PDF)

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