NEVER CONFUSE OUR VIEW WITH WHAT IS ACTUALLY HAPPENING IN THE STOCK MARKET

 

The declines last week were painful, especially Friday’s sell-off. In my opinion, part of Friday’s equity market decline was related to “algos,” anticipation of the Mueller report, and further weakness in global yields due to poor overseas economic reports. My view is that the majority of non-trading based, underlying demand-supply characteristics often highlighted here and in our webinars are still supportive of equities. But on a short-term trading basis, while the S&P 500 Large Cap Index (SPX/2798.36) is still in a short-term uptrend (since late 2018 the chart has been recording a string of higher price troughs and peaks), the Russell 2000 Small Cap Index (RUT/1512.86) is recording a short-term string of lower price peaks and troughs. This is the definition of a short-term downtrend. The Russell 2000 is also contending with a declining 200-DMA.

Adding to the short-term fray, the NASDAQ Composite (COMPQ/7637.54) rallied up to and failed to break through the lower end of a band of selling pressure between 7900 and 8100 (rounded figures). Finally, a breakdown by the D.J. Transportation Average (TRAN/10000.79), which hasn’t happened yet on a closing basis, may signal that the short-term weakness in the Small Cap arena may extend into the Large Cap universe and produce a deeper correction/pullback—chart on page 3.

S&P 500 with rising 50-DMA support (green line at 2738)
Russell 2000 Small Cap Index with falling 200-DMA resistance (red line @ 1580)
NASDAQ Composite and rising 50-DMA support (green line) - 9 month chart
D.J. Transportation Average and falling 200-DMA resistance line.

Summary: Large Caps- The SPX has made a multi-quarter lateral move since January 2018. However, the short-term trend remains up. The 50-DMA and the 2722 low (see chart above) represent key short-term support levels. Small Caps broke down on a short-term basis. This implies Wall Street may be becoming more risk-averse. If you review and cull your portfolios, Small Caps may be an area to start the process.

How do we operate with these opposing short-term observations? Remain committed to an unemotional investment process that first and foremost manages risk supported by economic, fundamental and technical indicators. This can reduce angst during these frustrating periods. Going forward, the stability of global economic reports is a non-price related guidepost.

Last-minute Chart: During my drive to work this morning, a Bespoke Investment Group representative discussed on CNBC the strong/bullish relative strength trend of the Semiconductor group, suggesting it was a helpful guidepost going forward. Given the role the semiconductor companies play in connecting the global economy, I wonder if the semiconductor complex could replace the Transports and form a new type of Dow Theory—Dow Industrials and Semiconductors, as opposed to the Dow Industrials and Dow Transports. What do you think?

Dow Jones Transportation Average/S&P 500 Large Cap Index

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UPCOMING EVENTS

Day Hagan Market Update Webinar with Donald Hagan, CFA, April 10, 2019 @ 4:15 PM EST

Day Hagan Technical Analysis Webinar with Art Huprich, CMT, April 16, 2019 @ 4:15 PM EST

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 03.25.2019. Chart sources: StockCharts. Thank you, Walt Deemer, a 52-year Wall Street veteran, for providing the title of this report in his recent book that includes timeless pieces of wit and wisdom.

PDF Copy of Article: Day Hagan Tech Talk March 26, 2019 (PDF)

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