OVERBOUGHT AND HIGHER PRICE TROUGHS & HIGHER PRICE PEAKS—BOTH SHORT TERM

 

On a near-term basis, I believe an excellent guidepost will be how the domestic equity market responds to its current short-term overbought condition, defined by the percentage of stocks above their 20-day exponential moving averages—refer to the chart below. Please recall that one of the guideposts last fall was the domestic equity market’s inability to favorably respond to oversold conditions. We know how that turned out.

Currently, the opposite condition exists. Specifically, the domestic equity market should pull back given its overbought condition and close proximity to an area of resistance (theoretical selling pressure exists between 2700 and 2750—please refer to chart below). However, if the equity market doesn’t pull back, or if a pause/pullback is minor, then the underlying strength of the domestic equity market must be respected and adjusted to accordingly. Tactically, respecting the equity market’s strength would be prudent in my opinion, especially since the equity market was able to ignore bad news last week—no sign that the budget stalemate in Washington will end soon, renewed reports that President Trump is considering imposing tariffs on all imported motor vehicles, (thank you, Dr. Scott Brown, Chief Economist of RJF, for this information), and “misses” in the Empire State Manufacturing survey and University of Michigan Consumer Sentiment survey. 

Switching gears, I’d like to expand on previous Tech Talk reports and Technical Analysis webinars relative to the favorable near-term trend of Emerging Markets, but now add Frontier Markets to the discussion. Why Frontier Markets? During a “time long, long ago” my efforts were “recognized” by the head of Technical research at Fidelity Investments. Since then, this gentleman has moved on and started his own newsletter. I recently read a report he wrote in which he discussed the positive year-to-date performance of a Frontier Market proxy. His comment, with which I agree, wasStill early days, but a change back to non-US leadership would be a mental adjustment for investors.…” Please refer to the graph below.

One of the checkmarks in my Equity Market Low/Bottom Checklist (please refer to our Technical Analysis webinar on 1/15/19) was a pattern of “higher price troughs and higher price peaks,” a simple definition of an uptrend. While that pattern has not occurred domestically, when viewing the S&P 500 (SPX/2670.71)—the SPX has formed a V-shaped low (straight down and straight up)—the Emerging Markets proxy (seeks to track the investment results of an index composed of large-, mid- and small capitalization emerging markets equities) and Frontier Markets proxy [seeks to track the investment results of an index composed of Frontier Market equities (in my opinion, this is a very volatile area and subject to a lot more potential price risk than the U.S. markets)] has indeed formed a more stable, short-term pattern of “higher troughs and higher peaks.” Please refer to the chart below.

Percentage of Stocks Above 20-Day EMA: All three readings are close to areas that have caused a reversal in readings. Once a reversal occurred, a pullback by the respective capitalization size asset class occurred. However, to repeat what I stated earlier, the domestic equity market should pull back given its overbought condition. If it doesn’t, or if a pause/pullback is minor, then the underlying strength of the domestic equity market must be respected and adjusted to accordingly.

percent above 20 day EMA.JPG
spx.JPG

Prior to last Friday’s tape action (1/18/19), the proxies for the Frontier Market (red) and Emerging Markets (blue) were outperforming the developed markets, U.S. (green) and EAFE (pink), on a year-to-date basis. If this change sticks, it will cause “asset allocators” to really scramble, and you want to be in front of this change, even if only in a small fashion.

ytd for fm, iemg, spy, efa.JPG
emerging and frontier proxy.JPG

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UPCOMING EVENTS

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 01.21.2019. Chart sources: Stockcharts.       

PDF Copy of Article: Day Hagan Tech Talk January 22, 2019 (PDF)

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