POTENTIAL BUYING POWER EXISTS WHILE LARGE CAP TRENDS AND MOST ADVANCE-DECLINE LINES REMAIN SUPPORTIVE OF EQUITIES

 

Please Note: Due to extenuating circumstances, Tech Talk will be written on a sporadic basis until the 8/27/19 Technical webinar. Consequently, this report will be longer than normal and I am going to concentrate on long-term chart configurations. Near the end of the report I’ll include some short-term tactical observations.

  • Poor Equity Flows: From a contrary sentiment perspective, this chart implies that a source of potential “buying power” exists—aqua circles below. This begs the questions: at what level does the fear of missing out (on the current rally) kick in and the potential buying power come back into the equity market? Has that level already been reached?

S&P 500 Monthly Chart. Equity Fund Flows: 12-Month Rolling Sum.
  • The real bubble/sentiment extreme is in the Fixed Income market, in my opinion. Please plan now how you will manage downside risk.

TLT-ing Into Treasuries. Largest long-term bond ETF sees assets grown by 65% this year.
  • S&P 500 (SPX/3020.97) Trend: The Large Cap trend supports higher prices, even if subject to pause/pullback periods. As Bob Dickey so aptly wrote recently, “a lot has happened in the world during the past 10 years, but the market has continued to move higher within its long-term rising channel.”

S&P 500 Large Cap Index. S&P 500: Weekly chart with 200-week moving average.
  • U.S. vs. the Rest of the World: Based on relative strength analysis, the U.S., defined by the SPX, remains the leader amongst most world markets—first chart below. Our unbiased models confirm this, and until they change, we will invest accordingly. With that said, while trying to time the market on “valuation” alone can be difficult, at some point better values outside the U.S. will matter—second chart below. Please note: EM stands for Emerging Markets. DM stands for Developed Markets.

S&P 500 Large Cap Index/MSCI World (ex. USA) Index (EOD)
Global Equity Valuations - PE10 (Price vs. 10-Year Average Earnings)
  • Large Cap (Russell 1000) vs. Small Cap (Russell 2000): Large Caps have been outperforming Small Caps since 2014, and most clearly since 2017, as shown by the chart below. Interestingly, Large Caps have moved up to an area of resistance in the making for over 10 years—solid red line. Will we see a breakout and a secular change in this relationship or will Small Caps once again start outperforming as they did for the most part between 2000 and 2014? We will know in the fullness of time. Until then, our models currently favor Large Caps and when they change, so will we.

Large Cap (Russell 1000) vs. Small Cap (Russell 2000)
  • Growth vs. Value: Could something of significance be developing in the S&P 500 Large Cap Value versus S&P 500 Large Cap Growth space? This bears monitoring because a violation of resistance may be a start, and possibly significant, in the S&P 500 Large Cap Value/Growth space only.

S&P Large Cap 500/Citigroup Value Index/S&P Large Cap 500/Citigroup Growth Index
  • U.S. Dollar Index: The catalyst for the U.S. Dollar Index’s next move is likely the Fed announcement later this week. What may be more important than the Fed’s action (a 25- or 50-basis point cut) is their wording. Since many cross-market relationships are affected by the direction of the U.S. Dollar Index, please heed Arthur Cashin’s advice to “stay wary, alert and… very nimble.

US Dollar Index - Cash Settle. US Dollar Index - Weekly Chart
  • Global Yields (U.S. not shown): To paraphrase Wall Street veteran and technical analyst John Murphy (and I can’t disagree with him),

Let’s hope Global Central bankers know what they are doing... I find the sudden dovish turn by global central bankers to be somewhat puzzling… disturbing. Mario Draghi signaled that the ECB was ready to lower rates in September for the first time in three years.... Most yields in the Eurozone are already in negative territory. The reason being given is that the Eurozone economy remains dangerously weak… the problem is that negative rates haven't boosted its economy... So why keep doing it? Australia, South Africa, and South Korea have already lowered rates… and the Fed is expected to do so (this week).… All of which begs the question, “If central bankers are using up their ammunition now in order to prevent a recession, what are they going to do when the next recession finally does arrive?

10 Year Government Bond Yields.
  • GOLD: I am by no means a “Gold bug.” I simply prefer to keep my opinions in alignment with the charts (Gold chart is bullish), internal measuring tools and our models.

Gold - Continuous Contract (EOD) CME
  • Flows into gold mining stock ETFs are muted. From a contrary sentiment perspective this is favorable, especially given the topside move they have already experienced.

Gold Miner ETF Flows
  • Light Crude Oil: According to Ned Davis Research, “Oil’s technical, sentiment, and fundamental evidence paint a directionless picture.…” Until support (green lines) and resistance (red lines) in the chart below are decisively violated, I would agree.

SWTIC Light Crude Oil - Continuous Contract

Near-Term Tactical Observations:

  • S&P 500 (SPX/3020.97): Despite new highs and proximity to resistance (3025 to 3050), a few minor divergences are occurring. Specifically, new 52-week highs (a poor timing tool) aren’t confirming and the percentage of stocks above 50-DMA and 20-day EMA have rolled over. If these near-term tactical issues can be shrugged off, it would be a sign of underlying strength and supportive of higher equity prices. In the meantime, please use the following short-term tactical support levels accordingly: 2996 (rising 20-DMA, which will marginally change each day), 2973, and in and around 2950. As Cashin says, “stay wary, alert and… very nimble.”

  •  The Dow Jones U.S. Semiconductors Index (3791.94) has rallied sharply and is currently testing a previous price peak—resistance. Given the semiconductors’ tendency to lead the NASDAQ and at times the broader market, please watch the semiconductor index or ETF of choice and see how it reacts to resistance.

  •  The chart configurations for the S&P 400 Mid-Cap Index (Mid-Cap A/D line closed at a new high last Friday), “Transports” in general, and a number of Financial/Bank indices are improving. Please reach out for details.

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you.

UPCOMING EVENTS

Day Hagan Market Update Webinar with Donald Hagan, CFA, August 14, 2019 @ 4:15 PM EST

Day Hagan Technical Analysis Webinar with Art Huprich, CMT, August 27, 2019 @ 4:15 PM EST

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

— Written 07.28.2019. Chart sources: StockCharts.com and Topdowncharts.com  

PDF Copy of Article: Day Hagan Tech Talk July 30, 2019 (PDF)

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