TREND CHANGE? NO. RELATIVE IMPROVEMENT? YES.

 

Does leadership, defined by improving relative strength versus the S&P 500, return to a risk-seeking bias—a desire to aggressively buy/own stocks? From my perspective, the ability for “risk-seeking” groups tied to the economy to stabilize and or rally in response to economic data will be important in terms of discerning a credible bottom in the equity market. Having discussed Small Caps, Emerging Markets (short-term relative strength improvement in Emerging Markets is noted, though the absolute price action has more work ahead), Financials and momentum/growth stocks in this context in past Tech Talk reports/webinars, these observations will specifically address the Homebuilding, Automobile and Semiconductor groups.

Why follow these groups? Besides their business being tied to domestic and global economies (General Motors recently announced massive layoffs), from a “buying versus selling” price perspective, the price action of these groups was weak well in advance of the recent domestic equity market decline. Therefore, if absolute or relative improvements start to occur in these groups, it makes sense to pay attention. 

U.S. Home Construction Index (covers most of the US Home Construction industry): After retesting a prior low and reaching a statistically oversold level, a short-term positive divergence occurred (MACD momentum indicator recorded a higher low—not shown) and the group responded favorably—it rallied. The group isn’t out of the woods yet—a lot of resistance lies overhead (red lines). However, a close above 674 would complete a short-term bullish pattern of accumulation and may be a reflection of a less aggressive Fed in 2019 and a reduction in trade tension between the U.S. and China. Stay tuned.

 Dow Jones US Home Construction Index Chart, dated November 27, 2018.

U.S. Automobile Index (companies in the U.S. Automobiles industry, representing 95% of market capitalization): Following a 32% price decline between January and October, this index successfully tested support going back to June 2016, right as the domestic market indices started to freefall in mid-October. Since then, the “autos” have formed a bullish near-term continuation pattern, evident by the different-colored, dashed lines. A close above 203 would complete the pattern and, as stated above, may be a reflection of a less aggressive Fed in 2019 and a reduction in trade tension between the U.S. and China. The key test now is how the group acts going forward.

 Dow Jones US Automobiles Index Chart, dated November 27, 2018.

U.S. Semiconductor Index (companies in the U.S. Semiconductors industry, representing 95% of market capitalization): This index completed a huge top during the October decline. Therefore, given its historical leadership tendencies for the rest of the domestic equity market, it is vital that the group continues to stabilize and/or improve on both an absolute and relative basis. Consistent with this, it is critical that this index get above and stay above resistance at 3200, defined by a falling 50-DMA and previous price peaks.

 Dow Jones US Semiconductors Index Chart, dated November 27, 2018.

Summary: The Homebuilders, Automobiles and Semiconductor charts are not yet bullish, but improvement in their absolute and relative trends may be an early sign that their current downtrends, and possibly the domestic market downtrends, are “long-in-tooth.” As Don Hagan succinctly stated yesterday, “the pieces are in place for a near-term bottom. For us to become more constructive, we’ll need to see broader participation on the upside.” In my opinion, the three groups highlighted above are a good place to start!

Day Hagan Asset Management wants to thank you for allowing us to be part of your business!  

UPCOMING EVENTS

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written during and after the market close on 11.27.2018. Chart sources: Stockcharts.     

PDF Copy of Article: Day Hagan Tech Talk November 28, 2018 (PDF)

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