Market Update for October 1, 2019

Today, we're going to talk about market cycles. As we know the markets continue to move, cycles rotate, but eventually they stop. Where are we today and what is the next cycle coming? There is a lot to talk about!

First up, S&P Daily. But what did I say, two weeks? Although the signal was positive, I had a negative bias. Now I'm not surprised that although we are positive, I have a negative view that we're going to end up back in the box here before you know it. As you can see, I did not particularly like this market. Where are we today?

One, this line here is resistance, that's basically our high one year ago. Which is exactly where we are today. So not a lot of movement, from there I look down, that's momentum, we've had a negative crossover. Not good in the short term, and then volatility above 15, which keeps us cautious as well.

But let's take a closer look here and discuss my signals. We are up today. Why? How? Oh, I can guess why! Steve Mnuchin last night made a comment about getting closer to a deal with China. Please don't get me started.

Right now, I am neutral. Why? As I mentioned, I thought we were going to go down. We topped off, that's what we've done. We've hit right here once in this area of support but came back up. Not a bad sign, but at this point, I don't see us in a negative view until we come back into this box. So, again, short term signal neutral with a negative bias.

Here's our weekly chart midterm. What has changed here, if anything? Well, for one, we are definitively below the trend line. We are still struggling to get above. We continue a negative bias on the mid term.

Next up, our monthly view. What, if anything, is changed here? Nothing!

We are still negative, but why? Back in 2007, yet another negative crossover on momentum, Negative crossover in 2015, and you can see our negative crossover from last fall. Has anything changed? Not at this point. It's fighting, but it is not going above. You've got negative divergence in what's called relative strength. Not good. That goes down as we hit new highs. So, we continue to be…. Negative.

How about some background information? New highs minus new lows for NYSE. Last year, when we hit our highs, you can see the strength. These are new highs going up and a series of higher highs. Last summer I talked about this, I did not believe the run up because of the new highs, minus new lows. In fact, we then had a pullback and you can see it, we're again hitting new highs versus new lows. This all looks very weak. Another thing that I see here is, a classic head and shoulders setting up on the market. Just another reason to be a little conservative right now.

What about Bonds? What, if anything, has changed? We have come down from our highs. Here's your 2-year, 3-year, 30 year. We have come down not exactly the way I'd want to, but the big thing, of course, is yield spread. The first one is your 10 year minus your 2 year. If that goes negative, that is not a good thing. We are at .06% that is a recession indicator. Your 10 minus 3 month, we've been under it now for several months. That is not a good sign. I continue to worry about that. I still am of the opinion that bonds go lower down to the 140-150 range.

Next up, what keeps me up at night? What keeps me up at night lately? Not a lot, actually, but the market during the day keeps me on the edge. We peaked in earnings last year. From there, earnings growth. Is your portfolio ready for a continued slowdown? We went from 24 to 12 to 1.2% growth, 1.6% projections. Last week I saw 3.8% in another major retailer declare bankruptcy this morning.

Let's talk about the federal debt. What's happened? Obviously, we didn't have much, then we had the crisis. This is QE quantitative easing that you hear about. We stopped and then they started letting all the bonds sell off. That's pretty much a good thing. Now, what was the impact of this?

Great chart here from Lance Roberts? Follow him @lanceroberts

Are stocks indicating a strong economy? Here's our growth in stocks, 164% strong. How about GDP? 24%. Talk about a diversion, Yikes. That is not a good thing. The Fed balance sheet is up 197%. That is a big issue. Why? Well, you look again. Here's a closer look on our federal debt. What happened here? We haven't seen QE in how long? How come this went up big time in the last two weeks?

Newspaper Headlines

Are you aware of the Fed's first in a decade intervention? What do you mean? Why is the Federal Reserve pouring money into the financial system? Repo market chaos signals Fed may be losing control of the rates in the repo meltdown.

Here's what happened. Overnight lending, cash, which is liquidity. The market loves liquidity, right? They want to see it flowing, flowing naturally. They go in for the night, you're buying bonds, you're selling bonds and you're bringing out some cash. Whatever the case might be. We have two things going on, 1, the Fed balance sheet, we are selling off. There was pulling of liquidity out. 2 you have earnings going down, there is lack of liquidity on the corporate side. Overnight lending shot up big time in 1 day. What does that mean to you as an investor?

The market craves liquidity. If liquidity dries up, we're going to have some big issues.

How about consumer sentiment? We see what's going on here. Big drop in consumer sentiment. Not a good sign. Some of the background for that data, Industrial production. We have a 31-month low rate there. You know, I'm not that bearish. I want this market to be good, but I look at the data and that's exactly what you want me to do.

Real GDP. Once again, we're going down. Let’s spend a little time here. I continue to do research; I haven’t talked about this before. This is a real good indicator. If we do in fact head into tough times. Why? The yellow line is your high yield, Delinquency rate. The high yield market funds small companies, mid-sized companies, mid cap sized companies, etc. As you can see, when the market goes bad, you see a spike in both of those. Right now, we have a little bump, It’s not big. I am not trying to concern anybody, but I will continue to watch this to see where this goes.

Next up, what's on my radar? What is the game plan going forward? It continues to be those sectors that do well. At the end of the cycle, we talk about the cycle. Where we are right now, bonds and bond proxies continue to do well. Here is one of those sectors. This is home construction.

Today, it's up 1.6% alone. We're up over 20% year to date. This has really been a great sector for us, we have been in since last November. What does it mean to you, an investor, and how do you look at this? Well, let me add a couple things. If you're coming in and you look at this sector right now, I'd say be patient. Number 1, it's a little expensive. Our side relative strength, when you get above 70, you generally will see a pullback, maybe a flattening out. I would be careful. Why is this sector doing so well?

Here is your 10-year treasury, right? Going straight down. How about lumber? How do these things tie together? You've got Treasury rates going down. Borrowing power is cheap, the price of lumber has basically been cut in half. So, we have more profits for the builders.

Let’s talk about oil. But what did I say a couple weeks ago? BE CAREFUL, folks. You're still in a downtrend here. I am personally going to stay away from oil. When you have this type of geopolitical risk you have to stay nimble. Do not buy into the headlines, go by the data, it had spiked. What has happened since then? Exactly what I expected, because the data doesn't support it. We are back in a downtrend.

Let's talk about this sector and how these bond proxies have done during this part of the cycle. When we talk about this in this sector focusing game plan, as I mentioned, we've been in bonds, and bond proxies since last November. But what do you compare it to? Everyone thinks of asset allocation, right? Large cap growth, mid cap, small cap, small cap value, international, emerging markets. That's kind of your typical advisor when they talk about those type of investments in asset allocation. This chart is showing you year over year.

Where are we? Mid-cap is down, and mid-cap value is up. Smalls are really down. Then we have international. let's take a look at some of these bond proxies.

Wait, did I turn that chart upside down? No, I did not. This is year over year. So today back a year. This is an asset allocation model. These are the places that we have been in the last year. You can see the difference in performance.

Wrapping things up, 52 neutral overall. 2 weeks ago, we were a little bit greedy at 75. Neutral on the short term with a negative bias. Mid-term and long term continue to be negative. Be careful out there, folks. Thanks for reading!

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