One New High FITS all
Start of something big….
In a week that saw increased Trade War and Brexit tensions, Indian financial institutional concerns, rising yields and many currencies going in opposite directions. US indices made further new highs. Counter intuitive maybe but it’s a very familiar story not just during the 2010s. It all FITS neatly into the same narrative of the 1929 and 1987 where stocks blew out to the upside yields continued to rise but a recovery in the Dollar fizzled out into a USD and stock index collapse. This week’s newsletter outlines the fundamental, intermarket technical and sentiment aspects that we will cover in the next four weeks to help us through an exciting but still challenging and promising market.
For the last few weeks we have highlighted the importance of DJIA (as opposed to SPX and NDX) new highs. The significance of the new high in tariff hit DJIA as opposed to growth driven SPX or revenue led tariff resilient NDX is simple and complex at the same time. It means simply confirmation of our January 2018 view that a prolonged consolidation would lead to the long awaited final 1987 style leg higher.
This aggressive climax is typically driven by sentiment as opposed to fundamentals where technicals become even more challenged. A market that is even harder to navigate unless you have a very good handle on the elusive sentiment changes. A market whose best guide (to buying dips into a top and selling later for a crash) is not levels or time but the interaction between asset classes clearly outlined by John Murphy (in his now classic Intermarket Analysis based on the 1987 blowout) or indeed the divergence between instruments that we have implied with the Yield->USDJPY->DXY->SPX->NDX fateful sequence.
We have explained previously how the final leg of any trend but particularly 1920s and 1980s stock bull market leaves the fundamentals behind.
Not necessarily with an economic turndown has led some to look prematurely for recession but a deterioration in the rate of improvement. We continue to monitor economic data that will suggest the fateful decline in US GDP while stocks rally in the final collapse in dividend yields. However we have sought, and it appears we have got the break to new highs, based not just on the 1987 template but also the more recent trend of negative negative news. SInce Trump’s election new highs have been increasingly triggered by the absence or decline of negative news such as an easing in North Korean tension than anything truly positive.
In other words an increasingly sentiment driven market which takes out shorts and allows the market to get long leaving many scratching their heads. Indeed many accounts this week have attributed the upmove to tariffs being less drastic than first feared, or the Chinese premier’s statement in favour of more positive growth policies to offset the impact of tariffs. Neither cut it.
But the rally in the yields does explain the move and particularly in the context of intermarket relationships both historical and current. The DJIA break to new highs is partly due to a reassertion of anticipated rather than inflationary growth that doesn’t materialise (in the 1987 and 1929 template) helping DJIA overweight financials and oil. But also fits neatly into the unique interaction of instruments. That is USDJPY rising alone with stocks and yields but the Dollar generally staying flat while tariff hit indices start a corrective recovery only. Next week we will outline how the interaction of different asset classes and instruments not only help us time this move but highlight some very interesting cross and spread plays over the next few weeks.
The need for the focus on the intermarket relationships and in particular cross and spread plays we wouldn’t normally monitor closely is because the technicals in the more major instruments have not been performing well except perhaps in a historic or fractal sense. We have seen a series of staggered stock blowouts (NFLX AMZN AAPL FB) and USD moves (GBPUSD=>NZDUSD=>AUDUSD, USDJPY=>USDCAD) since the beginning of the year. Pinpointing where we are in these templates should help overcome some of the challenges to traditional technical analysis. The technical aspects of a blowout and these templates will be the subject of our newsletter in the week after next and an increasing feature on most of our analysis pages.
The reason why technicals are underperforming is because sentiment and volatility are combining to a variable extent to produce erratic but sometimes aggressive moves—both ways. Some of this can be attributed to news but also the increasingly important variable liquidity—that can in part be attributed to central bank, funds and company buy-back policies.
Its in all the mix, a very erratic almost unique (expect 1929 and 1987) mix that will probably only appear easy in retrospect. One day a market trend and then stops and reverses while another market keeps going. To say this is an easy market where you just stay long indices such as SPX as we have done from below 2600 is so untrue. Those seeking an uptrend in European stocks—as we have also done—will know that is the case and why we have resorted to option calls and keeping trades tight and shorter term.
Here’s to making the very best.
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