Risks Are Rising, Breadth Is Falling


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Rabbie Gill

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Risks Are Rising, Breadth is Falling

The S&P 500 has rallied to the 2,800/80 resistance zone with an increasing number of negative divergences, hinting that the move from Dec 2019 is close to a finale.  The Canadian Financial sector is likely to correct greater than 15%, as it moves into the 4-year cycle low.

The move down in Can 10-year rates is stretched and rates can consolidate or even have a counter-trend bounce higher as it digests recent price action below the 1.80% resistance level.

Market Trends

  • The S&P 500 daily cycle is in the final stage of topping, which will lead the topping of the weekly cycle as well.
  • Can10yr rates triggered a daily sell signal, but this move into the daily cycle low should be counter-trend move before rates continue lower.
  • USDCAD daily cycle is topping, while longer-term weekly and monthly cycles remain positive.

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on March 29, 2019.  Please see the TRI Overview document for further information.

Source: Fieldhouse Capital Management

Equity – Risks Are Rising, Breadth Is Falling

The S&P 500 has rallied to the 2,800 to 2,880 resistance zone with daily, weekly and monthly bullish trend signals.  Under the hood, an increasing number of negative divergences are developing, hinting that the move from Dec 2018 is closer to its finale. The S&P 500 daily cycle is expected to bottom in the Mar 20 to Apr 10, while the weekly cycle bottom is expected between late May and early Jul.  Like the previous daily cycle low in Feb 2019, we may have seen the current daily cycle low on Mar 25 as a very shallow pullback but need further price action to confirm.

In either case, the S&P 500 is making new daily, weekly and monthly cycle highs into the resistance zone with increasing daily negative divergences versus:

  • MACD
  • McClellan Oscillator
  • NYSE New Highs/Low
  • Russel 2000 Index, Airline Indices, Transport Indices, Financials Indices
  • Interest rates

Source: Tradingview.com

Several indices, including the Russell 2000 and Transports indices appear to be leading the S&P 500 lower with daily and weekly bearish trends currently in place.    In fact, given the cyclical phasing and price action of leading sectors the risk is elevated for weaker S&P 500 and risk asset values into the summer.  This suggests to the TRI there is about a 20% chance the S&P 500 will have a blow off top into the 3,000+ level during the current weekly cycle move.

A completion a of a weekly swing high and turn down in our indicators is required to confirm a topping of the current S&P 500 weekly cycle.  The move out of that cycle bottom and its structure will be the key in determining if the move lower into the 4-year cycle low has resumed. This will indicate the move from Dec 2018 low to the most recent high, was merely a counter-trend move higher necessary to reset investor sentiment as smart money distributed stock holdings.

Canadian Banks / Financials

The S&P/TSX Capped Financials Index represents approximately 34% of the S&P/TSX Composite Index and its underlying securities are core holdings in many investor’s portfolios.  The sector has returned 15.5% on an annualized basis over the past 10 years, and the XFN ETF has returned 14.7% over the same period ending Feb 2019, both outperforming the overall S&P/TSX Composite Index.  As such, the price appreciation and dividends from the financial sector have been key contributors to the S&P/TSX Composite Index total return and will continue to be for the foreseeable future given its large weight.

Can investors expect the same average return from the Canadian financial sector going forward?   TRI analysis suggests the Canadian Financial sector will be under pressure into at least the next 4-year cycle bottom.  TRI would like to remind investors that extrapolating in straight line is fraught with potential errors.  When things look the most promising and everything is positively aligning, that is usually when risk is highest, and we must be aware of potential changes in trend. TRI believes everything moves in repeatable cycles, and the TRI Investment Process is anchored around identifying potential cycle highs and lows.

Source: ECRI

The XFN ETF recent 4-year cycle bottomed in Feb 2016 and then rallied 23 months into the Jan 2018 high current 4-year cycle high. TRI is now anticipating the next 4-year cycle low to bottom in the 2020, and ideally in the first half of 2020. With the 4-year cycle topping in only 23 months, this puts into play the potential of a left-translated cycle.  Momentum has been weak on the Jan 2018 high with a divergence on the weekly MACD indicator. The XFN is likely to bottom between the Dec 2018 low of $32.56 and lower previous 4-year cycle low support at $26.25. This represents a greater than 15% drop versus the annual gain that most investors expect.

Source: Tradingview.com

Since the Jan 2018 high, the XFN has had two monthly cycle upturns, of which the first failed to make new highs and the second one appears to be now failing with a weekly swing high in place. The next confirmation will be a turn down in our Cycle Turn Indicator and failure to make a new high by Jun 2019.  As always, investing is based on probabilities and risk management.  As evidence continue to mount of a move into a larger degree cycle bottom, caution is recommended for both the Canadian financial sector and the overall S&P/TSX Composite Index.

Fixed Income – Economic Risks Rise When Yield Curve Steepens

Government of Canada 10-year yields dipped to 1.51% in Mar 2109 which is over a 110 bps lower than current cycle peak of 2.61% just a short 6 months ago in Oct 2018.  Cycles on daily, weekly and monthly degree are all pointing to still lower yields from here.

Not much has changed from the March TRI outlook where we stated,

“If the daily cycle fails to make new highs above 2.05% and the daily cycle becomes left-translated, then the probabilities increase of Can10yr rates will test the May 2017 1.40% rate level sooner rather than later.”

Going forward the daily cycle appears to be quite stretched and Can 10-year rates can consolidate or even have a counter-trend bounce higher as it digests recent price action.  The 1.80% region is resistance on any counter-trend bounce higher.

Source: Tradingview.com

Yield Curves – Risks Rise When Curve Steepens

The TRI has been asked why we are so pessimistic on the economic and risk asset outlook, as yield curve inversion seems to be a poor predictor of recessions.  The TRI does not dispute the fact that equity markets have rallied and even made new highs after past yield curve inversions.  TRI watches yield curve inversions, but concern and red flags rise for TRI when the potential for the yield curve to steepen from short-term interest rates falling below already falling longer-term interest rates.  In other words, after central banks have tightened monetary conditions too much, policy rates need be cut.

Let’s look at the Canadian yield curve and what its is forecasting.  The 6-month T-bill rate of 1.65% is about 0.25% higher than the 5-year rates of 1.40% and the 10-year rate at 1.52%.  The yield curve is inverted, and TRI would expect Canadian 6-month rates to fall well below 1%.

The US yield curve structure is very similar, but each point in the curve is approximately 0.80% higher.  The story with US rates remains consistent with Canada where TRI expects a number of rate cuts in 2020.

The market is now pricing a rate cut in Canada by Sep 2019 and the US in Jan 2020.  This rate cuts will re-steepen the curve signalling an increasingly high chance of material economic weakness into 2020.

Source: Bloomberg

10% Total Return from Can 10 year Bond

From a total return perspective, if an investor bought Gov’t of Canada 2.25% 2019 bonds in Nov 2018 which were priced in the $97 range was interest rates were north of 2.5%. The bond is now trading up in price (opposite of yield move) to the $106 range and would have obtained a return of over 10% from capital gains and income.  As the business cycle turns, there are opportunities for large price moves in longer dated fixed income securities as interest rates fall.

Source: Bloomberg

Currencies – USDCAD

The USDCAD moved higher into the 1.34 range with several higher lows since the Jan 31 daily cycle low.  We are now in the timing band for an expected daily cycle low between Mar 24 and Apr 7.  TRI would like to see the 1.31 level held on the move into the daily cycle low.  The weekly and monthly trend for the USDCAD remain positive, with expectation of higher levels into 2020.

Source: Tradingview.com



* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.

Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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