Relief Rally?


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Rabbie Gill

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Macro Market Summary

Risk markets are likely to bounce into the Spring of 2019 as many markets are now exhibiting oversold conditions.  Does this mean we move directly higher from here? Not necessarily, while most of the downside for the short term is likely behind us, we are still waiting for confirmation the current correction is over.  It is important to stay nimble and defensive into February and March.

TRI has been adamant the Bank of Canada and the Federal Reserve were on the verge of a policy mistake by continuing to increase short term interest rates into a slowing economy.  Lower global PMI prints, slowing trade and lower earnings growth estimates pushed the market to price in a 7% chance of March 2019 US interest rate cut.  Yes, a rate cut, not further interest rate hikes. The markets will likely force the central banks not only to the sidelines, but to eventually provide more stimulus.

Market Trends

  • TRI cannot rule out a lower low in the 2,250 to 2,300 range for the S&P 500 into February / March, before a relief rally back to the 2,800+ level into the Spring / Summer 2019
  • Government of Canada bond yields (and US bond) yields have peaked and will likely be range bound, as they back up in a counter-trend move over next several weeks
  • We believe that with a counter-trend bounce higher in risk assets, the USDCAD can weaken to the 1.30 to 1.32 range

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on January 4, 2019.  Please see the TRI Overview document for further information.

Source: Fieldhouse Capital Management

Economy – Headwinds Increasing

Most global equity markets finished lower in 2018, with many falling over 20% from their cycle highs.  Many investors and clients we speak to have been spooked by the recent market action and appear to be paralyzed by the volatility, conflicting market information and rapid sentiment shifts.  At TRI we continue to follow our investment process and signals that oscillate around the business cycle.

TRI believes 2019 will be challenging for most traditional investors as co-incidental and lagging economic indicators are likely to print decent numbers given, they peak with or after actual economic growth, while earnings growth rates are moderating leading to a repricing of risk assets.  Through this volatility the drivers of economic growth remain constant; the cost of money and cost of goods.  The relative change in these two economic variables drive capital flows into various asset classes. These indicators are showing increasing headwinds into late 2019 and early 2020.

TRI adheres to the market adage that “technicals lead the fundamentals” of markets.  That is, price moves before it is clear what the fundamental driver of that move might be.  The market action of most assets classes in 2018 were a textbook example of this.

Global economic growth, as measured by the JP Morgan Global Composite PMI eased to a 27-month low in December 2018 with a reading of 52.7.  This is the lowest reading since September 2016, which was just months prior the US election.   (Note: 50 reading indicates no change over the prior month). As seen in the chart below, the indices have been on a downward trajectory since early 2018. A main driver of this slowdown has been the Eurozone currency zone which had weakest prints since November 2014.


The slow down in economic growth and trade is also seen below with South Korean exports falling 1.2% in December, which has been highly correlated to global earnings growth.  Slowing earning growth does not bode well for risk asset valuations and we have seen global equity markets fall substantially into the end of December.

Source: Bloomberg

The combination of lower global PMI prints, slowing trade and lower earnings growth estimates have reduced, I mean eliminated, the markets expectations of further US & Canada interest rate hikes in 2019.  In fact, on January 3, 2019 shortly after Apple’s pre-announcement of lower revenue and earnings the fixed income market in the US had priced in a 7% chance of March 2019 rate cut.  This is major change from less than a month ago when the Federal Reserve raised short term interest rates by 0.25% and expecting several further interest rates hikes into 2019.

Federal Reserve Chairman Powell has now changed his tone stating, “Fed policy can change and is ‘prepared to adjust policy quickly and flexibly’ while adding that ‘there is no preset path for policy’, confirming that the Fed is “listening carefully to market.” And “the Fed would adjust the balance-sheet normalization policy “if needed” and if it becomes an issue for the market and economy.  Powell says that “markets are pricing in downside risks” even as he sees no major risks in the economy.

Risk markets are likely to bounce into the Spring of 2019 as a lot of bad information has been priced into the current correction.  Does this mean we move directly higher from here? Not necessarily, while most of the downside for the short term is likely behind us, we do not yet have confirmation that the current correction is over (first phase). We remind our readers bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend. TRI will monitor the market on a day by day and week by week basis to optimally position our portfolios and models.

Equity – Weak Market Internals

Throughout 2018, TRI had been warning the weak price action in equity markets and the probability of a 20% to 25% correction for markets such as the S&P 500.  The sharp sell off from the S&P 500’s October high to it’s December low was just over 20%, and TRI admits this first phase lower was sharper and quicker than we had estimated. Let’s review cyclical price action.

The S&P 500 made is latest 4-year cycle low in February 2016 and we expect the cycle to bottom in the 2020-time frame. The 4- year equity cycle consists several smaller degree annual cycles. The S&P 500 made its most recent annual cycle low in February 2018, which also coincided with weekly and daily cycle lows. The S&P 500 rallied to make higher highs and higher lows into it’s annual cycle top into October 2018.  As seen in the chart below, the rally in to this high was accompanied by weak internals, lower highs of our indicators compared to higher highs in the S&P 500 (aka negative divergences).

Probabilities of the 4-year cycle top increased as prices began to fall in October 2018 and make a series of lower highs and lower lows. The first piece of evidence was the bounce out of the Oct 29 low failing to make new highs and rolling over.  This failure led to the break of previous February 2018 annual cycle low.  From there the S&P 500 fell into December 2018 triggering a bearish daily, weekly and annual cycle trends.


The S&P 500 made daily cycle low on December 26, 2018 and we expect higher prices until we see a daily swing high and turn down in our cycle turn indicator.  Our timing band for the weekly and annual low runs between December 2018 and March 2019. We cannot rule out a lower low in the 2,250 to 2,300 into February / March time frame before a relief rally back to the 2,800 level into the Spring / Summer 2019.  We will see if price action is strong enough to turn this daily cycle to have a right translation along with weekly bullish trend.

In Canada, the TSX Composite prices daily, weekly and annual trends were bearish into the end of 2018.  The TSX peaked in July 2018, almost 3 months before the S&P 500, with a left translated cyclical structure. The annual low is expected between December 2018 and March 2019.  As with the S&P 500, until prices confirm the December low, we need to be cognizant of another push lower in before we get a larger relief rally into the Spring/Summer.


TRI anticipates the equity markets are in the midst of finding a short-term bottom, with a relief rally into the spring / summer, before a more protracted low into late 2019/2020.  TRI advises investors to take this relief rally to focus on capital preservation, defense and liquidity in anticipation for better entry points in the late 2019 / 2020 time period.

Fixed Income –Rates Likely Peaked for This Cycle

Government of Canada bond yields (and US bond) yields have likely peaked and can head lower into early 2020.  The Canada 10-year bond yields have falling 0.75% from their October 2018 highs. On a weekly basis the move lower in yields have become oversold.  The Canada 10-year bond yields have currently bearish (lower) trends for the daily, weekly and annual cycles.


Yields moved lower as equity and commodity price weakness shifted capital into the safe-haven of government bonds. The risk-off environment can be linked back to weakening global growth.  In addition, the market has changed its expectation of inflation, growth rates and how much the Bank of Canada and Federal Reserve can raise rates.

Cyclically, we can expect a daily cycle to bottom shortly and the potential for a weekly cycle bottom in rates as well. The move higher in rates, will likely be a counter-trend move higher before we see rates fall again into the end of 2019.  Please see the chart above and the potential trend channel for rates to trade in for the next several months.

Currencies – USD Correction

The DXY Index (US dollar) moved peaked in early December 2019 in its 9th month of advancing out of the February 2018 4-year cycle low.  The DXY did not make a higher high relative to S&P 500 late December lower low, which is telling into the short-term transition that is happening under the hood of risk asset markets.  DXY is on a daily and weekly bearish trend signal and we expect a weaker DXY into its annual cycle low into the February to April 2019 cycle low timing band.


The USDCAD peaked just below the 1.37 level on January 4, 2019 and has reversed sharply lower to below 1.34 level triggering a daily bearish signal.  As seen in the chart below, the USDCAD is consolidating in an ascending triangle formation since mid 2017.   If the Bank of Canada holds steady with interest rates while equities and commodities move higher in a counter-trend bounce higher, then we can see the USDCAD weaken to the 1.30 to 1.32 range over then next several months.


Commodities – Weakness

Commodities, as measured by the Thomson Reuters/ CRB Index was lower into the end of 2018, with daily, weekly and annual cycle bearish signals.  As seen in the chart below, the CRB index has been range bound below the 2009 lows.  CRB is in the timing band for its 3-year cycle low, that previously bottomed in January 2016.    Short-term, like equities, the CRB is deeply oversold and ripe for a bounce higher.  On January 3, the CRB triggered a short-term daily bullish signal, and further strength followed on Friday.


Oil fell to the low US$40’s per barrel in December after failing to follow through on the November short-term consolidation.  Crude oil is the biggest component of the CRB Index, therefore the are in sync. The move in oil to the low US$40’s per barrel appears to be a more complete move to the downside, and we have seen a short-term bullish signal triggered. A right translated daily cycle and weekly bullish signal formation will be positive for oil into the Spring / Summer 2019.


* 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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