Another Trap Ahead for Both the Bears & Bulls?
The topping process for equity markets is just that, a process. The process catches many investors off guard as the numerous twists and turns whipsaw their conviction and positioning. TRI’s anticipatory indicators continue to point to significant economic headwinds in the year ahead. TRI believes this will result in risk assets being re-priced materially lower. But before we get there, the risk markets appear to be setting up two more traps, one for the bears and then one for the bulls, before the larger degree sell-off materializes into Fall 2019 / Winter 2020.
Bulls and bears alike have become more polarized from the current market action. TRI is neither a perma-bull, nor a perma-bear. TRI’s endeavors to provide independent and objective market insights and portfolio management through a proprietary and repeatable investment process anchored around the business cycle.
TRI process is probability based, as there are not guarantees or certainties with investing. At times TRI might be early or late on call and will openly acknowledge misses or changes in our expectations as new information surfaces. TRI’s goal is to protect our client’s capital and grow it regardless of bullish or bearish market conditions, often contrary to consensus forecasts.
What exactly does another trap for both the bears and the bulls mean?
Well, TRI came across this sentiment index published by Nomura showing the similarities in investor sentiment between the 2006-09 period and Dec 2016 to present. If the pattern proves to play out in a similar fashion, then we can expect shorter-term lower prices (1), with a medium-term bounce of higher prices (2), before the longer-term flush of lower prices (3).
Nomura’s sentiment based outlook is consistent with TRI Cycles & Trends outlook, where expectations for a daily and weekly cycle low into mid-to-late June with lower prices (1), which will be a bear trap as too many investor’s jump on the bear train only to be whipsawed by counter-trend bounce higher (2). This counter-trend bounce higher in a daily and weekly cycle degree should have the bulls chanting new highs and all is well, only to be run-over by a lower low in (3) of a larger monthly cycle degree low. As the market does, it is setting up to cause the most investors the most pain.
TRI Cycles & Trends
The S&P 500’s last daily cycle bottomed on Mar 25 and the current daily cycle topped on May 1. TRI expects this daily cycle low into late Jun to coincide with the weekly cycle low. The previous weekly and monthly cycle low completed in Dec 2018. Once we have a daily and weekly cycle low in place, expectations are for the up portion of the moves to be counter-trend move which will fail and/or peak in a left-translated manner.
The S&P 500 Index has held up better than other global market indices. The Dow Jones Industrial, Nasdaq, Russell 2000 and the Emerging Markets are all weaker than the S&P 500. .
Short- and medium-term market moves can and are trickier to forecast. The alternative of the set-up of a bear and bull trap mentioned above is that the daily and weekly cycles bottomed on Jun 3 and we will not get the first bear trap of lower prices into late June. This means a new weekly cycle has begun and we are likely just left with the bull trap set-up and prices move higher in (2) from here.
Emerging markets are weak.
The EEM ETF chart is very concerning. In May 2019, prices were lower completing a monthly swing high with a turn down in the TRI Cycle Turn Indicator (not shown here). If prices are not able to surpass the April highs, which TRI believes is unlikely, then the current monthly cycle has topped after a 6 month move higher. We can expect lower prices into the monthly cycle low that in the Sep 2019 to Feb 2020 time frame. The monthly cycle low will likely break below the Oct 2018 level.
US PMI’s are fading…
TRI believes the business cycle and its various phases driver the level of economic growth, which in turn drives asset valuations. As seen in the chart below, the US PMI recently printed a 50.5, a level lower than witnessed in early 2016. The last 3 rates hikes and the recent escalation of the trade war has not yet filtered the economic supply chain, as we are likely to see lower, not higher PMI prints in the coming months.
Here come the Central Banks…
In recent days Fed Chairman Powell and Governor Bullard have made dovish comments regarding rate cuts and other extraordinary policy tools that are now needed. A far cry from Oct 2018 when the Fed was adamant about several further rate hikes. More central bank accommodation, lower interest rates and stimulation are coming soon.
Unfortunately, central banks don’t control the business cycle as they are reactive to its ebbs and flows. Its natural oscillations are driven by cycles of rising and falling cost of goods and cost of money.
TRI reiterates, please know your time frame and your risk profile.
TRI Cycle & Trend Signals*
The TRI Cycle and Trend Signals are shown below. These signals are as of market close on Jun 3, 2019. Please see the TRI Overview document for further information.
* 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.