Risk Gauges Retreat Despite Rally

November 11, 2018

Weekly Market Outlook

By Keith Schneider


Despite the pre and post-election rally that resulted in 3 out of the four key US stock market indexes gaining nicely for the week, our risk gauges thought otherwise, slipping back to neutral territory. For tape readers, a failure here would be very disconcerting. October’s drop is now the second 10% drop this year. That is not a common occurrence when that manifests in all the major benchmarks.

Two drops of 10% in less than a year has only happened 8 times since 1973. Each one resulted in major declines and recessions, except in 1987, although that meltdown was no walk in the park either. The crash in housing stocks and weakness in Semis is ominous as well.

The post-election rally was impressive. But by Friday’s close, those gains that were initially led by FANG stocks, lost several molars. Both Netflix and Facebook closed lower than where they closed on election day.

On a “somewhat” positive note, the Dow Industrials has assumed leadership and remains in a bullish phase, with strength primarily coming from consumer staples and big cap healthcare stocks. Mickey Mouse is the happiest we have seen him as Disney approached all-time highs on Friday after earnings.

This week’s takeaways are:

  • The Dow Industrials regained a bullish daily market phase leaving the IWM, the QQQ’s in much weaker positions
  • Sentiment Indicators (negative for stocks) remain elevated, while short term market internals are overbought
  • Sector rotation indicates Mr. Market is bracing himself for a serious market downturn and even Grandma Retail (XRT) the strongest sector, gave up its attempt at a bullish phase
  • Safety plays such as big cap consumer staples and healthcare gained on Friday while equites faltered
  • High Yield debt (HYG or JNK) needs to hold current levels or will be yet another red flag for stocks
  • Risk Indicators which all turned green post-election, gave up its gains by Friday’s close and turned neutral (link to our quant based model that use on our risk Indicators https://www.marketgauge.com/alpha/ )

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