The Long (Bond) Goodbye

October 7, 2018

Weekly Market Outlook

By Keith Schneider


Global equities got smoked this week except for Brazil which jumped on news that a right-wing populist will most likely be the next president. The NASDAQ100 dropped -2.89% and the IWM swooned -3.79%.  October is generally a decent month regarding historical returns for stocks, although occasionally October is famous for some exceptions named after a bird.

The catalyst for the selloff in stocks was US treasuries which broke down under long term support.  The Fed set expectations for more hikes. The one positive is that stocks relative to bonds did not capitulate, keeping our risk gauges in neutral ground

On closer examination, there are only 3 (US, Canada, Israel) countries out of the 30 or so that we monitor that have any meaningful gains over the past 6 months, while the balance have negative returns. One could conclude that populism currently sweeping the globe has not trickled down or helped the global economy. The few positive exceptions are tenuous at best in the short term.

Value stock’s decade long slumber versus growth is on the verge of confirming a major shift and indicates a focus to more conservative plays. Gold Improved against stocks and is looking like a bottom is in the making.

On a more positive note for the buy and hold investor, long term trends are still intact as the 50- and 200-week moving averages show strong positive acceleration while momentum is diverging. Until we get confirmation in price action, it is just worth keeping an eye on.

This week’s takeaway is that it is crucial that you get your analysis in sync with your objectives as currently short-term readings are negative while longer term price action remains intact.

The highlights of this week’s market action are the following:

  • Interest Rates rose sharply and have confirmed major reversal of the long-term downtrend in rates
  • Momentum has broken down for US Equities on the daily charts (Dow Industrials and value stocks are the exception) with double tops in place for SPY and QQQ
  • All sectors in the Modern Family are underperforming the S&P 500
  • The New High/Low Ratio is very weak
  • Sentiment Gauges are on the cusp of multi-month break-out
  • The Agricultural sector is trying to bottom

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