First things first. This, by all probability, is my last detailed weekly update. I am in the process of writing a series of books on trading, which are to capture all that I said in this and other posts and forums. I will definitely update this site when I start publishing these.
Back to the update.
We left the world as of my last weekly update in what I anticipated to be a “rolling consolidation.” If you were long the NASDAQ composite this last Friday, the word consolidation may not be your first choice of words. After all, a 2.6% drop is noticeable, regardless of what your portfolio sigma, beta and alpha are.
In the larger view of things, the action was not that significant. After all, yes the Composite did touch the slow moving weekly average, but that is something it does almost on monthly basis. Further, the weekly averages did not consolidate (yet), meaning it is still a consolidation and not yet a correction – per my naming schema.
For the DJIA and the S&P 500, the action was not more significant than the normal consolidation-of-the-month action. If anything, the weekly charts for both did not even register a blimp. Yet, as we noted in multiple recent updates, what is concerning here is that the interest rates and the gold are starting to act as if in a flight-to-safety mode. Noting that in addition that implied volatilities on the like of Altria (MO), Annaly (NLY), AT&T (T), Verizon (VZ), and many of the other high-yield aristocrats also climbed, I would think that the impression of a general flight-to-safety is the right impression to walk away with from the last few weeks. Considering the rolling consolidation has been going on for almost a month now. Never the less, the verdict of the jury is not there yet, since it was mainly a NASDAQ Composite plight.
Further, the Composite is sitting about 14% above its slow monthly moving averages (Monthly EMA-21),. On one hand, this is still high in historical measures. On the other hand, this is more or less what is at risk in the case of a decent market correction, and hence, those with profits may decide to take them, effectively making it a self-fulfilled prophecy.
The economic numbers were generally good. In particular, employment was excellent, even though some considered it to be below quality and/or expectations. I like to think adding a couple of hundred thousand jobs in a month is good. What makes it even better is the significant revision of last month’s numbers. And yes, the PMI numbers were somewhat disappointing, but in reality the market celebrated that and hit new highs earlier in the week.
My original stance is still
- Interest rates, in the coming couple of years, are on the way up
- Gold prices are on the way down
- In the lack of a true impending correction or a rolling consolidation, equity markets are heading into the overpriced zone
Relating to the first point, we note that the yield curve is now flattening, note that the 5-year treasury rates have climbed 37% from their year-ago levels, the 10-year about 16%, while the 30-year is about flat (only 3% higher).
As for the second point, it still holds, as the action this week did not dent the downward-pointing technical patterns for gold at all.
Now for the third point, my oscillator closed at 43%, after hitting 75% earlier in the week; the closing number is in the bought region, while the weekly peak was in the overbought region. The longer term signals are still strong. As such, it is not clear to me whether this is a continuation of the “rolling consolidation,” which currently it still seems, or this is the beginning of a full-fledged correction.
Most sectors had a good week, save Friday. As such, the longer term trends were still good, but the shorter term trends got impacted by the action on Friday. I cannot see an impetus for a crash, except for some unseen natural or geopolitical phenomenon. Further, the fact that the index overextended most (the composite) is the only one seriously suffering is actually a good sign, since that was truly needed.
All in all, the Fed, Gold and Treasuries should show us whether this Friday’s action is to be continued or it does have legs. If the reversal from my expected patterns continue, then this would be a full fledged flight to safety. This should mean that the index extended most – Composite, S&P 500, and DJIA in that order – will suffer most.
Disclosure: It is important that you understand and agree that all information provided in this newsletter rely on publicly available data and tools with no guarantees of quality or suitability for any purpose, and that I can be long or short in any of my trading-set equities, at any time, with or without regard to indicated trends and described analytics, and that I do not give buy or sell or any other financial recommendations, and that any and all actions based on this commentary are solely the responsibility of the reader.