Uncategorized, Weekly Update

Markets Shifting

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Published November 8, 2019


As the calendar has turned to the seasonally strong fourth quarter, markets appear to be at important crossroads. After leading the market all year, the more cautious low-volatility stocks might be finally giving way to strength in the more economically-sensitive, higher-beta stocks. The boxed area below shows how high-beta stocks were leaders during the last market rally in 2017.

Strength in the higher-beta stocks

This is happening at the same time as the index of market nervousness – the VIX – tests its typical support level (dotted line on the chart below). The box below indicates how the VIX fell below 12 during the market’s last rally in 2017.

Volatility index is close to support line

We also find the yield on the U.S. Treasury bond at its lower bound. If history repeats, then yields should head higher from here, a move that would provide fuel for financial stocks and encourage a shift away from the “safety” assets of utilities and real estate, which have been strong all year as interest rates fell.

Yield on the U.S. Treasury bond is at its lower bound

Strength in financial stocks would also boost the small and midcap stocks that have languished for two years now. If they can bust higher, it could be a big move after such a long consolidation period.

Small and midcap stocks at the end of their consolidation period?

In brief, markets appear ready to make a notable move – and that move, technically speaking, looks to favor higher prices. Either way, our models will continue to light the path for us.

Market Update

While in the thick of earnings season, investors were nonetheless preoccupied by trade chatter. Stocks pushed higher by +0.4% Monday in response to a number of Trump Administration officials issuing positive statements regarding the “phase one” trade deal with China. Stocks ran in place Tuesday and Wednesday, even as the monthly service sector reports in both the U.S. and Europe showed good growth. Stocks resumed their rise with a +0.3% move Thursday on strength in semiconductor shares following a solid earnings report from Qualcomm (QCOM). Investors also received further good news on the trade negotiation front Thursday with Chinese officials suggesting that existing tariffs could be “rolled back” while the deal is finalized. President Trump splashed some cold water on the rollback idea Friday leading stocks to a soft open. However, investors bought the slight dip as strong earnings from Disney (DIS) and a solid consumer confidence report provided support. Stocks closed higher by +0.3%.

Stocks added a fifth straight week of gains with the S&P 500 (SPY) rising +0.91% to close within striking distance of 3100. The Nasdaq 100 (QQQ) lifted +1.19% while small-cap stocks (IWM) tilted +0.62% higher.

Warm wishes and until next week.