What You See Is What You Get
In an investment strategy report that I produce each week for clients I review the market trends of the four major global markets (US, Europe and Asia, emerging markets and frontier markets) as well as the 10 US economic sectors seeking to identify the established and emergent price trends of each. I evaluated three time periods in an effort to see if there is one cohesive trend that is applicable to all markets and sectors. The data reviewed the market price and its cumulative result in which price over time produces its moving averages and its momentum. I produce these results in the form of a table and, from time to time, reference them in individual charts with comments accordingly. In this week’s report, let’s look at the primary market, the US, in the form of its primary sector, large cap stocks, to see how such analysis informs us as to the trend of the global equity markets.
The Long Term picture is a mixed one with the Mega Trend1 (price and its moving averages) in bullish mode while its momentum reading (MACD) is negative.
Ever since price has moved into a sideways pattern since the beginning of 2015, momentum has reflected this with a generally downward bias.
Contrary to the long term, the Intermediate Term picture is not mixed at all. While ragged at times, the current conclusion is bullish in the Mega Trend and positive in momentum (MACD).
There have been periods, as you can see, when the story looked poised to turn but while a bearish call was at hand the call had to be moderated by the fact that the long term was not confirming what the intermediate term was saying.
The most volatile of the three time periods is the Short Term. For all the obvious reasons, price over a short period of time will swing most dramatically. Its usefulness is less in the area of making the major trend call and more in the way of entry and exit points within the major trends established in the long and intermediate term periods.
(Note: all charts and data are as of the close of trading on Friday, June 17.)
At this point, a couple questions are in order.
· What is the best way to use the three time periods and their analysis?
· Does what I have described apply to other markets?
The best answer to the both questions is rooted in the investment principle of divergences2. Markets synched up and performing in unison – most specifically the long and intermediate term – act their best and produce the most consistent results when so. To illustrate, here is the table that I produce each week that lists the major markets and the 10 US economic sectors over their three time periods.
At the bottom of the table are the major markets. For the US large cap sector (S&P 500) you can see in text what I have shown in chart form.
The conclusion is clearly a mixed one with Mega Trend and momentum generally but not completely synched up to each other. Therefore, is it any wonder that the current market action has stagnated in the 18 month sideways action we have experienced?
Investment Strategy Implications
There are more “sophisticated” tools to use, however most of them are simply variations of what I have provided here today: price and its expression over time. There are many reasons why equities do what they do as the price action is predominantly (but not always3) rooted in the real economy and its three main inputs in the valuation model – earnings, growth of earnings, and a discount rate applied to the future growth rate of earnings. The conclusion reached from the market action described is a conflicted one with some signals bullish, some bearish, some positive and some negative. The results play out in the form of a sideways market with no sustained upward or downward trend in place: hence the sideways trend established.
Will this last indefinitely? Of course not. Stagnation is not what markets do for very long. Eventually a breakout from the sideways trend – to either up or downside – will occur. Unfortunately, there is no real way to say which will be the outcome. Hence the recommended 70% equity exposure in the Model Growth Portfolio4.
Eventually, the interpretation of what is happening in the real economy and the impacts felt from the major trends and themes globalization and technological change will result in a direction that will be sustainable. Until then, what you see is what you get: a mixed picture resulting in sideways stock market action we are locked into – for now5.
1 The Mega Trend is a price trend tool that I created several years ago. It takes the so-called "death cross" and "golden cross" to the next, more complete level by requiring that the moving averages be sloped in the direction of the cross.
2 Price action across various markets and time periods and how they perform compared to each other.
3 Certainly not over the short term.
4 The Model Growth Portfolio is a feature of the investment strategy report and is offered as a guide to suggested investment positions.
5 The sideways action pertains to the US only. The other major markets are in primarily bearish trends with some signs of positive tendencies but not enough to suggest a trend change.
Disclosure: Accounts managed by Blue Marble Research may presently hold a long/short position in the above mentioned issues and their inverse comparables.