By
Cam Hui
:
As the stock markets weakened on Friday, the SPX closed just
under its 50-day moving average, an important level of technical
support.
(click to enlarge)
The weakness was confirmed by the Dow Jones Industrials
Average:
(click to enlarge)
Is it time to sell everything and turn more cautious?
What the bears need to do
Here is what I think the bears need to do in order to gain the
upper hand. First, European markets are still holding above their
50-day moving averages and I would like to see them decline below
the 50-day MA to get more bearish. Here is the FTSE 100:
(click to enlarge)
...and the Euro STOXX 50, which is an excellent barometer of
stress:
(click to enlarge)
Market psychology needs to get more bullish
Moreover, investor psychology needs to get more bullish. The latest
AAII readings show bullish sentiment retreating in the face of a
market advance (via
Bespoke
):
(click to enlarge)
The VIX Index needs to stage an upside breakout above 20:
(click to enlarge)
Moreover, the media was full of stories about the Crash of 1987
and
how a crash could happen again
. This is not the kind of psychological backdrop from which major
declines begin.
Risk appetite is not in retreat
Many measures of risk appetite are not in retreat. Consider the
NZD-JPY cross rate, which is a key barometer of the carry
trade:
(click to enlarge)
The ratio of junior gold mining stocks to the more senior golds
is showing a range-bound consolidation pattern:
(click to enlarge)
Here in the Great White North, the ratio of the more speculative
TSX Venture Index to the more senior TSX Index is rising,
indicating rising risk appetite.
(click to enlarge)
Until we see a broad retreat in risk appetite, I am not ready to
declare this bull run over.
Earnings and the economic cycle
What about earnings? It is true that this Earnings Season has been
disappointing. Josh Brown put it aptly when he wrote:
How's earnings season going? Only 42.3% of S&P 500
reported companies beat Q3 revenue expectations and 57.7% have
missed. 64.9% have beat EPS estimates. Sucks.
He concluded:
So, ask yourself:
Is the weak earnings picture for Q3 the start of a new trend
toward lower profitability or a bump on the road to full
recovery?
Simple question. It will answer all.
Mr. Market's conclusion so far can be found in the relative
performance of the Morgan Stanley Cyclical Index against the
market.
(click to enlarge)
The relative uptrend is still intact, indicating that it
believes that Q3 earnings are only "a bump on the road to full
recovery".
Bottom line
: Until I see a broader retreat in the major averages, reduction in
risk appetite, the public getting bullish, and relative
underperformance of cyclical stocks, I am still inclined to give
the bulls the benefit of the doubt.
Speaking tactically, however, we may have some weakness this
week. Notwithstanding the minor violation of the 50-day moving
average, which could set off some selling, last week was option
expiry week and option expiry week tends to have a bullish bias
(and it did - up until Thursday). The week after (this week) tends
to have a mean-reverting bearish bias. Nevertheless, with an FOMC
meeting and many important earnings reports from major bellwether
stocks coming out this week, there will be lots of volatility. My
inner trader is inclined to buy into any weakness while keeping an
eye on the bearish tripwires that I outlined.
Disclaimer
: Cam Hui is a portfolio manager at Qwest Investment Fund
Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as
an outside business activity. As such, Qwest does not review or
approve materials presented herein. The opinions and any
recommendations expressed in this blog are those of the author and
do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog
constitutes a solicitation for the purchase or sale of any security
or other instrument. Nothing in this article constitutes investment
advice and any recommendations that may be contained herein have
not been based upon a consideration of the investment objectives,
financial situation or particular needs of any specific recipient.
Any purchase or sale activity in any securities or other instrument
should be based upon your own analysis and conclusions. Past
performance is not indicative of future results. Either Qwest or
Mr. Hui may hold or control long or short positions in the
securities or instruments mentioned.
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