Déjà vu is a French phrase meaning “already seen”, and it refers to the experience of feeling sure that one has witnessed or experienced a new situation previously.
My Grand Mother used to say the feeling of Déjà vu is either kind guidance or a cruel joke.
With markets seemingly stuck in a range, or as we penned in our last missive “Stuck in the Middle With You“, the later of the 2 options may be more appropriate in describing the equity markets for the past few months.
This can be seen in the primary equity indexes (Dow and S&P500) topping the first day of April 2012 and as of now bottomed around the second day of June 2012 creating a trading range that has lasted for roughly 5 months. Hence the Déjà vu.
Currently, we sit at the top of this range wondering……What now?
Trading ranges are funny places to be within, a bit like the twilight zone as news and investor sentiment swing from highs to lows quicker than a monkey after a Chiquita delivery truck.
Trading ranges can be a sign of Bullish things to come or they can be the beginnings of something more ominous like a top in markets. So how is one supposed to know the difference?
While there are no certainties when it comes to markets there are possibilities and probabilities. The goal of any investor is to create a skill set that helps them focus on the probabilities as opposed to possibilities.
For us at Quiver we turn to the “technicals” to help us determine what the next move may be within markets. Before we open up some of our technical resources to you let’s also make a quick mention of what has happened the last few months within the fundamentals of the economy.
In the past few months the economic numbers in the US, Europe and China have shown signs of slowdown. Most of Europe is in recession with a few countries in a depression. China has seen 8 straight months of slowing numbers (according to David McWilliams) and have begun taking action to spur their economy by lowering rates. The economic recovery of the US appears to be losing steam with GDP coming in around 1.5% (according to Bloomberg). It was only a few months back when The FED and most economists were predicting growth of more than 2%. As always things continue to change and for now the bottom line is that the fundamentals are telling us that our concerns should be raised and we may want to consider ways to adjust our portfolios accordingly.
The fundamentals can and will change and considering all the negative news the market has digested over the past few months it is impressive that the market has stayed stable.
Granted most of this market stability is on the back of hopes that The Central Banks of the World will once more unite to print more money or do more rounds of QE, TARP, LTRO or whatever new acronym they are able to come up with to provide some stimulus to markets.
We shall see if markets get what they want. If they do then the fundamentals won’t matter and equity markets could bolt higher on the back of the liquidity provided. If this is the case then investors will want to focus on the commodity and small cap names to benefit from the central banks providing more sugar to stimulate the spoiled children of Wall Street.
On the technical side, markets are showing some interesting negative divergences that should be a warning to all investors.
To help frame this let’s cover a little market knowledge for our readers. Typically (not always but more time than not) new bull markets are accompanied with an increase in the strength of advancing stocks vs declining stocks so this is one technical metrics we will watch to get a feel of how strong a markets move is. In addition, new bull markets typically have participation by a wide range of indexes and industries. For example, when institutional players are feeling frisky and are willing to take maximum risk they will be buyers of small caps. In addition, when the belief is that the economy is expanding you typically will see an increase in transports as well. Essentially a sign of a healthy market is when all sectors and indexes are moving in tandem. When you see this it can be a sign that you may be rewarded for the risk you take in markets.
On the flip side, if there is a time where the primary indexes (DOW and S&P) are moving higher at a faster pace than the secondary indexes (small caps and transports) we call this a negative divergence or fragmented market. In most cases fragmented markets are not what you find at the beginning of a new bull run. This doesn’t mean that the market will not continue to move higher or that those lagging sectors of the market won’t play catch up.
However, a fragmented market should be a warning that you should wait to extend risk until there is more cohesion within market sectors and indexes. To give you a visual of how a fragmented market looks I offer these charts provided by our friends at Elliott Wave International.
This first chart gives us a picture of the ratio of advancing vs. declining stocks. Take note of the down trending channel represented by the red line. This is an indication that the current rally could be waning. A waning market does not mean the market cant go higher but it should be a warning sign.
These next two charts give you a visual of the negative divergences between the primary indexes ( DOW or S&P) and the secondary indexes (Transports and Small Caps).
After two decades of observing markets I have learned that calling a market top is always tricky business. Market tops take time to develop as investor psychology slowly changes from risk taking to risk aversion. While these technical signals should raise concern they do not guarantee that the market wont move higher as we saw a similar setup in early January of this year.
Regardless the signs are telling investors to be cautious. In our opinion this in itself creates a great amount of opportunity for investors that have proper diversification and a blend of both fundamental and tactical strategies within their portfolio
Newport Coast Securities
Colby McFadden and Quiver Financial is a Registered Representative and an Investment Advisor Representative with Newport Coast Securities, Inc.,.a Broker/DealerMember FINRA / SIPC and an SEC-Registered Investment Advisor. Securities offered through Newport Coast Securities. Investment Advisory Services Offered through Newport Coast Asset Management. The opinions expressed are those of Colby Mcfadden and Quiver Financial as of August 14th, 2012 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a SEC registered investment advisory
Bridging the Gap Between Opposition & Opportunity
Are you looking for ways to create income and growth for your investment portfolio?
Are you wondering how you may be able to invest in these uncertain times?
Join us for a special event on August 23rd in Irvine where we will discuss:
How to bridge the gap between Opposition and Opportunity in today’s market.
Learn what opportunities exist and how does an investor protect himself from the potential issues that may lie ahead?
See how to use some of the tools professional money managers use to protect their portfolios.
All this and more will be discussed as we look to Bridge the Gap between Opposition and Opportunity
Thursday, August 23rd 12:00
Lunch will be served
Newport Coast Securities
18872 MacArthur Blvd, 1st Floor Irvine CA 92612
RSVP by clicking here or call us at 949-492-6900 ext 1001
We look forward to seeing you there.