Risk On Gauge Shifts With Many Markets At Tipping Points

September 4, 2017

Weekly Market Outlook

By Geoff Bysshe


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Last week the equity markets had a remarkable reversal of fortune as the SPY and QQQ moved from breaking down under major institutional support levels such as their 50 moving averages, to rebounding to new all-time highs.

Additionally, the MarketGauge Risk On / Risk Off gauge changed to green, and several major asset classes ended the week with charts in pivotal positions.

blankblankThe rally in equities began on Tuesday, was fueled on Wednesday with positive GDP news, and continued through lackluster economic data on Friday.

Wednesday’s positive news of the strongest year-over-year quarterly GDP growth in two years is illustrated in the Wall Street Journal’s chart of GDP below.

This news comes a week after another front page article on August 24, 2017 in the Wall Street Journal reported, “For the first time in a decade the world’s major economies are growing in sync… All 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) are on track to grow this year, and 33 of them are poised to accelerate from a year ago…”

As illustrated by the chart to the right this is the first time since 2007 that all 45 countries are growing.

The Market Gauge Big View Risk On / Risk Off Gauge Turns Bullish

blankAs you can see image the image to the right, the gauge has been bearish for at least a month, and this week it turned bullish.

The gauge is a proprietary calculation using many of the relationships our Big View service charts in the “Risk On/Off” section.

While it’s not a buy/sell signal by itself, it has an impressive track record of identifying when to be bullish or bearish on stocks.

If you’re a regular reader of this weekly MarketGauge Market Outlook column, then you you’ve seen via the accompanying video that we’re about to release a new expanded Big View service that enables us (soon you too) to have a ‘top down’ assessment of how bullish or bearish the markets are based on many different indicators and intermarket relationships.

Where Are The Big Trades If Global Growth Accelerates?

This week’s market action and GDP news prompted me to take a look at the key asset classes that might shift or accelerate in their trends if global growth accelerates.

What I found was exciting! Many of the intermarket relationships that are driven by growth, interest rates, inflation, and currencies are at major long-term technical inflection points.

The analysis this week is all based on weekly charts so we can see monthly and quarterly trends, and the insight revealed will guide my big picture view for the balance of 2017, maybe longer!

This week’s Market Outlook, therefore, will not include a video, because I wanted to enable it to be downloaded.
Click here to download this post as a PDF.

Do Stocks Trend Based On Anticipated GDP Trends?

GDP is not an easy (nor recommended) way to anticipate market moves. However, it is helpful to understand the “why” behind major market moves.

The arrows in the chart below suggest that the general market trends coincide with the trend and size of GDP growth when you look out a quarter or two.

In other words, big market participants anticipate the investment landscape 6-12 months ahead. The chart below suggests they may actually be good at it.

In the chart below, you’ll notice that the stock market turns tend to start before the changes in the GDP trends, and go in the direction of the GDP trend.

Given this pattern, the market appears to be anticipating positive GDP numbers in the coming quarters.

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How Do U.S. Stocks Stack Up To Global Equity Indexes?

Looking at the ETFs that tracks the MSCI All Country World Indexes (AWCI), it would appear that global markets have broken out.

However, when you look at the global index that does not include the U.S. (ACWX), you find that it has not been able to breakout above its 2014 highs.

While the U.S. may be a leader, the global equity markets can be viewed as near the top of a 7 year trading range.

A breakout by ACWX would be a very bullish event for global equities.

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Global Markets: Emerging Markets EEM vs. Developed Markets (EFA)

As indicated by the OECD data mentioned above, global GDP growth is occurring across all 45 countries it tracks, so it’s no surprise that both the emerging markets (EEM) and developed markets (EFA) have positive trends for the last year or more.

The key take away is that both are running into major long-term resistance levels, but also have the strongest 40 and 80-week momentum they’ve had in years.

A breakout above the black lines, would be bullish, but a pullback or consolidation would be normal.

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Asian and European Central Banks Have Been Accommodative

The All Country Asia (ex-Japan) Index (AAXJ) and FTSE Europe Index (VGK).

Asia is breaking out of a 7 year consolidation with strong momentum. Europe is consolidating near at a pivotal area near the upper end of its 8 year consolidation.

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Japan Hedged (DXJ)

Japan as viewed in its own currency has not broken out to new highs, but is consolidating over its  40-week average and pivotal resistance.

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S&P 500 (SPY) and Long-Term Interest Rates (TLT)

Global central banks’ quantitative easing has had an impact on the natural movement and relationship between stocks and interest rates.

However, as demonstrated by the chart below the major trend relationships still hold true. The arrows on each chart correspond in time frame. This illustrates the relationship of lower interest rates (higher TLT prices) as being bullish for stocks has been intact, especially since the end of U.S. Q.E. in 2015.

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Chart Points of Interest:

  1. The period of rising interest rates from mid-2012 until January 2014 experienced rising stock prices. This can be explained by expectations (and actual reporting) of increasing GDP (see GDP chart above). Additionally, as noted, 2013-2014 was a period of Fed Q.E. (see Fed Balance Sheet chart below), both of which are bullish for stocks.
  2. The 2017 breakout in stocks occurred as TLT’s collapsed. It’s possible that the market anticipated that the TLT would at least bottom at such an important support level. Additionally, higher rates due to expectation of higher GDP are not always bearish for stocks if the market believes the benefits of higher growth in earnings will out weight the drag of higher borrowing costs (interest rates).
  3. Currently the TLT has been unable to move above a very big resistance level defined by prior price levels, and the 80-week moving average. This is a technical warning that lower rates may be difficult to achieve with any news that is also bullish for stocks.Likewise, a move lower in TLT will needs to be accompanied by stronger GDP expectations to be supportive of higher stock prices.
  4. A break below the 2017 low in TLT would break the uptrend that began in 2011. Fears of inflation in wages or commodities, faster economic growth, accelerated Fed tightening, and other events could lead to a sharp rise in rates, lower TLT prices.

However, it’s not conclusive that TLT must move lower. Fears of slower growth, a flight to safety from geopolitical events, and other events push them higher.

Regardless of the catalyst for next big move in TLT, the key inflection technical points are clear.

The Big Question… The Fed’s Balance Sheet

As mentioned above this illustrates periods of Q.E. and their impenetrable bullish effect on stocks.

It’s unclear how this unprecedented condition will revert back to a more normal state, but we should not make any bullish or bearish assumptions.

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Leading & Coincident Indicators of GDP Growth

Copper (JJC) is commonly considered a leading indicator for economic growth.

Additionally, according to Jeffery Gundloch, the founder of DoubleLine Capital and referred to as the “bond king”, copper is a very good leading indicator for 10-year rates.

The TLT is not exactly 10-year notes, but looking at the chart below I’d say the same holds true here.

If copper is going to suggest stronger economic growth, and or inflation, it should move in the opposite direction as TLT and move first.

Copper may also be impacted by global demand, not just domestic, so the correlation with TLT may diminish at times.

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Points of Interest:

  1. Copper often begins its major moves months before TLT does. For example: mid-2010, late 2011, and 2016 when copper based out (moved sideways) as TLT climbed.
  2. Copper is in a strong 40 and 80-week uptrend, and it has broken above its 200-week moving average for the first time since 2012. TLT has not reacted to this move.

Lumber (WOOD)

Additional evidence of strengthening economic conditions can be seen in lumber (WOOD). It would make sense that wood and copper would trend together based on demands of new construction in and expanding economy.

In the chart below you’ll see their trends diverged from 2012 to 2015, but then became in sync in 2016.

Both have now accelerated higher in 2017.

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What Are Other Commodities Doing?

The chart below looks at the PowerShares Agriculture ETF (DBA), and the Commodity Tracking ETF (DBC). DBA focuses on agriculture and meat commodities, while DBC focuses on energy and metals.

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This long-term view illustrates the downward pressure on commodity prices, and in turn one source of inflation pressures.

It is not visible on these charts, but DBC has not had its 40-week MA over its 80-week in a meaningful way sine 2011!

As you see in the zoomed up view below, DBC is in position to break above the 40-week MA which is also well above the 80-week MA.

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Given its recent bounce off of logical support at 14, a substantial move over the 40-week MA would represent a potential long-term bottom.

DBA, however, is in a strong down trend. 

Gold Is Gaining Momentum!

Both Gold the metal (GLD) and gold mining stocks (GDX) are gaining long-term momentum at the same time. Since 2016, GDX has essentially held the support of its 80-week MA!

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Will the Dollar Breakdown or Bottom, and What Does That Mean for Stocks?

Faster growth and higher rates are both bullish for the dollar. However, these trends must also be considered in relation to the same measures of other countries.

Nonetheless, the chart below shows that since 2015 there has been a pattern of the dollar following TLT (in the opposite direction).

The dollar now sits on its 200-week moving average and a significant price support level of 24.

Since currency traders need to have a global perspective, and currencies tend to have very persistent trends, this inflection point is one you should follow even if you have no interest in trading UUP.

A breakdown in the dollar from here would be a reason to focus on equities in non-U.S. markets (i.e. EEM) as they will benefit from this.

On the other hand, a sharp rally could indicate stronger expected GDP which should lead to stronger stocks despite the expected higher interest rates.

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Conclusion:

Without trying to predict what comes next, there are some important markets sitting at price levels that create opportunities for big trend trades.

  • Stocks are trying to breakout, again.
  • Global stocks are at major resistance.
  • Interest rates (TLT) are at major resistance.
  • Copper and Wood are in sync and trending.
  • The U.S. dollar is at a major support level.
  • Gold looks like it’s breaking out of a big base.

For years the markets have been subjected to massive quantitative easing globally. While it is obvious in the charts that it has affected market behavior, it also seems to be obvious in the charts that classical intermarket relationships are still in place.

Analysis like this is time consuming and difficult to condense into very timely trading decisions, but it provides a big picture understanding of the large trends that affect our trades.

This is why we develop gauges like the Big View Risk On/Off gauge mentioned above, and automated trading models that trade global and domestic trends (ETF Complete, ETF Sector Plus, and Nasdaq All Stars), and momentum indicators like Real Motion. These all help focus on the market movements that are tradable without needing to do all the intermarket analysis manually.

Additionally, our Big View service will soon be released to help you more easily take advantage seeing the big picture that is driving the markets and trends that you’re trading.

You can find the first layer of Big View available now and free as the main page of our “Tools” area at www.MarketGauge.com/tools/big-view/.

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