Sea Change Underway led by Small Caps, Value, and Foreign Equities

October 20, 2019

Weekly Market Outlook

By Keith Schneider

blankUS equity markets were mostly flat this week except for small caps which led, up +1.59% playing catch up.

Looking under the hood showed that sector rotation was confusing.

Semis and, technology which are the leading hot speculative sectors, backed off as did Utilities which is a safety play.

Its unusual that both were down at the same time, hence we have a mixed message.

While we are looking under the hood, we see some other very interesting developments unfolding.

First, foreign equities are starting to gain ground verses the US and that includes Emerging Markets (EEM), larger and mid cap foreign equities (EFA, which does not include US or Canada) and China (FXI).

The biggest gains came from Europe as it appeared that a Brexit deal will happen before the upcoming deadline.

However, as I am writing this, the British Parliament has withheld passing Brexit and it’s possible it still might not pass.

The recent run-up in both the Euro and Eurozone equities could reverse some of its recent gains if Brexit remains unresolved.

This week’s highlights are:

  • US Equity Market remains in a wide trading range
  • Risk Gauges are still in full risk-on mode
  • Volume patterns improved with small caps leading (IWM or Grandpa Russell)
  • Market Internals remain positive while working off running rich short term
  • Semi’s looks toppy with a momentum divergence in place at recent highs
  • Small Caps (IWM) improved which if holds could mean the tariff war is at least on pause
  • Value stocks after a decade long slumber are looking ready to rally hard
  • Foreign Equities are gaining verses the US
  • The dollar broke down under some key moving averages

Last week we highlighted the wacky volatility US equities were having.

Turns out that some players late Friday a week ago bought 400K plus futures contracts on e-minis despite the poor price action and the unknowns about trade talks with China.

Supposedly the player made $1.5 billion dollars which is not too shabby.

The SEC decided not to investigate it as they thought this was normal trading behavior.

Maybe this is the new normal, but after 40 plus years of watching the tape both as a floor trader and from the screens, I think not.

The new normal includes the US retreating on the world stage as seen in the Middle East.

The full implications of our retreat have not been realized as this is the first act of a new play.

What appears as cause and effect, is that US stocks mostly lagged foreign equities since our withdrawal from Syria last week.

The dollar also got hit which is not surprising either, considering a new global order is unfolding.  For the moment these are the facts, not an opinion.

Best wishes for your trading!

Keith Schneider

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