Replies to post #22217 on Market Direction and Stock Trends

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>>> Weekend Reading: Losing The Faith?
By Lance Roberts | August 18, 2017

Last week, I penned the following:

“Now, you would suspect the possibility of nuclear war might just be the catalyst to send markets reeling, but looking at the market’s reaction on Thursday, I suspect there will be t-shirts soon reading:

‘I survived the threat of nuclear war and the ‘great crash of 2017’ of 1.5%'”

Of course, as markets touched on their 50-dma, the algos kicked in hard on Monday morning sending the markets surging higher. The reason, according to the media, was the reduction in global risk as Donald Trump briefed Kim Jung-Un about the U.S.’s retaliatory response should North Korea decide to attack Guam.

I was able to acquire a copy:
And with that…. “NOMO NOKO” as Kim Jung-Un backed off his more aggressive posture, letting traders rush back into the markets to once again “BTFD.”

That excitement was short-lived.

On Wednesday, following a conflicted response by the White House to the Charlotte, N.C. protest, numerous CEO’s resigned from Trump’s economic council. The resignations eventually led to its full dismemberment.

Surprisingly, and as we have addressed in recent weeks, this was the catalyst that sparked a sharp decline on Thursday? Have investors “Lost The Faith?”

With President Trump embroiled in one entanglement after another and constrained by a deeply partisan legislature, the ability of the Administration to pass legislative agenda seems to be fading.

The reality is this was the headline. Over the last couple of months, the markets have remained on a weekly “sell signal,” at a very high level, even as stock prices continued to struggle higher amid eroding internal measures. However, the break below the “accelerated advance trend line,” as noted, suggests the current correction could accelerate IF the markets don’t regain their footing by Monday.



One note of importance is that outside of the speculative enthusiasm of investors, there has been a continuing pressure in earnings as the lack of legislative agenda advancement is beginning to weigh on Q3 estimates.



Given the bulk of the upward push in earnings estimates since the election was based on hopes of tax reform/cuts and infrastructure spending, the realization such will not occur soon is elevating the “risk of disappointment.” Without a driver to push economic growth higher, the market has likely priced in the majority of expectations.



The repricing of expectations could be fairly brutal.

Just remember, the “running of the bulls” was the method to transport the bulls from the fields to the bull ring where they were killed later that evening.

As with the market, it’s great to be the “bull” until you get to the end of your run.

Here’s what I am reading this weekend. . .

https://realinvestmentadvice.com/weekend-reading-losing-the-faith/

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Disruption Of Confidence
By Lance Roberts | August 19, 2017

Short-Term Sell Signal Deepens

As noted last week:

“The weakness in the market previously, combined with the threats between the U.S. and North Korea, led to a fairly sharp unwinding in equities on Thursday which in turn triggered a short-term sell signal.

That sell-off has remained confined to the current bullish trend line but has threatened to violate the 50-dma. If the market is unable to regain the 50-dma on Monday, and remain above it for the balance of the coming week, the most likely move in the markets will be lower.“



I have updated the chart above through Friday afternoon. I followed that analysis up on Tuesday stating:

“On Monday, the market surged out of the gate as headlines suggested ‘geopolitical risk’ had subsided. I find this particular explanation hard to digest, given the rising rhetoric of a potential trade war with China, violence in Charlottesville over the weekend, no resolution with North Korea, etc., so forth, and so on. I find little evidence of a global turn in geopolitical stresses currently.

Monday’s ‘buy the dip’ frenzy was no different. The question will be whether the market can both reverse the short-term ‘sell signal’ and climb above the previous resistance of the old highs? Such a reversal would end the current consolidation process and allow for additional capital to be invested.”

That was so last Tuesday…

The reversal, at least to this point, was not to be the case.

Exactly one week after last week’s sell off, the market dumped again. This time it was the news of the complete dismemberment of President Trump’s “economic council” of CEO’s along with the rumor that Gary Cohn would be exiting his position at the White House as well. While the latter turned out to be #FakeNews, the damage had already been done as market participants began to question the ability of the Administration to get its promised legislative action advanced.

Given the run up in the markets since the election, which was based on tax cuts/reform, infrastructure spending, repatriation and repeal of the Affordable Care Act, the lack of progress on that agenda has left the markets pushing higher on “hope” and “promises.” The disbanding of the economic council has led to some disruption of that confidence.

Importantly, with the market currently on a weekly sell signal, it also compounded the bulls problems by breaking the bullish trend line that begins in February of last year.



This is not a “panic and sell everything” signal….yet.

It is, however, a potentially important change to the bullish backdrop of the market in the short-term particularly given the ongoing deterioration in the internal participation in the market. Note that when sell signals have been triggered from similarly high levels (vertical red dashed lines), subsequent corrections have been fairly brutal.



Previously, I questioned whether, or not, to “buy the dip?”

“My best guess currently is – probably. But not yet.”

I also stated the following two reasons for that sentiment:

1. Bull markets don’t typically end when the mainstream media is “peeing down both legs” over the 1.5% drop on Thursday.

2. The bullish uptrend remains intact and “fear” gauges remain confined to a downtrend.

This remains this week as well. The sell-off, so far, remains contained above the previous bullish breakout to new highs and remains above current price support levels. Furthermore, while volatility did pick up a bit on Thursday, it has not exceeded last week’s volatility spike suggesting traders are less worried about a correction than media headlines makes it appear.



As noted last week, I still believe this to be the case currently:

“The market remains confined within its overall bullish trend while volatility remains confined to downtrend. Given this backdrop, I would suspect that current weakness will result in an internal rotation of sector participation as ‘bulls’ continue to ignore the mounting risk of deteriorating of reported EPS growth, weak revenue growth, slowing economic growth and fading realities of positive legislative agenda coming to fruition.”

Prepping For Action

Last week, I stated that in our core portfolios, we would wait for confirmation the current sell-off has abated before adding additional risk exposure to portfolios.

“In recent years, such market tantrums have been very short-lived and have provided opportunistic entry points for increasing equity-related exposure. However, EVERY TIME is DIFFERENT, so it is always important to NEVER ASSUME the outcome will be the same as the last. That is how you wind up losing a lot of money.”

From a technical basis, there are two potential outcomes as shown below:



Scenario 1:

The market regains its footing next week and rallies strongly enough to break above the downward trending levels of previous rally attempts. Such action would confirm the bullish trend remains intact and would provide the opportunity to rebalance equity exposure to model weights accordingly.

Scenario 2:

The market rallies to the upwardly sloping “bullish trend line” that began with the election of President Trump. The rally fails at resistance and turns lower. Such a failure would confirm the current short-term bullish trend has likely concluded leading to a reduction of equity exposure, increases in cash positions and fixed income, and a reduction in overall portfolio equity risk.

What To Do Now

I made a mistake following Monday’s rally by adding mildly to underweight positions in portfolios. Those positions are now under direct threat of being stopped out with the current action. That is part of the investing process, not everything always works out as we plan.

However, we are now actively reviewing all of our portfolios, and positions, in order to be prepared to take action depending on what happens given our two scenarios above. . .

https://realinvestmentadvice.com/disruption-of-confidence-08-18-17/

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