Tech leaders bearish

There are five tech giants that dictate market direction. All reflect bearish sentiment in the market but only Facebook (FB) is in a primary down-trend. Not enough to call this a bear market.

FAAAM

Facebook (FB) is the only one to have broken primary support. At present it is retracing to test the new resistance level at 150.

FB

Alphabet is headed for a test of primary support at 1000 while declining Money Flow warns of selling pressure.

GOOGL

Apple (AAPL) also signals selling pressure and has penetrated its rising trendline. Expect a test of primary support at 150.

AAPL

Amazon (AMZN) is stronger, respecting its LT trendline, but declining Money Flow  warns of selling pressure. Breach of 1500 would be bearish.

AMZN

Microsoft (MSFT) is strongest with Money Flow holding above zero. Breach of 100, however, would warn of a test of primary support at 85.

MSFT

If another, most likely AAPL or GOOGL, breaks primary support then the needle would swing into bear market territory.

ASX 200 tests primary support

The ASX 200 continues to flirt with primary support at 5650. Money Flow is still comfortably above zero, indicating strong support. But breach of 5650 would signal a primary down-trend, offering a target of 5000.

ASX 200

The two largest sectors are already in a primary down-trend.

ASX 300 Metals & Mining Index broke support at 3500, signaling a decline with a target of 3100. Follow-through below 3400 would confirm.

ASX 300 Metals & Mining

The ASX 300 Banks Index, in a down-trend since 2015, is currently testing long-term support at 7000. Trend Index peaks below zero warn of selling pressure. Breach would offer a target of 5000.

ASX 300 Banks Index

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

Europe cracks but US steady

Dow Jones Euro Stoxx 600 followed through below 350, confirming a bear market in Europe. A Trend Index peak below zero warns of strong selling pressure. Expect a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie broke support at 6900, signaling a primary down-trend, while a Trend Index peak at zero warns of selling pressure. Expect a decline, with a target of 6000.

FTSE 100

US markets are high on volatility but low on direction.

The S&P 500 continues to range between 2600 and 2800. Breach of 2600 would warn of a primary decline but rising volatility does not flag immediate danger. A large trough above 1% extending over at least six to eight weeks, however, would warn of elevated risk.

S&P 500

The Nasdaq 100 shows a W-shaped bottom above primary support at 6500. Declining Money Flow is still above the zero line suggesting that the sell-off is secondary in nature.

Nasdaq 100

Last week I mentioned that bellwether transport stock Fedex had breached primary support but quarterly Fedex Express package shipments were rising in August 2018. Statistics for Q2, to November 30, are due for release on December 18 and I expect will reflect a robust economy.

Fedex

ASX 200 heads for a bear market

The ASX 200 dipped below primary support at 5650, signaling a primary down-trend. A Trend Index peak at the zero line warns of strong selling pressure. The market is still open, and a lot can happen by the close, but the prospect of a bear market is now close at hand. Expect retracement to test the new resistance level but respect would confirm a bear market, offering a target of 5000.

ASX 200

The two largest sectors are already in a primary down-trend.

ASX 300 Metals & Mining Index broke support at 3500, signaling a decline with a target of 3100.

ASX 300 Metals & Mining

The ASX 300 Banks Index, in a down-trend since 2015, is currently testing long-term support at 7000. Breach would offer a target of 5000.

ASX 300 Banks Index

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

East to West

The S&P 500 put in a strong blue candle this week but one swallow doesn’t make a summer. Follow-through above 2800 would signal a test of 2950. Small bullish divergence on Twiggs Money Flow looks promising but is secondary in nature and may not alter the larger trend.

S&P 500

The Nasdaq 100 shows a similar W-shaped bottom but weaker divergence.

Nasdaq 100

Bellwether transport stock Fedex recovered above the former primary support level at 225 but still looks weak. Reversal below 220 would warn of another decline.

Fedex

Asia

The Shanghai Composite Index rally ran out of steam. Respect of 2700 warns of another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is headed for a test of 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Australia

The ASX 200 is testing primary support at 5650 following a down-turn on the mining index. Bullish divergence on Twiggs Money Flow has now rolled over, with penetration of the rising trendline. Breach of primary support would warn of a decline, with a target of 5000.

ASX 200

Europe

Dow Jones Euro Stoxx warns of a bear market. Breach of primary support at 365, and respect of the new resistance level on the subsequent retracement, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie is testing support at 6900, while bearish divergence on the Trend Index warns of selling pressure. Breach would signal a decline, with a target between 5600 and 6000.

FTSE 100

Never cut a tree down in the wintertime. Never make a negative decision in the low time. Never make your most important decisions when you are in your worst moods. Wait. Be patient. The storm will pass. The spring will come.

~ Robert Schuller

ASX 200 miners tumble

ASX 300 Metals & Mining Index broke support at 3500, signaling a primary decline with a target of 3100. A bearish sign for the broad ASX 200 index.

ASX 300 Metals & Mining

The ASX 300 Banks Index is consolidating above primary support at 7000. Recovery above 7450 would indicate another bear rally but the primary trend is down and breach of 7000 would signal a decline with a long-term target of 5000.

ASX 300 Banks Index

The ASX 200 continues to display long tails and a bullish divergence on Twiggs Money Flow, signaling buying interest. Recovery above 5950 would suggest another advance but that is unlikely in the current climate. The primary trend is down and breach of primary support at 5650 would signal a decline with a target of 5000.

ASX 200

 

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

If it’s flooded, forget it.

This Queensland Road Safety video addresses how motorists are good at identifying risk but tend to act impulsively rather than weighing the consequences.

Stock market investors face a similar conflict between their risk antenna, which warn of elevated risk, and the tendency to act impulsively despite the possible consequences.

Take a deep breath. Pause. Be patient.
Wait for the market to show clear direction before making a decision.
Otherwise, acting impulsively, your chance of success is no better than flipping a coin. Often less.
Stick to your backup plan.

S&P 500 earnings rise while stocks fall

96% of S&P 500 component stocks have reported earnings for Q3 2018. Including estimates for stocks that have not yet reported points to a 29% increase over earnings for Q3 in the previous year. What is more interesting is that S&P are projecting a further 2% increase for the next quarter (Q4) and 12% by Q3 2019.

S&P 500 Quarterly Earnings

Now these forecasts could be wrong but what they show is that the market expects further increases in earnings in the year ahead. Compare that to the sharp fall in earnings in Q4 2000 and in Q3 2007, before the last two major market down-turns.

Earnings growth may be slowing — it is hard to top a 29% increase —  but why the sharp downgrade?

The perceived level of risk is rising. Primarily because of the threat of a trade war with China, but also problems in the EU with Brexit and Italy. Earnings multiples are being adjusted downwards to compensate for higher risk.

S&P 500 PE of Previous Maximum Earnings

Even after the recent sell-off (orange on the above chart) the earnings multiple for S&P 500 stocks remains elevated. I use maximum 12 month earnings to-date, rather than current earnings, to remove distortions caused by temporary setbacks. The current P/E is still above the peaks prior to the October 1987 and October 1929 crashes.

The difference is that here, earnings are rising. While we cannot rule out further falls, they are unlikely to be as severe as 1987 and our expected worst case scenario is a P/E of 15. While that is harsh, it is a worst case and not the most likely outcome.

If you are a long-term investor, the sell-off should present opportunities to accumulate quality growth stocks. But patience is required. Rather get in too late than too early.

ASX 200 bullish divergence

The ASX 300 Banks Index respected primary support at 7000 but only recovery above 7450 would indicate another bear rally. Declining peaks on the Trend Index continue to warn of selling pressure. Breach of 7000 would signal a primary decline with a long-term target of 5000.

ASX 300 Banks Index

ASX 300 Metals & Mining Index is again testing support at 3500. Breach would be a bearish sign for the broad ASX 200 index. Primary down-trends on the two biggest sectors would be likely to drag the overall index into a similar down-trend.

ASX 300 Metals & Mining

On the ASX 200, a long tail and bullish divergence on Twiggs Money Flow indicate strong support. Recovery above 5950 would suggest another advance but that is unlikely in the current climate. Breach of primary support at 5650 would signal a primary down-trend with a target of 5000.

ASX 200

 

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

Two years is a long time

An outcome where neither Republicans nor Democrats control both chambers provides markets with reassurance that nothing too radical will emerge, making the outlook for the next two years appear more predictable and the settings more stable……But the complacency might be premature. ~ Stephen Bartholomeusz

With Democrats in control, Donald Trump is unlikely to get further tax cuts through Congress. Even a large infrastructure spending program, which both major parties support, is unlikely to enjoy a smooth passage through the House because of a polarizing President and a federal budget deficit already close to 5.0% of GDP.

The Fed will continue to raise interest rates in order to contain inflationary pressures, fueled by low unemployment and the current budget deficit. Rising average hourly wage rates warn that the Fed will be forced to act.

Average Hourly Wage Rate

Earnings growth rates are likely to slow because of higher interest rates, higher wages and higher input costs from imports and trade tariffs (although a strong Dollar may soften the blow). But there is no sign of this in Q2 2018, with profits rising and employee compensation falling as a percentage of value added.

Corporate Profits and Employee Compensation as a Percentage of Value Added

Restraint from buybacks in October — the four weeks prior to earnings releases are known as the “blackout period” — may have contributed to the severity of the recent correction. But now most earnings have been reported and buybacks are likely to return with a vengeance, taking advantage of low prices. I expect support at October lows to hold, though there is likely to be another test in the next few weeks.

Declining Twiggs Money Flow peaks on the S&P 500 warn of selling pressure and it is likely to take several months for confidence to be restored. Recovery above 2850 would be bullish, suggesting another advance.

S&P 500

The Nasdaq 100 respected its long-term rising trendline at 6600. Again, recoveries take time: there are few “V-shaped” corrections and plenty with a “W-shape”.

Nasdaq 100

Buybacks and strong reported Q3 earnings are likely to counter bearish sentiment but there is one wild-card. Trade is one of the few areas where the President still has the reins and he is likely to make full use of them. I suspect that the Chinese will attempt to wait him out, making conciliatory noises but doing little that is concrete, which is likely to frustrate Trump further. He may try to force a deal through before the next election in two years. That could only end badly.

The two most powerful warriors are patience and time.

~ Leo Tolstoy