A bi-polar world

There is much talk in the media of a multipolar world, with the split between the West and the BRICS, led by China & Russia. That may be relevant in the long-term but the immediate challenge for investors is a bi-polar world, where some markets are rallying strongly while others are collapsing. Even within the US market, we have some sectors rallying while others are collapsing.

The S&P 500 is still in a bear market but the index has rallied to test resistance between 4200 and 4300. Breakout would confirm the bull signal from 250-day Rate of Change crossing to above zero.

S&P 500

The big 5 technology stocks — Apple, Amazon, Alphabet (GOOGL), Meta Platforms, and Microsoft — have all rallied strongly since the start of 2023.

Big 5 Technology Companies

Volatility is elevated but declining peaks on Twiggs Volatility (21-day) suggest that this is easing.

S&P 500 & Twiggs Volatility

However, the rally is concentrated in big tech stocks, with small caps struggling to hold above support. The Russell 2000 iShares ETF (IWM) is testing the band of support between 164 and 170. Breach of support would signal a second downward leg in the bear market.

Russell 2000 ETF (IWM)

The Treasury yield curve is also inverted, with the ever-reliable 10-Year minus 3-Month spread at its lowest level (-1.49%) since 1981. Recessions tend to only occur after the spread recovers above zero — when the Fed starts cutting short term rates — which tells us that the recession is only likely to arrive in 2024.

Treasury Yield Spread: 10-Year minus 3-Month

The longer than usual lag may be the result of the “pig in the python” — a massive surge in liquidity injected into financial markets during the pandemic.

Commercial Bank Deposits/GDP

We are already seeing cracks in the dyke as liquidity starts to recede. Regional banks are in crisis, caused by the sharp hike in interest rates and the collapse in value of their “most secure” assets. Risk-weighted capital ratios are meaningless when bank investments in Treasury and Agency securities — which enjoy the lowest risk weighting — fall sharply in value. True levels of leverage are exposed and threaten bank solvency.

The S&P Composite 1500 Regional Banks Index ($XPBC) is testing support at 75 after a sharp decline. Not only do regional banks have solvency problems, caused by losses on Treasury and Agency investments, many are also over-exposed to commercial real estate (CRE) which faces a major fall in value, primarily in the office sector as demand for office space shrinks due to the shift to work-from-home after the pandemic.

S&P Composite 1500 Regional Banks Index ($XPBC)

There is always more than one cockroach — as Doug Kass would say — and regional banks are also threatened by a margin squeeze. Short-term rates have surged to higher than long-term rates, pressuring net interest margins. Banks are funded at the short-end and invest (and lend) at the long-end of the yield curve.

The Fed is unlikely to solve the regional bank problem easily, especially with the political impasse in Congress — needed to support any increase in deposit guarantees.


Falling commodity prices warn that the global economy is contracting.

Brent crude is in a bear market, testing support at $70 per barrel. But US cude purchases — to re-stock their strategic petroleum reserve (SPR) — may strengthen support at this level.

Brent Crude

Copper broke support at $8500/tonne, signaling another test of $7000. Sometimes referred to as “Dr Copper” because of its “PhD in economics”, the metal has an uncanny ability to predict the direction of the global economy.


We use the broader Dow Jones Industrial Metals Index ($BIM) to confirm signals from Copper. The base metals index breached secondary support, at 167, warning of a test of primary support at 150.

Dow Jones Industrial Metals Index ($BIM)

Iron ore has also retraced, testing support at $100/tonne. Breach would warn of another test of $80.

Iron Ore

Dollar & Gold

The Dollar is also in a bear trend, testing support at 101. The recent rally in our view is simply a “dead cat bounce”, with another test of support likely. Breach would warn of another primary decline in the Dollar.

Dollar Index

Gold is in a bull market as the Dollar weakens. Dollar Index breach of 101 would likely cause a surge in demand for Gold, with breakout above $2050 signaling another primary advance — with a medium-term target of $2400 per ounce.

Spot Gold


The ASX 200 recent (medium-term) bull trend is losing steam, with the index ranging in a narrow band between 7200 and 7400 since April.

ASX 200

Breakout from that narrow band will provide a strong indication of future direction. Breach of 7200 is, in our view, far more likely — because of weakness in global commodity prices — and would warn of another test of primary support between 6900 and 7000.

ASX 200

The All Ordinaries Gold Index (XGD), however, is in a strong bull trend. Respect of support between 6900 and 7000 would strengthen the signal, while breakout above the band of resistance (7500 – 7700) would signal another primary advance, with a medium-term target of 8200.

All Ordinaries Gold Index


The US market is bi-polar, with large technology stocks leading a rally, while small caps and regional banks are struggling. The lag between an inverted yield curve and subsequent recession may be longer than usual because of the “pig in the python” — large injections of liquidity into financial markets during the pandemic.

Commodities are in a bear market, with falling crude and base metals warning of a global recession.

The Dollar is weakening and we expect a primary advance in Gold — with a medium-term target of $2400 per ounce — if the Dollar Index breaks support at 101.

The ASX medium-term rally is weakening and breach of 7200 would warn of another test of primary support. Two major influences are global commodity prices and major Wall Street indices.

Our outlook remains bearish despite the rally in the US technology sector. We are underweight in growth, cyclical and real estate sectors and overweight in gold, silver, defensive stocks, critical materials, cash, money market funds and short-term interest-bearing securities.

Hope is not a strategy

Bob Doll’s outlook this week at Nuveen Investments is less bearish than my own:

Trade-related risks seem to be growing. President Trump looks to be holding out hope that the U.S. economy will stay resilient in the face of escalating tariffs and rising tensions. So far, the U.S. economy has not faltered, thanks largely to continued strength in the consumer sector and labor market. But if business confidence crumbles (as it has in parts of Europe), it could lead to serious economic damage…..

The president’s recent actions to delay the implementation of some new tariffs show that he is sensitive to the market impact of his trade policies. But the erratic nature of his on-again, off-again approach adds too policy uncertainty. At this point, we can’t predict the ultimate economic impact from these issues. Our best guess is that the U.S. remains more than a year away from the next recession, but risks are rising. In addition to the solid consumer sector, we don’t see financial stress in the system. Liquidity is still broadly available, and fixed income credit spreads are generally stable outside of the energy sector.

With additional Federal Reserve rate cuts already priced into the markets and bond yields falling sharply, the only catalyst for better equity market performance could be improving global economic data. We hold out hope that the global economy will improve, and still think there is a better-than-even chance of manufacturing activity and export levels to grow. But those improvements will take some time, suggesting equities will remain volatile and vulnerable for now.

Where we seem to differ is on the inevitability of the US-China trade war escalating into full-blown disengagement. This week’s events have not helped.

China’s national English language newspaper, Global Times, under the People’s Daily, announced new tariffs.

Global Times

Followed by an admission that the timing of the announcement was intended to cause maximum disruption to US stock markets.

Global Times

The inevitable Twitter tantrum ensued.

Donald Trump

The President also tweeted “Now the Fed can show their stuff!”

He is deluded if he thinks that the Fed can help him here. The best response would be announcement of a major infrastructure program (not a wall on the Mexican border). Otherwise business confidence will decline due to the increased uncertainty. Business investment will contract as a result and slow employment growth.

Retail sales have shown signs of recovery in recent months but will decline if consumer confidence erodes.

Retail Sales

Especially consumer durables such as light motor vehicles and housing.

Consumer Durables Production

The global economy is already contracting, as indicated by falling crude oil

Nymex Light Crude

…and commodity prices.

DJ-UBS Commodity Index

Volatility (21-Day) is rising as the S&P 500 tests support at 2840. Breach is likely and would test primary support at 2750.

S&P 500 Volatility

Bearish divergence (13-Week Money Flow) on both the S&P 500 and Nasdaq 100 (below) warn of selling pressure. The Nasdaq 100 is likely to test primary support at 7000.

Nasdaq 100

The Russell 2000 Small Caps ETF (IWM) is testing primary support at 146. Follow through below 145 is likely and would signal a primary down-trend.

Russell 2000 Small Caps ETF

Fedex breach of support at 150 would also warn of a primary down-trend and slowing activity in the US economy.

Fedex (FDX)

We maintain our bearish outlook and have reduced equity exposure for international stocks to 40% of portfolio value because of elevated risk in the global economy.

Approaching stall speed

With 89.7% of companies having reported, S&P are projecting 4.4% earnings growth for June quarter 2019 compared to the second quarter in 2018. Even more interesting is their projection of 3.4% growth for the September quarter. With EPS growth boosted by a stock buyback yield of 3.5%, this warns that the economy is close to stall speed.

S&P 500 Earnings per share Forecast

The daily chart for the S&P 500 shows support at 2830/2840, while a higher trough on 21-Day Money Flow indicates (secondary) buying pressure. I expect another test of resistance at 3030; breakout above resistance at 2940 would confirm.

S&P 500

But divergence on 13-Week Money Flow, as on the Nasdaq 100 below, warns of longer-term selling pressure.

Nasdaq 100

Small-cap stocks, as depicted by the Russell 2000 ETF below, are not enjoying the same support as large caps. A sign of rising risk aversion.

Russell 2000 ETF

Bellwether transport stock Fedex is testing primary support at 150. Breach would warn of a primary decline, suggesting a slow-down in activity for the broad economy.


We maintain a bearish outlook on the global economy and maintain less than 50% exposure to US and International equities. Our view is that probability of a US recession in the next 6 to 12 months is as high as 70% to 80%.

We expect stocks to rally for another attempt at the 3020/3030 high for the S&P 500 and will use opportunity to further reduce our exposure to equities.

A good time to be cautious

Markets are buoyant with the S&P 500 headed for another test of its all-time high at 2950. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure but the overall technical outlook looks promising.

S&P 500

So why should it not be a good time to invest in stocks?

First, the yield curve warns of a recession in the next 6 to 18 months. The 10-year Treasury yield is below the yield on 3-month T-bills, indicating a negative yield curve. This is our most reliable recession signal, with 100% accuracy since the early 1960s.

Yield Differential

Annual jobs growth has declined since January. Further declines in the next few months would further strengthen the recession warning.

Annual Growth in Total Payrolls

Small cap stocks in the Russell 2000 lag well behind the S&P 500, indicating that investors are de-risking.

Russell 2000 ETF

Cyclical sectors like Automobiles & Components also offer an early warning, anticipating slower consumer spending on durables such as housing, clothing and automobiles.

S&P 500 Automobiles & Parts

Lastly, the historic Price-Earnings ratio is above 20 (PE and PEmax are equal at present), indicating stocks are over-priced.

S&P 500 historic PE ratio based on highest prior earnings

It’s a good time to be cautious.

S&P 500 hesitancy

This week’s doji on the S&P 500 signals hesitancy. Reversal below the mid-point of the previous week’s candle would complete a bearish doji star reversal. Breach of support at 2750 would further strengthen the bear signal, warning of a test of 2400.

S&P 500

Small caps are a lot weaker, with the Russell 2000 (iShares ETF) testing support at 145. Breach would warn of a test of primary support.

Russell 2000 Small Caps

Tech stocks and small caps lead US advance

The S&P 500 continues to test resistance at 2800. Declining Volatility suggests a return to business as usual. Breakout above 2800, with follow-through above 2820, would suggest a primary advance to 3000.

S&P 500

Dow Jones Industrial Average is similarly testing resistance at 25400. Breakout would signal a fresh advance but buying pressure is modest and gains are likely to be slow.

Dow Jones Industrial Average

The Nasdaq 100 leads the charge, advancing towards a target of 7700 after respecting new support at 7000.

Nasdaq 100

Small caps are also out-performing, with the Russell 2000 iShares ETF testing resistance at 170 after breaking out above its January high of 160.

Russell 2000 Small Caps

Although this is the final stage of a bull market, there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced  International Growth portfolio exposure to multinationals that have strong sales in China.

S&P 500 up-trend continues

The S&P 500 encountered solid support at 2000. Rising 13-week Twiggs Money Flow indicates buying pressure. Recovery above the descending trendline is likely and would indicate the end of the correction. Breakout above 2080 would confirm another advance with a target of 2200*. Failure of support is unlikely, but would test the primary trendline at 1900.

S&P 500

* Target calculation: 2100 + ( 2100 – 2000 ) = 2200

CBOE Volatility Index (VIX) retreated below 20, reassuring that risk remains low to moderate.

VIX Index

Bellwether transport stock Fedex continues in a primary up-trend, signaling that economic activity levels are improving.


Small caps also remain in an up-trend, with the Russell 2000 consolidating between 10.50 and 12.0. Retreat of 13-week Twiggs Momentum close to the zero line is typical of a ranging market. Breakout above 12.00 would signal a primary advance with a target of 13.0*; follow-through above 12.10 would confirm. Reversal below 10.50 is unlikely, but would warn of a bear market.

Russell 2000

* Target calculation: 12 + ( 12 – 11 ) = 13

Victory attained by violence is tantamount to a defeat, for it is momentary.
~ Mahatma Gandhi

US stocks find support

Dow Jones Industrial Average is consolidating in a narrow band above 17000. Sideways drift on 21-day Twiggs Money Flow reflects hesitancy. Breakout above 17150 remains likely, however, and would offer a target of 17500*. Reversal below 16950, while unlikely, would test the rising trendline around 16700.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

I still expect the Nasdaq 100 to retrace to test its new support level at 4000. A 13-week Twiggs Money Flow trough above zero indicates buying pressure. Respect of support is likely and would offer a target of 4250. Reversal below 4000 is unlikely but would warn of a correction.

Nasdaq 100

* Target calculation: 4000 + ( 4000 – 3750 ) = 4250

Russell 2000 small caps is once again headed for a test of resistance at 12.00 on the monthly chart. Completion of a second 13-week Twiggs Momentum trough at the zero line would suggest a healthy up-trend. Breakout above 12.00 would signal an advance to 13.00*. Breach of support at 11.00 is unlikely, but would warn of a down-trend.

Russell 2000

* Target calculation: 12 + ( 12 – 11 ) = 13

Nasdaq 100: Expect profit-taking

The Nasdaq 100 is headed for a test of the psychological level of 4000* at roughly the same time the S&P 500 is testing 2000. Expect resistance at these levels, but profit-taking is unlikely to be sufficient to halt the primary up-trend. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

Dow Jones Industrial Average recovered above 17000, indicating the recent retracement is over. Follow-through above 17100 would offer a target of 17500*. Recovery of 21-day Twiggs Money Flow above the descending trendline indicates selling pressure has ended. Reversal of the index below its (secondary) rising trendline at 16900 is unlikely, but would warn of another correction.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

Russell 2000 small caps retreated from resistance at 12.0/12.1. Declining 13-week Twiggs Momentum shows the up-trend is slowing, while reversal below zero would warn of a primary down-trend. Breach of support at 10.8/11.0 would confirm. Recovery above 12.1, however, remains equally likely and would offer a target of 13.0.

Russell 2000

* Target calculation: 12 + ( 12 – 11 ) = 13

Selling pressure rises

S&P 500 displays little direction while bearish divergence on 13-week Twiggs Money Flow continues to signal selling pressure. Reversal below 1850 would warn of a correction to test primary support at 1750. Breakout above 1900, however would signal an advance to 1950.

S&P 500

* Target calculation: 1850 + ( 1850 – 1750 ) = 1950

The primary trend remains upward and CBOE Volatility Index (VIX) below 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 is struggling to break 3600 and reversal below 3400 would warn of a down-swing to the primary trendline. 13-Week Twiggs Money Flow below zero warns of selling pressure, but breakthrough above 3600 would suggest another advance.

Nasdaq 100

* Target calculation: 3700 + ( 3700 – 3400 ) = 4000

The Russell 2000 is testing primary support at 11.00. Follow-through below 10.80 would confirm. Small caps outstripped large caps over the last 18 months, but now appear to be faltering. A 13-week Twiggs Momentum cross below zero would also warn of small cap reversal to a down-trend. A small cap down-trend would not necessarily mean large caps will follow: large caps significantly outperformed small caps for more than 3 years leading up to the 2000 Dotcom crash.

Russell 2000

Canada’s TSX 60 is retracing, but unlikely to break support at 820 and the rising trendline. Rising 13-week Twiggs Money Flow, with troughs above zero, indicates long-term buying pressure. Respect of support would suggest an advance to the 2008 high of 900.

TSX 60