Ebola, The Stock Market, And Those Trend Lines

Ebola, The Stock Market, And An Update To Those Trend Lines…

Ebola_virus_stock marketIs The Ebola News Cycle The Reason For The Stock Market’s Decline?

image: Wikimedia Commons

Investors are starting to believe that the Ebola outbreak will start to impact the global economy.

Any economic impact would most likely be caused by:

1) Aversion behavior in consumers.

2) Impacts to emerging economies where outbreaks may be more likely.

3) The international cost of aid for Ebola stricken countries.

4) Slowdown in international trade due to heightened screening processes at ports of entry.

Is Ebola Really The Reason The Market Is Declining?

While there may be a small economic impact here in the US, the main focus of traders has been the fact that the S&P 500 Index is trading below multi-year trend lines.

Why do trend lines matter?

Investors like to look at trend lines to help gauge what other investors are doing. Trend lines typically stay in place when investors believe an investment vehicle or index should continue to rise or decline.

In other words, trend lines are a visual representation of support and resistance in any time frame.

An example of a trend line.

An example of a trend line.

source: Trendfollowing.com

When a trend line reverses, it is an indication that other investors feel that the current trend can no longer sustain itself.

If you want to learn more about trend lines and how to take advantage of them, I highly recommend looking at the information Michael Covel has published over at www.trendfollowing.com.

A Look At The Current Trends

Last month the weekly trend of the S&P 500 index looked like this:

spx long term trend fall rally

This rising trend line that had been established since 2012 was still rising.

Now, however, that trend line has been broken:

sc-2

The breakdown in the trend has caused market volatility to spike:

vix

The higher levels of volatility are also causing a flight to safety to occur — US Treasury bond prices have dramatically risen:

tlt

 

What’s Next?

The longer term, upward trend that has been in place since 2009 is still rising:

(Sorry for the technical charts, but to show the long term trend I needed to use my charting software. Click chart to enlarge.)

2009 trend

Bonds are looking a little overbought here, but the upward trend is still in place:

bond overbought

And there may be an opportunity in Gold as it is bouncing up, off its sideways trend line. (I am showing a chart of the “GDX” ETF. GDX invests in gold miners instead of physical gold. GDX is an option I use to avoid K-1 statements in taxable accounts):

gdx

What We Are Doing In Our Portfolios

My long/short ARTAIS model is currently allocated in US Treasury Bonds (“TLT”), Gold Miners (“GDX”), And Cash/Money Market:

long short growth strategy

source: Riverbend Investment Management

Currently the model does not have any short/inverse positions as the current pullback has not broken the 2009-2014 trend line. If this longer term trend line is broken, then it is an indication that the markets may be in for a longer, more severe bear cycle.

Most likely, this is a normal short term correction of 10-15%.

With leverage at record levels in the market, I would expect the market to be extremely volatile during this time:

NYSE-investor-credit-SPX-since-1980 10.53.29 AM

 

Conclusion:

As I mentioned above, high leverage in the market will increase volatility in the markets. Keep an eye on the 2009-2014 trend line. If this trend line is broken, it may indicate that we are on the verge of a longer, more severe bear cycle.

For now, a 10-15% correction in the S&P 500 index can be expected – especially after the gains we have seen since 2012.

I see opportunities in US Treasuries and Gold. Longer term growth investors will want to watch the 2009-2014 trend line for entry points, if the S&P 500 index continues to decline.

Questions? Thoughts?

Feel free to leave a comment below or you can reach out to me privately here.

– John

PS: If you found this article interesting, please feel free to share it. Thanks!

 

**Note: I and/or my clients are long TLT, GDX. This is not a recommendation to buy. You should consult with your advisor for your specific needs.

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