Markets Are At An Interesting Crossroad

Markets Are At An Interesting Crossroad

The US stock market has been stuck in a sideways trading range since early December. Now we are at a point where the next few trading sessions may decide the fate of the next few months.

Some of the patterns that I have been watching during this time frame are starting to shift. If this shift in investor behavior continues, there may be an opportunity for investors to take early advantage of an emerging (and new) trading pattern.

US Equities

Money looks like it is on the verge of flowing more aggressively back into equities:

spx daily

 

The weekly chart shows that the MACD is nearing a crossover point. A possible entry for longer-term growth investors.

spx weekly

 

For those not familiar with MACD:

From Investopedia:

DEFINITION OF ‘MOVING AVERAGE CONVERGENCE DIVERGENCE – MACD’

A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.


Moving Average Convergence Divergence (MACD)

 

In addition, higher beta stocks are starting to break out of their sideways trading pattern:

qqq

 

Apple has already broken out of its sideways trend:
aapl

 

 

Notice since early December, the S&P 500 Index and Apple have had a strong correlation:

appl spx correlation

 

US Treasury Bonds

US Treasury Bonds are beginning to look weaker, as investors are allocating away from safe-haven asset classes back into higher beta sectors:

 

US Bonds

Bonds Fib

 

A continued breakdown in bonds, combined with a breakout in equities from the sideways trading pattern that has been present all year, is an indication that investors are becoming more bullish on the economy again.

 

Is Bad News The New Good News?

Continued lower oil prices have been having a positive impact on consumer confidence:

consumer confid

Unfortunately, this has NOT translated into a more active consumer – which is what investors have been hoping for.

Retail-Sales-ex-Gasoline

 

To leveraged traders this could be interpreted as a positive sign that the Fed will not be as aggressive as previously thought. The Fed does not want to risk raising interest rates too quickly on a constantly fragile economy.

We will need to keep an eye on this shift in the markets to see if the pattern continues, or if leveraged investors take this as an opportunity to reduce exposure in their portfolios.

NYSE-margin-debt-SPX-growth-since-1995

 

The high amount of leverage that is currently present in the market is a potential ticking time bomb. However, markets can remain over-leveraged for long periods of time.

We are already seeing that market swings are becoming more frequent and larger in 2015.

For growth investors with a longer time frame, an active, tactical approach to asset allocation is still recommended.

Questions? Thoughts?

 

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

Thanks,

John Rothe

CEO & Chief Investment Officer

Riverbend Investment Management

 

 

 

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