July 9, 2020
AliExpress WW
Market Holds Critical Technical Level, Bulls Remain In Control...For Now

Market Holds Critical Technical Level, Bulls Remain In Control…For Now

AliExpress WW

Posted by Lance Roberts through RealInvestmentAdvice.com,

AliExpress WW

The market holds bullish support

Last week I updated the analysis breakthrough above 200-day, what has changed the complexion in the market.

“If the markets can break above the 200-day moving average and maintain this level, this suggests that the bull market has returned to the game.”

Then, on Tuesday, we discussed how markets pushed for more extreme overbought conditions, and the importance of keeping the 200-day moving average at a subsequent correction.

“This fix came quickly on Thursday. The increase in the number of COVID-19 cases in the US has undermined the V-shaped meme of economic recovery. As we noted, the market has rallied in the upper resistance, and the correction found support on the 200th day. “

As we saw in April and May after the initial fall from March 23 lows, the market again began to consolidate its gains to overcome short-term overbought expansion. With a Friday sale, we can renew our risk / reward range, which has become more positive in the short term.

  • -2.9% to 200 dma versus + 4.9% to recent highs. positive

  • -5.7% to the 50-day moving average versus + 9.1 %% to historical highs. positive

  • -11.2% to previous consolidation lows versus + 9.1% to historic highs. negative

  • -15.2% to the March maximum of failures against + 9.1% to historical highs. negative

However, a Friday market reversal from a strong open to a weak close is a good reminder of how volatile markets can be. Despite the fact that the technical background is becoming more optimistic in the short term, We hedge our portfolios from this type of risk.

From bubble to bust to bubble

In January and February of this year, we wrote articles discussing the reasons for making profit from our portfolios and reducing the overall risk of the portfolio. IN “These are nuts” we stated:

“When you sit down at the portfolio management team, and the first commented question is“ this is crazy, ”it’s probably time to think about your overall portfolio risk. On Friday, this is how the investment committee started and ended – “it’s nuts.”

We have been discussing the overbought, expansion, and complacency market over the past couple of weeks. However, on Friday I tweeted a couple of charts that illustrated the excess. ”

That was January 6th.

I tweeted some interesting charts yesterday

It’s nuts

Our portfolio management meeting on Friday morning began with “This is nuts.”

It is important to note that I want to draw your attention to Nasdaqwhere portfolio managers invest money.

There are several things worth noting in the table above:

  1. Each time, and this is only a function of time, the Nasdaq extends tremendously above the 2-year moving average, it returns to this average or exceeds it.

  2. MACD is now more expanded than in the past 25 years.

  3. The current deviation above the 2-year moving average corresponds to the expansion that was observed in February before the collapse.

The S & P 500 also has warning signs. As shown below, the number of stocks on the “bullish buy signals” reached an extreme value for the week. Historically, such extremes have preceded short-term corrections and bear markets.

In addition, as noted last week, the number of S & P 500 shares trading above the 50-day moving average peaked and began to decline. This has always been a precursor to short-term correction or worse.

Currently, the main investment belief is that markets cannot fall due to the Fed. However, all that is needed is an unexpected, external event to trigger sales and a quick 10-15% correction due to the current lack of liquidity in the market.

What could be such an event? I have no idea. The market has already taken this into account in the second wave of viruses. However, no one currently expects states to close trade again. I also do not think that this will happen, but you understood my point of view.

Again, that is why we support our hedges.

The problem with two-year forecasts

As markets become overly optimistic, expanding, and booming, Wall Street tends to offer new ways. “Sucker” I mean “Rationalize” investors take on additional risk.

One thing that I was hoping for in 2018-2019 is that we will get a big enough correction to bring back some of the existing levels of overvaluation. This will ensure higher future rates of return over the next decade, allowing investors to achieve their investment goals.

Instead, thanks to the actions of the Fed, the correction was stopped, and “The cleaning process” was not allowed. The result was an even higher level of corporate leverage, and ratings were still greatly increased at many different levels.

So, as Wall Street justifies “Stock Purchase” in the current economic downturn, high unemployment and falling incomes? Easy, you just tell uneducated investors to use profit estimates after 2 years.

“Yes, stocks are expensive based on current earnings, but cheaper using profits in 2022.” – Wall Street

Incorrect analysis leads to erroneous results

There are serious problems with this analysis. First, even based on 24-month estimates, stocks are still historically expensive.

Secondly, Wall Street horribly evaluates forward earnings. Historically, forward estimates are 33% higher than sharply reduced. Thus, even if you assume that stock prices will not change over the next two years, as future valuations will be lowered, valuations will rise further.

Using Wall Street logic if you were buying stocks in 2018 using 2020 ratingsYou overpaid for the cost and eventually paid the price.

Finally, think about the stupidity of the statement for a moment.

You pay for your earnings in two years. This means that you will not have any price recognition for two years to maintain. “Evaluation” from what you paid today. In addition, each year in the future it will be necessary to receive higher estimates of profit than current ones, simply to maintain the same estimate.

This is why grades are so important. Overpaying for assets today and fixing profits after 24 months in the future, you guarantee yourself a long-term period of low profits.

Now do you understand why Buffett is sitting on 137 billion dollars in cash?

Bear pattern remains

In the short term, however, The technical background of the market keeps the bulls in check. The market has overheated, but a correction over the past week has successfully double-checked the 200-day moving average.

Nevertheless, a monthly “bear” picture is still present in the works. The expanding range of highs and lows known as “Expansion” or “megaphone” the picture is characterized by two diverging trend lines. As noted Investopedia:

Expansion of the formation occurs when the market experiences increased disagreement among investors about the corresponding price of a security for a short period. Buyers increasingly want to buy at higher prices, while sellers always find more motivation to make a profit. This creates a series of higher intermediate peaks in price and lower intermediate lows. When these highs and lows are combined, the trend lines form an expanding pattern that looks like a megaphone or an inverse symmetrical triangle.

The price may reflect random differences between investors or may indicate a more fundamental factor. These formations are relatively rare in normal market conditions in the long run, as most markets tend to change in one direction or another over time. For example, the S & P 500 is constantly increasing in the long run. Therefore, formations are more likely to occur when market participants began to deal with a number of disturbing news topics. “A geopolitical conflict or a change in direction in the Fed’s policy, or especially a combination of them, will most likely coincide with such formations.”

Technical Chart

You can understand why there is disagreement among investors, given the current background of the recessionary economy and the bullish stock market controlled by the Fed. Constant “Expanding Education” which is characteristic of long-term market peaks, combined with negative divergence in the relative strength index.

Given that this “Monthly” Chart, this does not mean that the market will collapse tomorrow, if at all. However, this is one of those warning signs that still suggests caution should be exercised in portfolios.

Portfolio Positioning Update

In the short term, our portfolios are almost entirely focused on equity risk, and we remain incredibly uncomfortable. As noted on Tuesday:

“From a purely technical point of view, the bulls are still in control. Fundamentally speaking. Nevertheless, we remain “bears”. We also understand that when the Federal Reserve injects liquidity into markets intravenously, we need to participate. Like us stated last week:

“As a portfolio manager, we buy the “opportunity” because we must. If we do not, we suffer from career risk, simply and clearly. However, you do not need to. If you really are a long-term investor, you should question the risk taken to achieve further profitability in the market at present. ”

As already noted, the basics will ultimately matter. We just don’t know when this will eventually happen. However, there are more than enough signs that we are probably close to a peak:

  1. Wall Street firms use 2-year forward “operating (or BS)” earnings to justify estimates.
  2. Investors are chasing bankrupt companies.
  3. Companies ramp up debt to maintain liquidity
  4. The complete lack of market liquidity.
  5. Excessive investor confidence
  6. Retail investor abundance.
  7. Overvaluation of future revenue growth.

You got the idea. ”

As I said, we are participating, but that does not mean that we like it. We just have to respect the market for what it is.

We continue to hedge our share in fixed income investments, dollars and gold. Although such hedging does indeed reduce the participation of our stock portfolio in the short term, it does reduce the risk of sudden and unexpected sales.

We are very sure that we are not in “No risk” The market is currently.


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