Krinsky On Stock Market: Primary Trend Has Shifted To The Downside

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Includes: DIA, QQQ, SPY
by: Financial Sense

By FS Staff

Thoughts from our recent podcast interview with Jonathan Krinsky, Chief Market Technician at MKM Partners, which can be listened to in full at Financial Sense Newshour here or on iTunes here.

Most major global equity markets are now in a downtrend, Jonathan Krinsky told listeners on Saturday, and investors should be careful of jumping in too soon in search of a bottom. Krinsky also notes that the uptrend in the dollar remains intact, and he expects the downward pressure on emerging market currencies to continue.

When asked about his definition of a bear market, he responded that, for his firm, it all comes down to the primary trend: "and a good way to gauge that for us is the slope of the 200-day moving average. The capitalization weighted S&P index had a rising trend line since 2011 but recently it started to inflect downward." The same is true for the Russell index, as well as many other smaller indices. Krinsky further noted how the equal-weighted S&P 500 index has already experienced a decline of roughly 20% in January, which many would call a bear market. He pointed to similarly bearish signals coming from many other foreign stock markets.

To those who feel that the market is oversold, and therefore due for a significant rally, Krinsky reminded listeners of the example of 2008, and cites his 2008 playbook for potential outcomes. In that year, after a similarly terrible start, the market simply moved in a sideways volatile fashion over the next few months. Once the primary trend has changed, as Krinsky believes, oversold conditions fail to generate strong rebounds as selling pressure continues to overwhelm new buyers.

He is also concerned about credit risk and points to evidence that credit problems have spread beyond the energy sector: "we're seeing financial CDS spreads widen... nothing like in 2008... but they are hitting multi-year highs." Financial stocks are likewise breaking down as the yield curve has begun to flatten, now at its narrowest in seven or eight years.

In the commodity space, Krinsky still feels "we need to see that Lehman-style moment" of capitulation among investors. Along with emerging market stocks and currencies, he thinks that for commodities "it is important to realize that after such a long downtrend the primary and structural trend has been so damaged, it is going to take a lot of time to give anyone confidence that the trend has shifted." This is especially true for oil, which has not touched the 200-day moving average in 18 months - the longest period ever. While Krinsky notes some strength coming into the gold market largely because of geopolitical concerns, he feels traders "should stick to the primary trend and for us that is lower."

Finally, when asked where he would put money to work, Krinsky favors defensive sectors like utilities, consumer staples, and REITs. These are the only ones breaking out to new highs at the moment. Rather than trying to catch a bottom in beaten-down sectors like energy and materials, he would rather stick with those sectors showing signs of strength.