Relative Trends Say Stocks May Need To Do Some Healthy Backfilling
- A comparison of behavior near the 2009 stock market low is telling.
- Leading ETFs say market believes Fed is done or nearly done with rate hikes.
- Bulls testing an important area.
How Much Improvement?
While the recent breadth thrust leans bullish for stocks, the CCM ETF Stack Rank Model shows the strongest trends on multiple time frames (1-month to 1-year) are still dominated by defensive ETFs (SPLV) and ETFs that benefit from lower/stable interest rates and a weaker U.S. dollar (e.g. income and foreign/emerging markets).
From a bigger-picture perspective, has the impressive V-rally in stocks flipped the trends back to a "the economy looks solid" footing? The chart below shows the intermediate-/long-term trend in emerging markets (EEM) relative to more defensive/income-oriented REITs (IYR). Notice how the present day chart has not flipped in favor of emerging markets as it did near the March 2009 low in the stock market.
The generic moving averages (125-, 150-, 175-, and 200-day) are shown to illustrate basic concepts about trends and investor risk tolerance.
A similar "growth-oriented ETFs have not turned yet vs. defensive ETFs" look can be seen using the same two periods, but this time via the technology (XLK)-to-defensive-utilities (XLU) ratio.
The intermediate- to long-term trends may flip soon in 2019, but they have not flipped as of Wednesday, January 30, 2019. The same concepts can be seen by comparing and contrasting the two growth (VUG) stocks vs. bonds (IEF) charts below.
100% Open To Wildly Bullish Outcomes
Our purpose here is not to make the bearish case, but rather to illustrate what we are still seeing in the hard data. Our S&P 500 (SPY) trend strength model has shown some very modest improvement this week, and the ETF Stack Rank is not yet screaming "everything looks great". We will continue to take it day by day, monitoring the data with an open mind. The charts above may simply mean the bulls need to take a breather with some normal backfilling and healthy retracements; a topic covered in the video below:
The S&P 500 (VOO) went straight down after the December Fed meeting and now has moved straight up off the recent low. The recent push higher is now testing one of the downward-sloping trendlines covered in the video above. A larger version of the chart below can be found in the CCM Twitter Feed.
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