Seeking Alpha

Technically Speaking For October 15

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Includes: IEF, IWM, QQQ, SPY
by: Hale Stewart
Hale Stewart
Bonds, commodities, ETF investing, long/short equity
Summary

Global equity markets are in fair shape over the last two months.

Central banks area concerned about international growth.

A SPY rally might be brewing underneath the surface.

The 2-month charts of most world equity markets aren't that encouraging:

All groups traded lower during September. On the plus side, it wasn't a "mad rush" but instead a disciplined drift lower. While there's been a modest rebound since October, no index has retaken September highs. The moving average picture explains why: most 50-day EMAs (in red) are trending lower. The shorter EMAs are largely just as bearish; with the exception of India (middle panel, far right) and Japan (lower panel, far left), all are moving lower as well. Assuming world markets are at least somewhat inter-locked, this is bearish for US shares.

Central banks are concerned about the international economic environment. The following is from the latest minutes of the Reserve Bank of Australia (emphasis added):

Members commenced their discussion of global economic conditions by noting that heightened policy uncertainty was affecting international trade and business investment. This had continued to be apparent in a range of indicators, including new export orders and investment intentions. Conditions in the manufacturing sector had remained subdued, partly because of ongoing US–China trade tensions. These tensions had led to a contraction in bilateral trade between the United States and China, which was resulting in the diversion of some activity to other economies. Members noted that the trade and technology disputes continued to pose significant downside risks to the global economic outlook.

The latest minutes from the ECB contain similar observations (emphasis added):

Regarding the external environment, survey data pointed to subdued activity in the third quarter. Services, although weakening, had continued to support growth, while manufacturing activity had decelerated further. Trade tensions had sparked a risk-off sentiment, especially in emerging market economies. In the United States, economic activity was slowing – most clearly evidenced in investment – but remained solid. In China, the slowdown in economic activity was accentuated by new tariffs, while in Japan the growth momentum was set to decelerate and inflation remained subdued. In the United Kingdom, the risk of a no-deal Brexit was increasing, while economic activity had stalled. Overall, risks to global activity and trade remained on the downside.

Not only do central bankers look at reams of data, but they also regularly communicate with business leaders. During these meetings, bankers receive a large amount of key anecdotal information about the economy, which also helps to inform central bank actions.

The IMF is lowering its global growth projections (emphasis added):

The global economy is in a synchronized slowdown and we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions. We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country-specific factors in several emerging market economies, and by structural forces, such as low productivity growth and aging demographics in advanced economies.

...

The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods.

The general pattern remains: heightened trade tensions lower sentiment, which lowers capital investment, which lowers manufacturing activity. The good news is that, in the developed world at least, most countries are service-oriented, so the manufacturing decline hasn't caused a recession.

Let's turn to today's performance table: This is the kind of day the bulls like to see. Small-caps were the top performer, gaining 1.31%. The transports and QQQ followed, with the IWM in fourth place. Once again, the long end of the Treasury market has fallen off, with the TLT down 1.22%.

There might be a stealth SPY rally brewing underneath the surface. Let's start with the 5-day charts: The IEF is still moving lower. It closed near a 5-day low. Prices tried to move higher yesterday but couldn't maintain momentum. There are two large gaps lower and a big selloff this AM.That stands in contrast to the SPY chart, which is in a clear uptrend. Despite a selloff yesterday morning, prices advanced strongly this AM. Prices are near a 5-day high.

The 30-day charts put this in better focus: The IEF has not only broken the uptrend but has continued to move lower. Prices are now below tall the EMA - all of which are moving lower. After consolidating in a triangle pattern in late September and early October, the SPY broke through resistance on October 11 and has continued to move higher.

As usual, the problem is with the small-cap indexes. Although the IWM has broken through resistance, prices could be forming a double-top -note the lower volume total on the second high.

I noted yesterday that the percentage of NYSE and Nasdaq stocks above their respective 50-day and 200-day EMAs were low, which is normally followed by a rally of some sort. These charts indicate that could be happening in shorter time frames. However, if the IWMs and other small-cap indexes don't participate, then it won't be the strongest of rallies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.