Geo-Political Stress and a Bear Flag

US Equities got hit yet again, led by Grandpa Russell, (IWM) which tanked -2.4% on week. The trade war with China escalated, as did tensions with Iran which sent Oil (USO) up almost +2%. Stocks went into a nasty retreat on a global basis. Not surprisingly,the exceptions were Russia and Switzerland.

Looking South of our Border, Brazil got hit the hardest down over -8% for the week, which basically wiped out the gains since Jair Bolsonaro was elected last winter. The new populist president has been losing confidence as the country is flirting with a recession. Adding to the pressure is the fact that Emerging markets are most sensitive to trade wars.

This week’s highlights are:

  • Risk Gauges remained 100% negative even during the bounce up
  • Grandpa Russell (IWM) failed  its 200 day moving average, 50 WMA and 50 DMA, and closed the week with a bear flag in a distribution phase
  • High Yield Debt continues to under-perform US Bonds -major concern (Risk Off)
  • Volume patterns continue to worsen with more distribution days over the past few weeks
  • Safety plays performed well (XLU) such as utilities and consumer staples (XLP) while spec sectors (SMH, IBB) and Retail (XRT) got hit hard
  • Market Internals have maintained an overall defensive posture with one exception; the number of stocks trading below the 10 DMA
  • Emerging Markets weakened versus Established Markets, another negative risk off sign
  • Market Sentiment hit oversold levels on a short-term basis and helped the market bounce

Last week we mentioned we had mixed feeling on the next big move in Equities but were leaning bearish. One reason was that our Real Motion indicator that measures momentum pointed to big negative divergences that is in alignment with other negative readings highlighted above. Remember, we are still a tweet away from just about any outcome so invest accordingly, which means maintain maximum flexibility and use intelligent risk control.

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Best Wishes for your trading!