Stocks Take Two Hits And Recover

Will the bulls thank China for last week’s opportunity to buy stocks lower?

Last week began with a punch back from China in the trade war that escalated the concerns of the trade war to concerns of a potential currency war. The result was the biggest one-day percentage decline in the SPY for 2019.

It also resulted in pushing the SPY, QQQ, and DIA well under their 50-day moving averages. Additionally, the IWM closed well below its 200-day moving average.

This set the stage of a weak market that would then get hit with a second shock on Wednesday when central banks in New Zealand, India and Thailand all announced larger-than-expected cuts to interest rates.

The rate cuts sent the U.S. bonds soaring and stocks plunging on escalating fears of global economic weakness.

Next, consider the increasingly violent protestors in Hong Kong and with lower rates, and currency concerns you have a recipe for a run into gold (GLD) which rallied 4% for the week.

There have only been 2 weeks in which gold (GLD) rallied 4% since 2016. The last one was GLD’s 6/21/19 close over the 2016 high.

Likewise, had TLT not pulled back from its Wednesday high, it would have had the largest weekly move since to 2015. This may have been a function of the charts as this week’s high of 143.06 was just shy of the 2016 all-time highs of 143.62.

The volatility was extreme, but it was also very much in synch. Global economic weakness and escalating geo-political tensions drive rates lower (bonds up), GLD higher and stocks lower.

However, stocks did not go lower after the second shock. The initial reaction was down, but had SPY closed the week on Thursday they would have been up for the week.

Instead, stocks consolidated on Friday, and the SPY and QQQ ended the week modestly lower and right under their 50-day averages.

So the question I cover in this week’s video is…

Did stocks just put in a significant bottom?

As you’ll see in the video and highlights below, there is a case to be made that stock got oversold, the trend is intact, and lower rates will win over the bulls?

Our Alpha Rotation trading system uses all the relationships I’ve discussed here and more, and it’s been dead right on the major trends in the market even throughout the crazy environment of the last 12 months.

In fact, over the last 12 months, the SPY has squeaked out a gain of only 3% and has been down as much as 15% during that period. Alpha Rotation portfolios have returned 20% – 60% depending on the model, and they were never down more than 5% for the period.

Alpha Rotation has a longer time frame than pinpointing the low of a 2-week sell-off, but for what it’s worth, it still prefers bonds over stocks.

Highlights & Considerations

  • At Mondays close, the SPY had the worst 4-day percent decline since December 2016.
  • Wednesday’s global panic into bonds, didn’t create a new low in stocks, but it did highlight the growing acceptance of the idea that significantly lower rates are ahead.
  • Gold broke out of a 6-year range
  • Silver is only at a 1-year high, but its weekly chart closed over its 200-week moving average. This has occurred 10 times since 2013 (all since 2016), but only once did it occur 2 weeks in a row. This week’s close is the best looking of any of the other attempts considering it’s the first time the slope of the average is not down, and the weekly close is 3% higher than the average. Neither of these conditions were true in any other attempt.
  • Adv/Dec breadth numbers reached modestly oversold levels.
  • The number of new lows in NASDAQ exceeded June’s level. This is concerning if markets head lower.
  • Sentiment as measured by VIX and % of stocks under 10-day moving averages reached oversold levels.
  • Vanguard Growth ETF (VUG) is over its 50-day
  • Biotech sector ETF (IBB) is positive on Triple Play price and volume and in Real Motion
  • Interesting double bottom in commodities ETF (DBA)
  • Copper hit a 2-year low which is line with the pessimistic outlook for global economic conditions.
  • Dollar (UUP) fell with the explosive interest rate move, but then consolidated and still remains in a strong bull trend.
  • The Yen (FXE) closed on the highs of the week, which is considered ‘risk off’
  • The Chinese stock market ETF (FXI) is at the December 2018 low which is a 2-year low and under 200-week average