Preface: Explaining our market timing models
- Ultimate market timing model: Sell equities
- Trend Model signal: Neutral
- Trading model: Neutral
Update schedule: I generally update model readings on my site on weekends. I am also on Twitter at @humblestudent and on Mastodon at @email@example.com. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
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A mystery chart
As investors search for evidence of market leadership, here is a mystery chart of constructive patterns of a closely related group. The chart shows patterns of either upside breakouts or pending breakouts out of long multi-year bases.
Faltering U.S. leadership
U.S. equities have been the market leaders since the GFC, but that may be changing. The S&P 500 appears to be undergoing a topping pattern after violating a relative uptrend. The topping patterns are more evident in the relative performance of the NASDAQ 100 and the small-cap Russell 2000. The NASDAQ 100 topped out earlier on a relative basis and the Russell 2000 is flat to down when compared to MSCI All-Country World Index (ACWI).
I have repeatedly pointed out the premium forward P/E valuation of U.S. equities. Where can investors find better value and momentum in other parts of the world?
Back to our mystery chart. It’s the relative performance of MSCI Eurozone and selected major core and peripheral countries in the eurozone. With the exception of Germany, all countries have staged upside relative breakouts from long bases, indicating strong upside potential.
What about the U.K., which is the cheapest major region by forward P/E. While U.K. equities are exhibiting a similar multi-year relative base and breakout pattern to other eurozone markets, some caution is warranted.
As we move across time zones, the relative performance of Asian markets can best be described as unexciting. Asian markets are flat to down compared to ACWI. The charitable characterization is that they will need more time to base before they can break out.
In the short run, Asian equities may see a boost from Chinese stimulus. Total Social Financing in China has been elevated in the last three months, indicating efforts by Beijing to boost the economy. Keep an eye on the relative performance of China and Hong Kong. Can they stage relative breakouts?
The week ahead
The market action of the S&P 500 last week showed the jittery and headline sensitive nature of market sentiment. The market was flat and marked time on Monday and Tuesday in wait of the closely watched CPI report. When CPI came in slightly softer than expected, prices rallied but retreated later on disappointment over the release of the FOMC minutes. The market then rallied Thursday when PPI came in lower than expected.
That said, hedges are in a crowded short in S&P 500 futures, which will provide buying support and a floor on stock prices in the event of bad news. In the best case, it could spark a FOMO buying panic in the event of good news.
The S&P 500 is testing overhead resistance while exhibiting negative divergences in the 5-day RSI and the NYSE McClellan Oscillator, which are both overbought. Until we see a definitive breakout, the base case remains a choppy range-bound market.