The S&P 500 cash index closed above the highly watched 200-day moving average for the last four trading days. The equities market is acting everything is fine, the FED is backing off from tight money policy, the trade war is going to be resolved and the growth engine will be back on again.
Is it really so? Apparently the bond market is thinking the recession is near. U.S. Federal Reserve chairman Jerome Powell has put short-term rate hikes on hold, but most economists say the key figure in finance is the rate on 10-year Treasury notes, which he doesn’t control. That rate on Dec. 31: 2.69%. Today it’s 2.69%. So the two very different opinions about the state of the economy are confusing and most of the retail investors have been on the sidelines. If you are holding a good amount cash, you are not alone and you are smart not to discount the current risks. This is a bear market rally in any traditional definition. Unfortunately, the bear market rally is the best kind for a quick trade. But it is not sustainable for investment positions.
Technically, it is entering the 8th bar in the weekly cycle, that’s typically in the top timing band zone. The 2nd daily cycle is at 14th bar, which is also in the top timing band. Both the weekly and daily cycle point to topping phase, but this is only in the weekly alpha cycle, meaning we will have a weekly beta cycle, which will produce a slight high to finish off the weekly cycle.
The November and December high is at 2800-2815, which is also the 78.6% retracement of the entire selloff. We believe the rally will die off around this level, but it will take several weeks of sideways trading to break down the strong momentum of the bear market rally. It will test the bears and bulls’ patience during the sideways trading in the next 4-6 weeks.
It is advisable to stay nimble, be ready to take profits around 2800 level. The market will never go straight up without a break, even though the current rally wants to make you believe that the rally will never stop.
Don’t be fooled — nothing has really changed
Stock markets around the world plunged last quarter. The Dow fell more than 3,000 points, and the MSCI All-Country World index (ACWI) dropped nearly 14%. Wall Street experts argued there were some good reasons: Economic slowdowns in China and Europe, rising interest rates, trade war fears, looming conflicts between a Democratic Congress and President Trump, and weaker corporate earnings. Today? Economists and other observers agree most or all of this is still happening. Corporate earnings may be heading towards a recession.
The corporate earnings will need a few quarters to heal. The Q1 2019 quarter will tell the real story of the slow down. So the correction of the current rally will occur sometime in April right before the Q1 earnings report. It may seem to be an eternity from now to April, but patience is required to win this game.