Weekend Video, Chart Notes and ChartBook – There Will be Growth in the Spring, but First…

ETF Chart Notes for Saturday, March 21st

There are no stock setups today because the breadth models are decidedly bearish, volatility is extremely high and the S&P 500 recorded a 52-week low. This environment is not for trend followers and cash is king for us trading mortals. There is opportunity for traders that thrive on volatility and can watch the market throughout the day. Trading volatility often involves buying after steep declines and selling on the rebound. Yep, you need to buy when it looks the worst and sell when it looks the best. Waiting for a pattern breakout or breakdown is highly unlikely to work in this environment.

The markets, of course, are forward looking and have already priced in a pretty bad situation. The market will at some point start pricing for a recovery, but nobody knows just how bad it will get and when the markets will begin to price in this recovery. A generation is around 30 years and the S&P 500 has already fallen 50% twice since 2000. The index is currently down 33% from its high and a 50% decline from the February high would mark the third in less than a generation. Thus, while people are calling this a “generational” buying opportunity, it is actually the third generational buying opportunity in the last 21 years.  

Only the 1-3 Yr Treasury Bond ETF (SHY) and Dollar Bullish ETF (UUP) recorded 52-week highs this week. There are too many 52-week lows to mention. Note that 179 of the 200 ETFs in my master list recorded 52-week lows this week.

This Week's Leaders and Laggards:

GDX +8.16%, TLT +3.57%, UUP +2.08%, AGG -1.64%, GLD -2.21%, SKYY -5.15%, IBB -5.44%, MJ -6%, XBI -8.13%, FDN -8.55%

REM -38.13%, XHB -27.25%, ITB -25.93%, IYR -24.93%, XLRE -23.08%, IPAY -21.99%, FINX -21.27%, KIE -20.72%, IHF -19.72%, XLE -19.66%

Breadth Models and Breadth Thrusts

I am not a fan of price targets and marking support levels in a downtrend. As more of a Dow Theorist, I believe the trend is in force until proven otherwise. The broad market environment turned bearish on February 26th when the Index Breadth Model turned fully red. The Sector Breadth Model also turned net bearish and the sum of the weighted signals hit -87%. All indicators in both models are current on active bearish signals.

Click here for an article and video explaining the indicators, signals and methodology used in the Index Breadth Model. This article also includes the signals of the last five years.

What would it take to turn bullish?

We need to see some green in the breadth models and a bullish breadth thrust would be a start. The chart below shows the 10-day EMA of Advance-Decline Percent for the S&P 500, S&P MidCap 400 and S&P SmallCap 600. A move above +30% triggers a bullish breadth thrust, while a move below -30% triggers a bearish breadth thrust. The group turns bullish when two of the three trigger bullish. Previous group signals were bearish in February 2018, bullish in January 2019 and bearish on February 25th, 2020.  

The breadth thrust is the most sensitive of the two indicators and often the first to change. This also means it is also the most prone to whipsaws (bad signals). Note that the chart above is part of the Essential Breadth Indicator ChartList, which is now ready and available to TrendInvestorPro subscribers who have a StockCharts membership as well. Friday’s article explained the indicators and listed the charts in this list. Here is a link to sign up for the ChartList.

Macro Analysis and Levels of Interest

We are currently in the “macro” analysis stage. In contrast to bear markets, bull markets are for “micro” analysis because we need to find the bullish setups, separate the leaders from the laggards and view pullbacks as opportunities instead of threats. There are lots of opportunities in bull markets and we must get granular to find the best ones. As noted before, correlations rise in bear markets and there are few, if any, places to hide. This is why cash really is an option in the bear market.

The macro stage is about the big picture: stocks, bonds, gold, currencies, the Dollar, and, perhaps most importantly, the credit markets. Next week I will put together a list of things to watch on the macro stage. For now, the monthly chart for the S&P 500 shows the index has yet to reach my “interesting” level. I posted this chart on Monday and noted that the 2000 area and monthly RSI(14) below 30 as my levels of interest.

The bigger trend and market environment are the most important elements. As such, support levels are NOT expected to hold in a downtrend or bear market. Lower lows are the norm and price targets are subjective, at best. Nevertheless,  the S&P 500 will discount the very worst at some point and probably even overshoot on the downside. Perhaps 2000 is being optimistic and 1700 is more realistic as a level of interest (bottom picking area). Keep in mind that bear markets end when most people are tired of trying to pick a bottom.  

Here is a link to last week’s article and video dissecting the last two bear markets and the 1987 crash.

The Bottoming Process

The next chart expands on the 2002-2003 bottom and the 2008-2009 bottom. Notice that the S&P 500 was down 50% in July 2002 and then began a six to nine month bottoming process. The index was down over 50% in October 2008, and then embarked on a four month bottoming process. Process is the key word here.

Being There

Here’s picture and quote from one of my favorite movies, Being There. We are currently in the fall-winter stage, but there will be spring and summer again.

So What about Corona?

Here in Belgium, we just finished a full week of nationwide lockdown. Yes, I have been living in Belgium since 2003. Only the grocery stores and pharmacies are open, and people must work from home if the company cannot provide enough social distancing. It seems that 80% of the workforce is working from home now. Virologists here suggest that we will see case numbers level off 10 to 14 days after the lockdown began, which means early next week. There were 559 reported cases when the lockdown began (13-March) and there now 2257 cases. Cases have quadrupled since the lockdown.

Adherence is the key to a successful lockdown and the Belgians have been pretty good. At least so far. Unfortunately, spring is here and the sun is out this weekend. This means everyone in lockdown will head to their local parks for a walk, run or bike ride. This is not good as joggers sweat, pant and create a short breeze as they run past. France closed their parks and I have a feeling that Belgium will do the same to contain the epidemic. Italy tightened their lockdown rules and deployed the military for enforcement. Half-ass containment does not work.

The image above is from the FT, but may be behind a paywall.

Lockdown is a containment strategy, but not an exit strategy and I am not sure if any country has an exit strategy at this stage. Belgium does not have an exit strategy and there is talk that the lockdown could last eight to ten weeks. This could also be the case for Italy, France, Germany and others. Belgian Universities shut down their campuses for the rest of the year and lessons will stream until the end of June.

A ten week lockdown is realistic because Wuhan went on lockdown on January 23rd and remains largely on lockdown. In fact, most of China is on lockdown and has been for around two months. The FT China Economic Activity Index went from 100 on January 1st to below 60 in late January. It moved back above 60 over the last week or so. Thus, even after two months of lockdown, testing and isolation, economic activity remains at 60% in China.

The country by country coronavirus trajectories from the FT show the US passing France and closing in on Germany in total cases. While I would like to be optimistic, lack of a nationwide lockdown suggests that US cases will exceed the number of Chinese cases, which is 68,357. The UK is also going to get hit hard. I do not want to be an Ackman type alarmist, but this is going to get worse before it gets better.

Victory over the coronavirus is likely to involve a long process and countries are at different stages of this process. The process is basically containment, mitigation, suppression and prevention. As the graphic in this CNN article shows, there is a significant time gap between suppression and prevention. Also notice that there will likely be flareups during the suppression period. Frankly, I think most countries are still in the containment and mitigation phase. Perhaps China and Korea have moved to the suppression phase.

Stay safe and stay home!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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