PHUKET: While all of my long term clients (and myself) have been in cash for some time, there will be a time to get back into the stock market, but when will that be?
To recap recent market action: major United States and global indices have already moved higher off their panic February lows, led by retail, gold, materials and oil stocks. In fact, last year’s big sector and stock losers (down 50 per cent or more) have been among some of the biggest gainers during the recent four or five-week rally that has moved markets back up to December levels.
However, you need to keep the following key market indicators in mind before you get overly excited about this ‘rally’.
The 200 day moving average is still sloping down in all US indices. When this occurs, the probability of ‘bad things’ occurring in the future is higher than if the moving average were sloping upward.
The 2,100 level on the S&P 500 Index needs to be watched, because if the bulls can move the index above this level, strong leadership stocks will develop and the recent rally might actually be sustainable.
The US Russell 2000, a small cap index, along with the Financial Select Sector SPDR Fund (NYSEARCA: XLF) technical chart, also need to be watched, because (as of mid-March), both were sitting at a levels that had been key supports. However, both plunged through their support levels earlier this year, before recently bouncing back, with the bears hoping that both run into resistance and roll over to retest recent lows.
Oil charts continue to show a down-trending mess, albeit there has been a recent short-term double-bottom with prices moving higher off of that. It remains to be seen whether oil is actually in recovery, or about to roll over and head still lower.
I will replant cash back into long-term stocks and funds only when the market clearly transitions back into a healthy uptrend. That will be when the 200-day moving average is sloping upward, leading stocks are forming sound technical bases, and strong sectors begin to emerge or lead the defensive industries.
Keeping an eye on the price action of leading stocks and sectors during the next one or two months will also be important to determine whether the market heads higher or once again rolls over.
Of course, there are still a number of risks that could hit the markets in the form of an unusually volatile US Presidential election (between a populist and an establishment figure who are both widely disliked); North Korea launching more nuclear missiles; the seemingly endless mess in Syria (along with the refuge crisis it has helped to fuel); and global monetary policy.
The latter in particular is worth a closer look, especially with European Central Bank President Mario Draghi’s recent announcement of new monetary measures designed to fight sluggish growth and the now-chronic threat of deflation.
Watching European bank stocks like Deutsche Bank AG (NYSE: DB), Exchange Traded Funds such as the SPDR STOXX Europe 50 ETF (NYSEARCA: FEU), and the price of European markets, will be the only way to know if these central bankers have the right policies, or if their policies will continue to backfire.
Whether their policies are right or not, Europe is still a mess and the technical charts for key European banking stocks like Deutsche Bank AG look worrisome. The banks grapple with the fallout from, or prospect of, negative interest rates.
Again, patience is important in the current stock market environment, as the price action will tell us what the next market move will be, along with what your next move should be as an investor.
Don Freeman, BSME, is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket. He has more than 15 years’ experience working with expatriates, specializing in portfolio management, US tax preparation, financial planning and UK pension transfers. Call for a free portfolio review. Don can be reached at 089-970 5795 or email@example.com.
— Don Freeman
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