Stock market outlook
Chart 1 below shows the track of the S&P 500 for the last 12 months. The green line is set at the previously recorded high water mark of 2,130, which was recorded in May of last year. The red line is set 10% below the green line, which represents the arbitrary but widely accepted parameter for a market correction.
Chart 1. S&P 500 with Correction Parameters
Two things to note here. First, there are two “W” formations on this chart as the market dipped below the red line – in August 2015, and again in February 2016. I’m not a big believer in the usefulness of chart patterns, but I will point out that the first “W” was successfully tested with a “higher low” while the second one was not. The second one shows a “lower low” on the right side of the “W”. I point this out because chartists view this as a sign of weakness on the part of technical traders, including algorithm-based trading systems that now play a dominant role in overall trading activity.
The second note is the repeated failure of bullish traders to push through the old highs. This correction is now the 13th longest in duration since 1950. My interpretation of this factoid is that it shows a lack of confidence on the part of market bulls. Maybe the combination of high valuations and punk earnings growth is causing them to question whether this is a good time to try to be a hero.
Chart 2. S&P 500 with Zone of Death Parameters
Chart 2 shows the track of the year-over-year percent change in the S&P for the last year. The green line represents the price level that is 10% above where the market was trading one year ago. The red line represents a 10% decline from year-ago prices. The Zone of Death is the area between these two lines. The significance of the ZOD chart is that historically, once the market enters, it has a difficult time escaping. This is just what we’re seeing now.
Additionally, once the market dips below the red line, the probability of continued weakness and a bear market increases markedly. Put another way, the ZOD exerts a type of gravitational pull that can be hard to overcome.
Chart 3. Market Momentum
Chart 3 shows momentum as represented by the relationship between the short term and long term moving averages. The black line (long term momentum) is the 50 day minus the 200 day moving averages. The green line (short term) is the 10 day minus the 250 day moving averages.
Both lines are above zero, meaning that price momentum is positive. But we’ve been here before and failed to hold above zero. The rally that began in the fall of 2015 looked good at first, but eventually failed. Now we have another rally that has taken both lines into positive territory, but I remain skeptical about the durability of the move.
Select Asset Class ETF Charts
The following charts represent a selection of asset classes we follow. They show up here because they are noteworthy, either because they are out-performing the broad market, or under-performing. They cover a cross-section of the stock, bond, and commodity markets. Each chart shows a blue background representing last year’s prices, along with a black line showing this year’s prices. I won’t comment on each chart, as that would probably put most readers to sleep. You’re welcome to browse through them at your own pace, stopping at anything that catches your attention.
Global Stock Market
We begin with the benchmark of the global stock market. After a shaky start to 2016, things have recovered back to last year’s level. But as you will see on the charts that follow, other asset classes have done much better or much worse than global stocks.
Emerging Market Stocks
Emerging market stocks, for example, are lagging behind developed market stocks. China, Brazil, and Russia are improving of late, but they still have some room on the upside before they catch up to last year’s levels.
U. S. REITs
Take a look at the U.S. REIT market compared to the emerging markets. They have fully recovered, topping their level from one year ago and very close to making a two year high.
Commodities
Commodities, on the other hand, are still struggling to catch up to their level of last year.
Gold Miners
Gold Miners, meanwhile, are one of the best-performing sectors of the market.
Bond Market
Last, but certainly not least, is the bond market. Thanks in large part to the coordinated actions of central banks around the world, interest rates are low and bond prices are high.
The wide disparity between and among global asset classes reminds us that when it comes to investment returns, investment policy matters. What is investment policy? It’s the way an investor positions his or her portfolio among the assets available in the marketplace. Costs matter a great deal as well, but I would argue that investment policy is the primary driver of investment returns.