U.S. Equities Weekly Update: Stocks Twist and Bonds Turn

Michele Schneider

Note that this was written by Keith Schneider.

Global equities got smoked this week except for Brazil which jumped on news that a right-wing populist will most likely be the next president.

The NASDAQ 100 (NASDAQ: QQQ) dropped -2.89% and the Russell 2000 (NYSEARCA: IWM) swooned -3.79%.

October is generally a decent month regarding historical returns for stocks, although occasionally October is famous for some exceptions named after a bird.

The catalyst for the selloff in stocks was US treasuries which broke down under long term support.  The Fed set expectations for more hikes. The one positive is that stocks relative to bonds did not capitulate, keeping our risk gauges in neutral ground

On closer examination, there are only 3 countries (US, Canada, Israel) out of the 30 or so that we monitor that have any meaningful gains over the past 6 months, while the balance have negative returns. One could conclude that populism currently sweeping the globe has not trickled down or helped the global economy. The few positive exceptions are tenuous at best in the short term.

Value stock’s decade long slumber versus growth is on the verge of confirming a major shift and indicates a focus to more conservative plays. Gold Improved against stocks and is looking like a bottom is in the making.

On a more positive note for the buy and hold investor, long term trends are still intact as the 50- and 200-week moving averages show strong positive acceleration while momentum is diverging. Until we get confirmation in price action, it is just worth keeping an eye on.

This week’s takeaway is that it is crucial that you get your analysis in sync with your objectives as currently short-term readings are negative while longer term price action remains intact.

The highlights of this week’s market action are the following:

  • Interest Rates rose sharply and have confirmed a major reversal of the long-term downtrend in rates
  • Momentum has broken down for US Equities on the daily charts (Dow Industrials and value stocks are the exception) with double tops in place for SPY and QQQ
  • All sectors in the Modern Family are underperforming the S&P 500
  • The New High/Low Ratio is very weak
  • Sentiment Gauges are on the cusp of multi-month break-out
  • The Agricultural sector is trying to bottom

A chart of the Long Bond – $TLT:

long bond treasury turn bearish lower chart_october

Good luck with your trading.

Twitter:  @marketminute

The authors may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.