On November 28th we (finally) had a market day in which the bulls could cheer at the close. Prices were up at the open and continued up for the entire day. Strength was showing up everywhere – from the small-caps to the Dow components (the really big guys!).

Even better, the sectors that showed up best were the ‘risk-on’ ones including finance, consumer discretionary, and technology. The majority of the gains came after Fed Chair Jerome Powell implied that we are close to ‘neutral’ in terms of interest rates. (Note that this is VERY different from his comments two weeks ago.) This is all good news.

However, I note that the bulk of the action since the beginning of Fall, has been downward. We have a definite downtrend since then and the 50-day moving average line is trending down at a pretty good clip. Many sectors are priced below their 200-day moving average, another downward indicator.

I also note that right now the areas of strength generally are healthcare, utilities, and real estate.  These are areas that investors move towards when they are less-than-bullish. And moves by a large number of investors toward defensive areas are not positive for markets.

Now, along with most of our readers, I loved watching all of my screens turn green on Wednesday – green is my favorite color! That said, I’m trying to be realistic. Sideways action has bullish periods, and even bear markets have oversold rallies. So, Wednesday was great but it was not a game changer.  We cannot ignore the recent heavy selling and breakdowns of moving averages.  Bottom line: we must remain cautious.

Many of you have asked, as you’ve seen your portfolios move to a defensive position over the past month, what we see in the future. So, a disclaimer: I am currently a cautious bull, and would not be surprised (with positive news from the G20 summit meeting, and an agreement on tariffs from China, among other things) to see a strong positive end to this calendar year. With that in mind we are keeping a careful watch on resistance levels in the hope that we soon see stocks exceeding those levels. Once reached, we expect Mr. Market would feel comfortable in continuing in an upward direction.

 Market Minute – A Few More Concerns – John Murphy Always Said…

You will likely remember that we sometimes talk about volatility in markets and the index that tracks it. VIX is the primary indicator of this instability. The ‘Vix’ then is essentially a fear index. Technically speaking, it’s actually a measurement of the cost of options – but a higher number translates into more fear in the markets, and a lower number translates to less fear. Less fear is good, because investors tend to ignore bad news when fear is low. A Vix measure around 10 or 11 can be a wonderful thing, as bad news headlines don’t necessarily cause big selloffs. On the other hand, when the Vix is higher, let’s say above 16 or so, irrationality seems to strike investors more often. Have a look at this chart from this past week. 

On Monday the Vix started its day at a relatively high 20.5, although it decreased throughout the day. At the start of yesterday (Thursday) trading – even though the market is much higher than it was back on Monday – the Vix again opened its day right up there at 20.5 again. It did drop back down a bit as the day progressed, but this is another cautionary flag for us. After studying years of Vix action and the resulting market action, I’ll repeat myself: When the Vix is elevated, market participants tend to act first (at negative headlines) and think later. You know we are rather defensively positioned at this time, which makes for a difficult choice. I am concerned about another potential bout of impulse selling. No one wants to miss the next rally should the 10-year bull market continue its upward trajectory. On the other hand, we don’t want to hold more equities should the next big reaction be a bout of reactive selling. John Murphy (patron saint of market technicians) always said there would be days like this. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

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