In the past couple of weeks our newsletter has brought up the question of market sustainability. The issue still deserves some attention so we feel compelled to bring you a few more paragraphs on the subject.

Although there are some ‘worry points’, in general terms things continue to look favorable. Once again, this week is returning to, or close to, new highs in both Nasdaq and S&P500. The Dow has been held down by a couple of its major components, but it too, is trending higher. Our concern then is that when the highs are reached, or exceeded, does that fact alone become a driver for more growth, or does it mean that we are at a point of ‘Is that all there is?’. Of course, if we had an absolute answer to that question, we would all be much richer than we are. What we DO have is the black art of technical analysis. The tools in this toolbox won’t tell us the future with any certainty, but they can give us an understanding of what the markets truly are doing right now and how we got to where we are. We can then gain some confidence that whatever the markets truly are up to at the moment it is a suggestion that that is, absent new data, what inertia alone wants them to do.

A very valuable data point for technical analysis is market breadth. Breadth is the expression produced by comparing the number of traded companies that are advancing to the number declining. If more are advancing then falling breadth is considered bullish, contrarily, when bears are in charge breadth will be negative. Now, here’s where things can start to look interesting: Suppose you have a situation where the S&P500 is trending up but at the same time the breadth (as indicated by the Advance-Decline line) is falling, that may well be an indication that the S&P500 may be topping out and could reverse direction in the near future.

Tom McLellan (he of the famous McLellan Oscillator) has a nice chart that displays their ‘Ratio-Adjusted Summation Index (RASI)’. Here’s what it looks like this week:

To understand what this chart is telling us let’s turn to Mr. McLellan:

The basic point which matters right now is that the ability of the RASI to climb up to a nice lofty value conveys an important message.  It says that liquidity is plentiful, and that is a condition which is likely to continue for a while longer.  A high RASI reading says that there is still more uptrend yet to come.  There might be an ordinary, garden-variety correction to help restore equilibrium, but we are not at the end point for the uptrend. 

Final price highs do not typically arrive with the RASI up above +500.  The time to worry is when we are seeing prices moving to new all-time highs but the RASI is down below +500.  This is especially important when there is a normal correction which takes the RASI down below +500, and then it fails to climb back above +500 on the ensuing rally.  That is a big invitation to trouble.

But it is not at all what we are seeing now.  The RASI is up at +1005 as of April 24, so it is a long way from decaying down to the point where it would be signaling a problematic loss of liquidity for the stock market.  An ordinary correction can still appear at any time, and we have to accept that and be ready for it, but this is not the end of the uptrend.  And that is a really nice piece of information to have the market give to us.

So, there you have it from at least one technical expert.

Ron’s Market Minute 4/26/2019 — Forecasts Frailty

So, the forecast consensus for US GDP growth in the first quarter was 2.0%. The actual number (although preliminary) is 3.2%. That’s a rather large difference! One might think that such a good report would be having a more positive impact on the markets this morning…but one would be wrong. Remember that big selloff in December? That was brought about by a combination of fears — of recession and Fed tightening. Recession fears then vanished (they were unfounded anyway) and the Fed reversed course. Hello Bounceback! Now, if the investment community thinks GDP growth is TOO good, they will return to fears of Fed advancing rates. Our sense is that this too shall pass quickly. There is some underlying data in the GDP report that suggest the economy is strong but nowhere near over-heating. In other contradictory details, consumer spending shows deceleration but consumer confidence has picked back up. We have two things to say: 1) Go figure and 2) watch this space. 

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

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