State of the Market: Stocks Hold Their Ground
Marvin Appel, MD, PhD, asserts that this should be a good year to increase exposure to international equities. He is president of Signalert Asset Management LLC, and an expert in timing models.
State of the Market: The S&P 500 Index is retesting its March 27 lows after staying in an unusually narrow range over the past three weeks. Our equity models remain overall neutral-positive for the intermediate term, which means that risk remains well-contained. However, if the market continues to move sideways or to weaken, our models will downgrade from neutral-positive to neutral at the beginning of May, which would be a signal to reduce equity exposure. For now, I expect stocks to hold their ground.
The chart of SPDR S&P 500 ETF (SPY) shows that it has been below the middle Bollinger band (20-day moving average) for almost four weeks. This is the weakest that SPY has been since before the election and signals a change in the near-term trend from up to sideways at best.
For the past three weeks, MACD has been scraping the zero line—very unusual. Overall, the sideways to lower price action and MACD do not give much clue as to which way stocks will break out. Fortunately, market breadth is positive, with the advance-decline line making new highs. The most likely scenario is for SPY to stay near or above the $233.60 support area for the next three weeks or so, although a small temporary penetration to a new low is possible.
It is not only US equities that have lost their momentum. The chart of the iShares MSCI Emerging Market Index ETF (EEM, daily) shows that it has formed a negative divergence with its MACD: MACD and EEM made new highs in February, but while EEM hit another new price high in March its MACD did not revisit its February peak levels. This is potentially bearish over the next several weeks. On the other hand, EEM is now sitting on potential support at the lower Bollinger band, around $39.
I am long term bullish on foreign equities. For now, EEM has hit a soft patch but should find strong support between $37.70 and $39. In the current decelerating market climate, I recommend writing covered calls on EEM if you can buy the underlying shares below $38.50.