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State of the Market: Buy on the Rumor, Sell on the News

12/12/2017 1:23 pm EST

Focus: MARKETS

Marvin Appel

President, Signalert Asset Management LLC

Our U.S. equity timing models remain overall on buy signals. Our foreign equity timing model went on a sell.  This means that risk should be contained, and you should ride out whatever volatility comes our way, asserts Marvin Appel, MD, PhD, of Signalert Asset Management.

The Republican tax bills working their way through Congress are thought to be bullish for stocks due to the big reduction in corporate taxes that is their central feature. 

I have seen estimates that tax reform could boost S&P 500 earnings by 7%, all else being equal. Indeed, when it appeared that the Senate would not pass a bill, stocks pulled back briefly. But after the Senate finally passed its bill early on Saturday, Dec. 2, making tax reform likely, stocks have been soft.

Perhaps much of the earnings boost that will accrue from lower taxes on business has already been priced into the market.

Either way, stocks this month appear to be working off an overbought condition. For example, the S&P 500 (SPX) stayed above its upper Bollinger band for four consecutive trading days (Nov. 28-Dec. 1, circled in the chart).  This is a relatively rare occurrence and is a sign of a strong market thrust.

Other chart patterns remain bullish.  The NYSE advance-decline line has confirmed recent price highs.  CBOE Volatility Index (VIX) recently touched overbought levels above the upper moving average band on Dec. 4 (circled in the VIX chart), which has historically been a one-week bottom fishing opportunity.

chart

Our U.S. equity timing models remain overall on buy signals. (However, our foreign equity timing model went on a sell.)  This means that risk should be contained, and you should ride out whatever volatility comes our way.

Our clients have their full equity allocations.

chart 2

Update on foreign equity ETFs—relative strength breaks down.

chart 3

I was optimistic about the prospects for the foreign equity ETFs iShares MSCI EAFE Index Fund (EFA) and iShares MSCI Emerging Markets Index (EEM).

However, relative strengths versus SPDR S&P 500 Trust ETF (SPY) in both have broken down. (Circled in the charts.) Our timing models suggest moving out of EFA. 

EEM remains attractive.  It has reached a short-term oversold level according to Bollinger bands and MACD. 

I expect it to hold in the 45.40 support area.

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