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U.S. Stock Indexes Overcome Recent Softness to Reach New Highs

09/24/2018 4:14 pm EST

Focus: MARKETS

Marvin Appel

President, Signalert Asset Management LLC

The S&P 500 Index (SPX), Dow Jones Industrials (DJI) and Nasdaq Composite (IXIC) hit record highs Sept. 20. The NYSE advance-decline line is close to its August 29 peak, very close to confirming the indexes’ new highs. Our U.S. equity timing model remains on Hold.

Hold indicates potentially profitable market conditions but at intermediate risk levels. We expect our model to switch to a Buy on October 1 based on seasonality factors.

For those of you who subscribe to the Dow Theory, the market looks good. The Sept. 20 all-time high in the Dow Jones Industrial Average confirms the September 14 high in the Dow Jones Transportation Average ETF (IYT) (See chart below.)

chart 1

The Transports are in a clear uptrend since July, as demonstrated by IYT being consistently above its middle Bollinger band. However, IYT has formed a negative divergence with its MACD, suggesting that the uptrend is losing steam.

I am not concerned about a significant retracement, much less the start of a new downtrend. Rather, pull backs should be viewed as intermediate-term buying opportunities.

The touch of new highs by both the Transports and Industrials means that any potential Dow Theory sell signal is many months away.  What would have to occur is for new downtrends to form in both averages, requiring a significant retracement, failed retest of the recent peak, and a second leg down to a new post-retracement low.

There is no universal definition of how to recognize the start of a new downtrend. I have found 7% reversals to be useful. Using 7% as a minimal move, what would have to happen to produce a downtrend would be for both the Dow Transports and Industrials to decline by at least 7% (each), rally by at least 7% but not to a new high, and then fall below the low of the initial retracement.

Emerging markets

Colleague Joon Choi makes a case that emerging markets stocks have fallen so far as to be attractive as bottom fishing candidates. Indeed, covered call writing using the iShares Emerging Market Index ETF (EEM) looks attractive because compared to options on SPY, premiums are rich with EEM. 41.60 appears to be a near-term support area for EEM, almost 4% below its close on Sept. 20.

Nonetheless, our long-term relative strength model still favors SPY over EEM. This model moved out of emerging markets on April 30, 2018. Since then, EEM has lagged SPY by 19% (Sept. 20).

Weakness in emerging markets currencies is a major cause of investment distress in their equities. Although the U.S. dollar has fared poorly against other developed currencies in the past five weeks, emerging market currencies have not yet turned the corner.

The chart below of the Wisdom Tree Emerging Market Currency Strategy ETF (CEW) is down more than 6% this year, although it remains above its 2016 low. MACD is oversold by historical standards, suggesting that emerging currencies should still firm up. That would confirm any bounce in emerging market equities. However, we have not seen an MACD buy yet. (See circled area in the chart below.)

chart 2

My own preference is to wait for our longer-term model to switch from favoring U.S. stocks to emerging market stocks. (The last buy signal for emerging market stocks lasted from July 31, 2016 through April 30, 2018, during which time EEM outperformed SPY by 8%.) However, if you are looking for an aggressive entry into emerging market stocks you might want to see MACD buy signals in both EEM and in CEW.

—Marvin Appel

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View a video interview with Marvin Appel and Dan Gramza on 2018 investing opportunities here.

Recorded: July 25, 2018 at TradersExpo Chicago.
Duration: 6:30.

View a video interview with Marvin Appel and John Bollinger on Bollinger Bands, when they are most useful for traders and about systematic investing pioneered by Dr. Appel and his father Gerald Appel here.

Recorded: July 25, 2018 at TradersExpo Chicago.
Duration: 4:31.

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