Friday, May 05, 2017
Let’s take a look at a few market indexes and see where the trends are.
Volatility lowest since 2007
Wow, Volatility, as measured by the VIX index is at a 10-year low, today it’s at 10.19.
Below is a 20-year chart of the $VIX index – since it is derived from options premiums on the S&P 500 index it is a good indicator of market volatility expectations.
The 2-year average is 50% higher at 15.62.
What to expect? I do not know, but odds are that volatility should move higher, toward that 2-year average.
US Large Cap stocks
Below is a 3-year chart of the S&P 500 index.
The S&P 500 index currently trades 7.3% above its long-term trend line (the 200-day simple moving average “SMA”) the red line on the chart.
Stochastics which is a short-term oscillator (the top window below) shows an overbought condition, since it is above 80.
What to expect? I do not know, but typically an overbought condition results in either a pullback to trend or a move sideways until the trend catches up. With low volatility, expectations would be for more sideways action, which is a positive thing.
Foreign developed markets
Below is a 3-year relative strength chart of the foreign developed market stocks vs. the US large cap stocks (the S&P 500 index).
When the chart is falling, US stocks are in favor; when rising foreign stocks are in favor.
As you can see for the past 3-years it has paid to stay away from foreign stocks and stick with U.S. stocks, which is exactly what we have been doing with our portfolios.
However, I have circled in green the recent action, where foreign developed stocks have been outperforming US stocks and have broken out above the long-term trend line.
What to expect? Foreign stocks (developed markets) have been doing well recently. We have not yet made a move to add foreign stocks to our portfolios. We will take a wait and see approach at this time. Foreign stocks are in a short-term overbought condition.
US Small Cap Stocks
Below is a 3-year relative strength chart of US Small cap stocks vs. the US large cap stocks (the S&P 500 index).
When the chart is falling, US large cap stocks are in favor; when rising US small cap stocks are in favor.
Note what occurred at election time – US Small cap stocks soared. Since December, US large cap stocks have outperformed US small cap stocks as small cap US stocks underperformed.
What to expect? We have had minimal exposure to small cap stocks in our portfolios, primarily because small cap stocks tend to be much more volatile than large caps. We will continue with that approach in the near future, since we do not believe we are getting paid for the excess volatility (risk).
Below is a 3-year chart of the 10-year US Treasury bond yields.
We hit a low of 1.366% in July 2016.
Notice how interest rates shot up at the election to hit a recent high of 2.608% in February. Currently the 10-year rate is 2.354%.
What to expect? I do not know. Interest rates are short-term overbought (note stochastics in the top window are above 80). Best guess? Odds are, in the short-term, that rates will decline as they pull back to the long-term trendline (the red line in the chart).
Probability of a Recession
Recessions have historically been very damaging to stock markets.
Just think of what happened to stocks during the last two recession s that were officially dated December 2007 to June 2009 (real estate bubble burst) and March 2001 to November 2001 (tech bubble burst).
Consequently, we want to keep a close watch on recession indicators.
We track the following 4 economic indicators every day. When they flash red, we are going to be more cautious.
What to expect? Based on the below Big Four economic indicators, along with a recession probability indicator that we track, the probabilities of a U.S. recession in the near term appears low.
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns.