2018 Halftime Update-Second 1/2 Market Outlook

Earlier this year, I recorded our usual Market Outlook screencast and then piggy-backed on the video with a written version for those who don’t enjoy videos.  I’m excited to say that the feedback was overwhelmingly positive, so again, you have two choices:

  1. CLICK HERE TO WATCH the 30-min VIDEO of this year’s Halftime Update, or
  2. Continue on to READ the update instead!

Please let us know if you have any questions, whatsoever.  We hope you find it both educational and enjoyable!

First, let’s discuss the stock market. 

The chart below is the S&P 500, a good representation of the U.S. stock market, year-to-date, as of early this week.  The black, horizontal, dashed line is where the market started this year and the solid, black line is where it’s been this first six months.  Needless to say, it’s been a wild, volatile ride with not much to show for all the distance (both up AND down)!

Switching over to the Dow, the chart looks even worse.  Again, we can see how this has been a year of “nothingness” thus far.  I don’t mind “boring” because investing shouldn’t be “exciting” if you’re doing it right, but I don’t like “flat,” and that’s exactly what cards have been dealt to the table this year, so far.

There has been some talk on Twitter, Facebook, LinkedIn, and in many other places on the interwebs that the market is crashing.  I use several indicators to create a “weight of the evidence” approach to the crime scene that is the market.  It is not prudent to look at one chart or one indicator and make a knee-jerk decision.  You have to look at the big picture.

Below, I’ve annotated a few of the indicators I follow on a regular basis:

  1. The market (black, solid line) is above the 200-day trend (at #3)
  2. The 50-day trend of the market is above the 200-day trend (at #3)
  3. The slope of the 200-day trend is up, not flat or
  4. Momentum has remained bullish (above 30 on RSI(14)), with a very tiny dip below 30 (the bearish line in the sand) back in early-February, but barely.

In other words, most of what I see on the surface for the market looks fine for now, but let’s keep digging deeper…

Most investors don’t know how skewed the market can seem on the surface.  Like the tip of the iceberg the Titanic struck decades ago, you can’t just observe the surface and make smart decisions.  You need to seek more information.

For instance, here’s something that most should find very interesting:

  • The total value of the top-5 stocks on the S&P 500 is $4,095,058,706,432, but
  • The total value of the bottom 282 S&P 500 companies is $4,092,769,755,136

In other words, when big, huge companies like Apple, Amazon, Facebook, Google, and Microsoft do well, “the market” does well.  When they do poorly, “the market” does poorly.  What about those few hundred, smaller companies?!  Do we just lop them off as if they’re completely unimportant?!  Of course not!

One of my early mentors explained it this way…

There are Generals in the Army, and they’re the big companies.  Then, there are the troops, which are all the smaller companies that are usually left unnamed.  It’s important the generals lead the troops into battle, but while these generals are surely an important piece of the battle, without the troops, the generals will still lose the war.

The top of the chart is the NYSE, which represents most of the stocks available for purchase here in the U.S.  The problem is, it’s “cap-weighted,” so the biggest companies get all the weight.  Since these huge “generals” make up so much of the Dow and S&P 500, it’s hard to see what the troops are doing.  In order to get this information, we use something called an “Advance/Decline Line,” (or A/D Line) which is in the bottom pane of the graph below.

The A/D Line simply takes the number of stocks that have advanced (gone up) minus the number of stocks that have declined (gone down) each day, and then we plot a chart to see what the trend looks like.

As you can see below, while the NYSE has continually failed to come remotely close to the January highs, the A/D Line tells a different story.  It tells us that the troops are charging away, or said another way, the small and mid-sized companies are making new highs and performing well while the generals are tired, lagging, and out of breath!

To prove my point, here’s the same NYSE chart with A/D Line back in 1997-2001 just prior to the Dot-com bubble.  Notice anything interesting?  While the NYSE continues to rise, the A/D Line is falling – an indication that small and mid-sized companies are already crashing!

To tell the story in a different fashion, the generals are charging into battle, but the troops are retreating.  Do you think this battle ends well?  Nope…

Here’s the same NYSE chart and A/D Line again, but this time we’re looking at 2006 through the early part of 2008.  While we didn’t get as much warning this time, you can see again how the trips have already started running away from the battle in late-2007 while the generals are running downhill into what will ultimately result in a painful decline.

It’s extremely difficult to have a market crash when the small and mid-sized companies are printing new highs.  So if you take a second and scroll up to the very first NYSE A/D Line chart above, you’ll see, again, that we have more evidence today that the market is headed higher from here as the troops continue leading the way.

Not to split hairs, but this is what a healthy confirmation looks like.  Below is the Russell 2000 index (in other words, just the small companies) and you can see how BOTH the price of small stocks AND the A/D Line of those stocks continue to rise together.

When markets crash, small caps usually crash first, then mid-caps, and then, once the mutual fund and institutional money buys the last of the large companies (pushing the Dow and S&P 500 higher), the end is near as the buying enthusiasm dries up and selling pressure starts a fire.  Observing the chart below, however, there is no doubt that the smaller companies are doing just fine.

Below is more evidence from Lowry Research, one of the top technical analysis research firms in the world and one that I subscribe to and read regularly.

Lowry Research has a proprietary formula for calculating Buying Power and Selling Pressure, combining the price movement of stocks and their volume each day.  As you can see below, Buying Power beat out an crossed above Selling Pressure back in late-November of last year (2017) and since then, we’ve continued to observe lesser selling pressure and more buying power.  In fact, this past week’s market movement generated the widest, most positive spread between the two since 2004.  This is not bad news.

So to close out our discussion about the U.S. stock market, let’s look at some levels to watch over the coming months.

First off, if you read any of my market commentary or watched any videos from earlier this year, you’ll know that the market broke northward, out of a descending triangle pattern in May (see the red triangle, below).  Usually, the market breaks down out of descending triangles, but this time, it didn’t.  Further, the profit statistics for upward breakouts out of descending triangle patterns is very good – in fact, one of the best profiting patterns in all of technical analysis and charting.

Now that this breakout has occurred, it’s crucial for the market to stay above the red dashed line, below.  In addition, we want to see momentum (RSI) stay above the 30-level, which keeps stocks in the bullish camp.  Lastly, in a perfect world, we want to see the market close at new, all-time highs, above the peak that took place back in late-January (blue dashed line).

Changing gears, here’s one quick chart that sums up the interest rate environment:

Below is the interest rate on the 10-year Treasury going all the way back to the 80’s.  While stock market crashes last roughly 18 months, the bottoming process in the last few months of a stock market crash is swift.

Conversely, the bottoming process in interest rates takes place at a snail’s pace… over a period of 3-4+ years.  You can see how the first low in rates took place about five years ago at this point.  Then, we saw another low in 2015.

Could this be a double-bottom in rates… a reversal that will result in a new, long-term uptrend in interest rates?  I think we may see it pull back before it finally breaks above that huge, long trendline, but only time will tell.  Just remember, when rates go up, the value of bonds goes down!  As a result, I think the next 10-20 years could be one of the most interesting times to invest in bonds since the 1st half of the century!

Gold is always a hot topic.  Let’s discuss it for a second…

Gold hit all-time highs back in late-2011.  That was almost seven years ago at this point.  With very few reprieves and opportunities for money-making, gold has had a rough go.  The $1,240 level was important, but the chart below is already a couple days old and gold already broke down below this level.  Now, it’s the $1,200 level at play, and then $1,120 before the $1,050 low from late-2015.

In order for gold to find itself in a long-term uptrend, it needs to find its way above the $1,360 level and stay there for a few days… and then continue northward.  If it can’t, then I don’t think this ends well for the yellow metal.

Not much else to share here – but this is a year-to-date gold chart.  You can see how the red dashed line acted as a floor of support, holding up the price of gold until it couldn’t hold any longer back in May.  Then, despite the bullish efforts of gold bugs, it couldn’t break back above that previous floor, which then became a ceiling of resistance, and it continued to parabolically fall from there.

If it isn’t already obvious, gold is a no-touch for me.  There are entirely too many other, better investment options (primarily U.S. stocks and ETFs) that make a whole lot more sense today than trying to catch a falling knife here and bottom-fish this thing.

Ahhh, Bitcoin…

These days, a big discussion about the market just wouldn’t be complete without a discussion about Bitcoin, now, would it?

Here’s a long-term bitcoin ETF chart (the symbol is GBTC), which is the easiest way to buy the crypto-currency on the stock market exchanges.  You can see how it was trading at 30-cents/share back in late-2015.  As it climbed the wall of worry, the price rose, as did the frequency of Facebook posts, Twitter Tweets, and Instagram recommendations to buy it.

What the longer-term chart above doesn’t show is the huge, -76% decline that Bitcoin has faced this past seven months.  Yikes!

Bitcoin (via the GBTC exchange traded fund) hit a point of resistance in early November, pulled back, and then broke thru that ceiling to all-time highs around $38/share.

  • It pulled back and found buyers willing to buy at $10.50 in February and rose, but
  • Only made it to around $20/share before falling back down to $10.50, twice.
  • It finally failed to hold that floor of support in June and tried to break back above the new ceiling, but also failed.

Since generating these charts, the GBTC Bitcoin Trust ETF has, in fact, managed to get back above the red dashed line below, but experienced a hard and fast downward reversal Wednesday.  Right now, I still have no interest in Bitcoin, but it’s entirely possible that it could come around as a viable, profitable investment at some point in the coming months.

Just for fun, this is how those people feel today – who told all their friends and family during the holidays to buy Bitcoin, Litecoin, Ethereum, and other crypto-currencies. 😉

Looking ahead to the 2nd half of 2018:

Thanks to great work by the Stock Trader’s Almanac, another top-notch research firm, we can see the seasonal patterns of the stock market during mid-term election years, just like the one we’re living in today.  Notice how (black line) historicaly, the market tends to flatten out and remain trendless through the end of the 3rd quarter, followed by northward trajectory at the end of the year.

The red and blue straight arrows (and question mark) are my annotations.  Since the S&P 500 has done slightly better than the average mid-term election year, I wouldn’t be surprised to see the same sideways action… so more, boring, nothingness for another couple months yet.

Here’s the same chart concept, but using the Dow instead of the S&P 500.  You can see, again, how the Dow has performed even worse in 2018.  Again, I expect the same, boring, sideways, trendless movement between now and a few weeks before election day.

There’s one last chart I wanted to share – and that’s the bearish case.  Anyone who’s known or followed me for long enough knows that I’m agnostic when it comes to the directional movement of the market.  I don’t care if it’s going up, down, or sideways because I can’t control it.  The market does its thing and it’s my job to react to it in our clients’ portfolios, adjusting what investments we own, and dialing the amount of risk we take up or down, all depending on the market landscape.

The chart below is a VERY long-term chart of the Dow, constructed by the very intelligent analyst and author, Gary Anderson.  Notice the trend channel that runs parallel above and below the highs and lows and then notice how the market typically reacts when it taps the top of the channel.

The last time the Dow hit the top of this trend channel was just prior to the dot-com bubble.  Before that, it was the 1960’s a time after which the market went literally nowhere for almost 25 years!

Now, does this mean that we can expect a market crash any day?  I sure hope that’s not what you’re thinking, especially after everything else you’ve read, above!

Remember, we can’t take any one piece of information and use it to make decisions.  We have to use several pieces of information to pinpoint the best course of action.  The long-term chart of the Dow above is just that: long-term.  Very long-term, in fact.  You’re looking at more than 100 years of market action and people were still riding horses at the left edge of the chart!

What I will say is that this chart is an intriguing piece of evidence that suggests this market might not have much longer to run before we see the next big downturn.  Will it happen this year?  I don’t think so.  I think we have another good six months yet, at minimum.  But is it possible we see the top sometime later this year or next year?

Sure… this is why we analyze, discuss, and stare at these charts all day!

In closing…

I shared this back in January and thought it was just too good not to share again.

GO Banking Rates did a survey recently and found that the largest percentage of people who responded said that their number one BIGGEST REGRET in 2017 was “Not saving enough money.”  Not only was it the #1 regret – it was #1 by a long shot.  Look at #2.  Go figure, “Spending money on non-essentials.”  Do you think that might have a correlation with “Not saving enough?”  I’d even lump these two together.

You can take a look at the rest of the survey results yourself, but as an investor, you cannot control who the President of the United States is.  You cannot control who’s tweeting what or when the next tariff will be announced.  Newsflash!  I know this is going to be difficult to believe, but you cannot even control the stock, bond, commodity and currency markets!

All you CAN control is:

  1. How much you save, and
  2. How much you spend.

That’s it!

We consider it our job to help you save enough, retire on time, and let the market tell us when it’s peaking and starting to crash so that we can avoid “the big ones!”

Have a relaxing, rainy weekend and we hope to hear from you soon!

Till next time…


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* Adam Koos, CFP® is a CERTIFIED FINANCIAL PLANNERTM  Professional, as well as president and portfolio manager at Libertas Wealth Management Group, Inc., a Fee-Only Registered Investment Advisory (RIA) firm, located in Columbus, Ohio.

Categories: Adam Koos, CFP®, CMT®, Market Commentary

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