2016 began with a thud and ended with a bang. After one of the worst-ever starts to a year, U.S. stocks managed to rebound and ultimately finish the year with solid gains. Much of the rise came in the final few weeks of the year, following the surprising results of the U.S. presidential election. Indeed, there has been an abrupt change in market sentiment, and asset prices have largely taken their cues from a recalibration of economic expectations in the wake of the surprising Trump victory and Republican sweep of Congress.
We’ve been looking at transportation stocks as an intra-industrial sector investment, due to a variety of factors: our forecast for a secular bear market in crude oil, sustainable airline profits, and high domestic exposure as compared to multi-national industrials hurt by a strong dollar. Nevertheless, transportation stocks have had a rough start to the year. As a market technician, I look to charts to tell us when we’re wrong.
The MACD (Moving Average Convergence Divergence) Indicator is one of many tools in a market technician’s toolbox. The indicator takes two moving averages (usually the 12 period and the 26 period exponential moving averages) and converts them into a momentum oscillator by subtracting the longer period from the shorter period. There are a variety of ways to interpret the MACD indicator, but for right now we are focusing on signal crossovers. To do that we also create a 9 period exponential moving average of the MACD for use as a signal line.
Earlier this year, we perceived significant risk inside the oil market: Large speculators had made extreme bullish bets in the futures market, and there was reduced demand from emerging markets. In response, we took half of our energy stock exposure and invested it in Master Limited Partnerships (MLPs). MLPs are natural resource activity companies, mostly involved in the distribution of oil or natural gas through pipelines. This side of the energy business is not directly tied to the price of oil, as oil needs to pass through pipes regardless of price. Additionally, oil supply in our country is skyrocketing and demand for the pipes is increasing. These two factors are major reasons why we were attracted to the investment, and why we remain constructive on the future of MLPs.
When it comes to matching buyers and sellers of blue chip stocks on the New York Stock Exchange, the era of the floor trader has passed. You’ll still see traders bustling around in the background whenever you turn on CNBC, but it’s just a sideshow. These days, electronic trading is king. This has helped democratize trading by freeing it from financial centers like New York, London, and Tokyo, but it has also given rise to the controversial practice of High-Frequency Trading (HFT).
One branch of technical analysis studies the relationships between asset classes to determine the health of the financial markets. John Murphy has written extensively on this subject and I have gathered a lot of my own wisdom through his teaching. With that in mind, here are a few relationships that I am watching right now to help determine the health of the U.S. stock market.
2013 has treated investors to a wonderful meal of huge equity returns, and there may still be a fine port waiting for us at the end. To steal from the Pola and Wyle song, we are entering what is typically the most wonderful time of the year (and right on cue, Bernanke Claus handed the market a dovish communique for the holidays). December is the second strongest month over the last 10 years and has a very clear pattern of strength during the last half of the month, as you can see from the chart to the right (from Jeff deGraaf, with RenMac).
If you could return to May 2012, would you invest your money in Europe or the United States? It may come as a surprise, but Europe is actually outpacing the S&P 500 with returns of 40% and 33% respectively. Headlines continue to beat the negative drum that ‘problems still loom in Europe;’ that may be true, but those problems also might be hiding the strong gains realized in those markets. The markets still look healthy from a technical perspective, and I’m particularly intrigued by the financial shares.
In the world of technical analysis, the symmetrical triangle represents a battle between bulls and bears. Neither side gains ground while the market forms this pattern, and the result over time is lower highs and higher lows. However, the direction of the next major move can be determined following a valid breakout of the pattern.