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Technically Speaking: Quick Update (The Flood Edition)

Written by Lance Roberts | Aug, 29, 2017
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I don’t often make political commentary in my missives unless it specifically relates to the financial markets. However, today I want to make an exception and tell you what I’ve witnessed.

As you are probably aware, I live in Houston where we are currently being hit by the worst hurricane/storm since 1986. Currently, I am one of the lucky ones. As of this writing, the rising waters have not yet reached the house, the power is still on and the family is safe. For all of this, I am thankful.

For thousands in the Houston area, they were not so lucky. I have dear friends, clients and colleagues reaching out to me with tales of complete loss. It’s a heartbreaking tragedy.

I do want to say one thing.

Since the election, the daily headlines have been filled with nothing but the ongoing political divide in this country between the extreme right and left. “Hate” has filled our airways, headlines, and social commentary. It is unfortunate that for many, it seems as if this is representative of the nation as a whole.

Let me assure you it isn’t.

If you want proof, all you have to do is turn on the television and watch the multitude of individuals that have leapt into action to help their neighbors and complete strangers. They have opened their homes, shared their food and helped in any way they can. They are raising money, making donations, and providing services where ever, and to whomever, they can.

There have been no debates over race, sexual orientation, gender identity, immigration status, religion, political affiliation or wealth. It doesn’t matter. It has been nothing more than one human being reaching out to help others in need.

THIS is who we REALLY are.

In times of need, we have always come together to help others. To reach out and lift them up. It is the very essence of our “human spirit,” the same spirit which has defined the very core our nation.

As President Harry S. Truman once said:

America was not built on fear. America was built on courage, on imagination and an unbeatable determination to do the job at hand.”

That is what we see in Houston today.

But it actually happens every day, every where, all over this country.

You just have to step out of your personal “echo chamber” of social media and look. American heroes are everywhere, not just on our front lines. They are our neighbors, our friends and complete strangers that are there when you need a hand.

It is only a shame that it takes a tragedy for the media to show it.

We are Americans. Not some “thin-skinned” snowflake protesting for a cause they generally don’t understand, a history they have never lived, or simply want someone else to blame for their own personal mistakes.

We are better than that. There isn’t a fight we can’t win, a cause we can’t conquer or a pain we can’t endure. Those are the things which have always brought us together, made us stronger, and emboldened our resolve to move forward.

To quote Bill Clinton,

“There is nothing wrong with America that cannot be cured by what is right with America.” 

Being with what is “right” is the only side I am really concerned with.

I hope you will join me.

Technically Speaking – Getting Oversold

This morning, as I woke to the welcome sight of “no rain,” market futures were sharply lower with the S&P 500 set to open somewhere close to 2430 due to North Korea firing an ICBM over Japan.

Despite headline jitters, the open won’t change the primary analysis from this past weekend’s missive wherein I suggested further corrective action is likely as the market continues to grind away at its shorter-term overbought condition as shown below.

Importantly, the market has now confirmed a weekly “sell signal,” at a very high level, which has historically suggested any further price gains will be both volatile and limited until it is reversed.

With the bullish uptrend from the beginning of 2016 now broken, that line now becomes overhead resistance. Fortunately, there is some psychological support not far below at 2400, and just slightly below that at the longer-term moving average of 2390.

A break below 2390 and things are likely to get ugly pretty quickly with prices falling back to the previous 2015 highs of 2134. Such would be a correction, from current levels, of 12%. 

Before you start scoffing at the notion, a correction of 10-12% is well within the confines of a “normal” correction within any given year historically speaking. However, given the length of time the markets have gone without such a correction, one of such a magnitude will feel far worse.

As I noted above, the recent spate of low volatility, and lack of draw downs, has pushed the 52-week rolling moving average to one of its lower levels in history. Periods of much higher volatility have ALWAYS followed. Forewarned is forearmed. 

Furthermore, the number of stocks on “bullish buy signals” (orange line) and the number of stocks trading above their 200-dma (green line) are still showing deterioration. Again, while this does not mean the markets are about to crash, it does suggest the current corrective process is likely not complete.

This analysis continues to support my current thesis of a deeper correction over the next month as previously discussed as “scenario 2:” To wit:

“Scenario 2:

The market rallies to the upwardly sloping “bullish trend line” that began with the election of President Trump. The rally fails at resistance and turns lower. Such a failure would confirm the current short-term bullish trend has likely concluded leading to a reduction of equity exposure, increases in cash positions and fixed income, and a reduction in overall portfolio equity risk.”

The good news, as stated above and shown again below, is on a VERY short-term basis, the markets are oversold enough to garner a bounce.

Such a bounce will likely be an opportunity to shore up risk in portfolios under the guidelines laid out over the last two weeks and summarized below:

“Based on the current backdrop, I continue to recommend, again this week, that investors should take some actions in rebalancing portfolio risks accordingly.

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against major market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

This doesn’t mean “sell everything” and run into cash. It simply means pay attention to your exposure and have a plan in place in case something goes wrong.”

As noted above, while the overall bullish trend remains positive which keeps our portfolios allocated toward equity risk, the deterioration of the primary supports of the market remain concerning. While warnings are just that, a warning, let me repeat that it does suggest a bigger correction may be in the works over the next month, or so.

If the markets are able to regain bullish trend, and break out to new highs, we will once again, as we have done repeatedly in the past, increase equity risk in portfolios.

However, until the threat of a more meaningful decline is substantially reduced in the near-term, we are willing to sacrifice some small amount of performance in exchange for the protection of investment capital. Stops have been raised to trailing support levels and we continue to look for ways to “de-risk” portfolios at this late stage of a bull market advance.

We remain invested but are becoming highly concerned about the underlying risk.

I appreciate your patience with the limited analysis, but the internet is extremely spotty at the moment.

Hopefully, by next week I should have all my tools back. Of course, that is “God willing and the creek doesn’t rise.”

I always wondered exactly what was meant by that.

Now, I know.


Lance Roberts

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Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter and Linked-In

2017/08/29
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