Weekend Market Review, 8.11.19

Last week the equity markets saw a nice bounce off of its lows. Previous Sunday’s futures saw the S&P 500 hit 2775; yet the S&P proved once again to be resilient after finding support around its 200ema around 2842, closing the week just modestly lower just below its 50ema at 2918 and just under the very important 50 RSI level. The question is, what happens next?

Although the market is currently sending mixed signals, the longer-term picture is weakening. Interest rates globally and here in the U.S. are at multi-year lows and the yield curve has become increasingly inverted, which typically signals a recession may be around the corner.

So what can one do under these circumstances? In times of low interest rates, high-quality, higher-yielding interest vehicles tend to perform well. For example, last week, REITs, Utilities, and defensive equities were some of the best performing sectors. Gold and Silver continued to rise to multi-year highs under the new lower interest rate paradigm and increased market volatility. At the same time, Financials and Energy continued to show weakness.

Gold appears to be overbought in the near-term, closing the week at 1508, just under its multi-year highs, yet began showing signs of negative divergence and near-term exhaustion. Crude Oil rallied on Friday, yet the Energy Sector seems to be on the verge of new leg lower. Should the weakness continue to persist, expect to see a rise in bankruptcies in the sector, particularly among the small & micro cap names. This weakness should also impact junk bonds, which have exposure to Energy.

So this begs the question, what happens next and how to best position our long-term portfolios? My answer is that Mr. Market will ultimately tell us what he wants to do. If it breaks below the 200ema, the move lower becomes more likely. If it breaks above the 50ema, the move higher becomes the more probable outcome.

In the meantime, take these consolidation opportunities to trim your winners back to normal asset allocations, sell the losers that haven’t performed well during the “good times” and raise cash to take advantage of the increasing market volatility, which is now hovering at support levels, appearing ready to move higher. The risk to the downside is much higher at these levels than the risk of upside breakout.


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