Financial Research, Education & Data Volume 11, Issue 10 October 2019 Charts as of 09/27/19 The FRED Report – Monthly Review Published 10/02/19 Monthly Research Piece: Yield Curve Inversion Cheat Sheet – by Richard Bernstein Advisors’ Dan Suzuki, CFA
Previous Previous Current Months Current Months Opinion Opinion Stock Market Page Opinion Opinion Other Markets Page Price Charts Bonds SPY – SPDR S & P 500 ETF 4 TLT – iShares Barclays 20+ Year Treasury Bond 16 MDY – SPDR S & P 400 ETF 5 BWX – SPDR Barclays Capital Intl Treasury Bond 17 IJR – iShares S & P 600 Index 6 LQD – iShares iBoxx $ Invest Grade Corp Bond 18 IYT - iShares Dow Jones ↔ ↔ HYG – iShares iBoxx $ High Yield Corp Bond 19 Transportation Average 7 ↔ ↔ International ↔ ↔ Daily - Fred’s Price Oscillator 8 EEM – iShares MSCI Emerging Markets 20 Weekly - Fred’s Price Oscillator 9 ↔ ↔ EFA – iShares MSCI EAFE Index 21 Internal Momentum Currencies Daily Fred’s Breadth Oscillator 10 ↔ ↔ FXE – Currency Shares Euro Trust 22 Weekly Fred’s Breadth Oscillator 11 ↔ ↔ FXY – Currency Shares Japanese Yen Trust 23 Fred’s New Highs/New Lows Indicator 12 FXA – Currency Shares Australian Dollar Trust 24 ↔ ↔ McClellan Oscillator 13 US Dollar Index 25 Sentiment Commodities Put/Call Ratio 14 ↔ ↔ DBC – Power Shares DB Commodity Index 26 Investors Intelligence % Bears Indicator 15 GLD – SPDR Gold Shares 27 ↔ ↔ USO – United States Oil 28 Sector Review ↔ ↔ UGA – United States Gasoline Fund 29 Equal Equal ETF Sector Charts: Consumer Disc. (XLY) 30 Equal Equal ETF Sector Charts: Consumer Staples (XLP) 31 Underweight Underweight ETF Sector Charts: Energy (XLE) 32 Overweight Overweight ETF Sector Charts: Financials (XLF) 33 Key Overweight Overweight ETF Sector Charts: Real Estate (XLRE) 34 Positive Negative Neutral Highlight Equal Equal ETF Sector Charts: Health Care (XLV) 35 Equal Equal ETF Sector Charts: Industrial (XLI) 36 ↔ Change Equal Equal ETF Sector Charts: Materials (XLB) 37 Equal Equal ETF Sector Charts: Utilities (XLU) 38 THE FRED REPORT 4514 Chamblee-Dunwoody Rd, Suite 112 Equal Equal ETF Sector Charts: Technology (IYW) 39 Dunwoody, GA 30338 Underweight Underweight ETF Sector Charts: Telecom (IYZ) 40 Phone: (404) 875-FRED Research Piece or Guest Column 41 e-mail: [email protected] See us at: www.thefredreport.com
Monthly Review The FRED Report –
Summary of Monthly Piece ASSET CLASSES:
STOCKS:
Rating the Three Market Principles: As readers know, we break the stock market down into three basic market principles: (a) Sentiment, (b) Internal Momentum, and (c) External
Momentum. I will review these here.
Sentiment: We use two indicators to measure sentiment. These are options activity and certain sentiment polls. For options, we use total CBOE volume and take the figure directly from the CBOE website. For our sentiment poll numbers, we prefer using % Bears from Investors Intelligence. We use only the % Bear’s number because, in our opinion, the bears almost always act. It is rare to find a complacent bear. Sentiment is what we call a “Condition Indicator”. By this, we mean it has nothing to do with timing trades – rather it is part of the overall mosaic of market activity.
Our current reading of the sentiment indicators is NEUTRAL. %Bears is unchanged from last month and made lower
highs than the last correction. The indicator rose a bit since last November, but not enough, and current data is weakening again. The Put/Call indicator is positive as it moved back into buy territory. In January, it was in areas marking major bottoms, but it has weakened since – it is now in minor buy territory once again. We rate sentiment negative here because the intermediate sentiment indicator did not advance much during the correction. Put/Call has improved but not a huge amount. %Bears may indicate long-term complacency, a big negative here. Put/Call is also showing some
complacency.
Internal Momentum: We use several Breadth indicators to measure internal momentum. We publish three indicators in this Monthly Review: The McClellan Oscillator, an Indicator of New Highs on the NYSE vs. New Lows, and our own breadth oscillator – called Fred’s Breadth Oscillator, or FBO. The McClellan gives great trading signals, while the last two are also “Condition Indicators”.
Our current reading of the internal momentum indicators is POSITIVE. The weekly FBO has finally broken out of the downtrend and has corrected. The McClellan Oscillator is down but not at an oversold extreme. New Highs/New Lows is stable and may be turning up again. This indicator has improved, and data has stayed positive unlike previous market pullbacks. This combined picture from these indicators could change but until it does, it is neutral to positive intermediate term, implying this pullback may be short lived, indeed almost over.
External Momentum: We use several price indicators to measure this, and these are primarily tactical indicators. We use the 5 and 20 period moving averages, and a simple crossover to determine trend. We use Stochastics, another standard indicator, to measure overbought/oversold levels, or as we prefer to consider them, areas of risk and reward. The one criticism of Stochastics is that they are too sensitive, so we also have our own Price Oscillator we publish, called Fred’s Price Oscillator, or the FPO.
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The FRED Report – Monthly Revie Summary of Monthly Piece…. continued Our current rating of the External Momentum indicators is NEUTRAL. Weekly indicators are mixed. Monthly and Quarterly indicators are neutral, and the December extreme oversold is resolved. We still recommend buying attractive units, and the prudent thing for advisors to do is continue to add money and realize the market is probably close to a rally attempt.
CONCLUSION: SPY rallied in the first part of 2019, per our yearly forecast. This advance has moved indicators to short-term overbought readings. The rally was very strong in terms of breadth, a plus, and weekly indicators are breaking downtrends. The market resolved the oversold conditions on this rally. As of now, the decline we have expecting is underway. It may be sharper, but end sooner, than many bears expect due to the improvement long-term breadth indicators.
FIXED INCOME: TLT has sold off from an extreme overbought condition. Below 137 would probably end the rally. LQD rallied also but is now pausing. HYG and various junk bond ETFs are at resistance. We continue to be cautious on bonds, and use alternatives such as PCEF, VRP, CWB, and dividend stock ETFs. After this rally, we expect a decline and would use this bond move to sell bonds buy dividend stocks and other alternatives. The next drop on TLT could end the advance for 2019. Accumulation models improved and forecast this rally on TLT but have flattened out on this advance, a slight negative. Watch TYX, as it could lead TLT in 2019. We remain concerned that the economy is stronger than expected, suggesting less rate cuts than many expect. We are not concerned about the yield curve inversion at this time.
COMMODITIES: Commodities, especially oil, have topping signs, and are pulling back. GLD has exceeded our targets and accumulation models suggest it is overdone. Industrial metals (DBB) have pulled back, but from high levels. Our favorite broad-based Commodity Index ETF, DBC, is declining with oil. Targets are 14 or so on DBC, and it is heading there now. Watch Oil via USO and DBC carefully. The oil stocks are still a concern. We may not see much in oil and oil stocks until the fall. They could be value traps, but you can buy yield here. MLP’s have likely bottomed.
INTERNATIONAL: International markets are interesting. Emerging markets have tested our downside targets and have bottoming indications. Developed markets now look weaker than emerging markets but are improving. The Dollar Index (DX#F or UUP) is a breakout, and it remains strong and at new 52- week highs. The Yen has built a base and improved. Note that FXF is stronger than FXE, a sign of impending problems in Europe. The trade news has been disconcerting but could improve later in 2019. FXE broke down again on Friday and is testing low end targets of 103 to 102 or so. This is the reason for dollar strength SECTORS: We are overweight XLF and XLRE. These still have strong accumulation models. We are underweight XLE and IYZ, both of which hit downside targets for 2019 but remains an underperformer. XLP is a breakout. XLRE has strong accumulation models and broke out to the upside – we are an Over Weight. The sector is trading well on this pullback. IYW is everybody’s favorite overweight, but we are seeing some key stock weakness – New leadership is showing up. XLB has weakened and we are an Equal Weight. XLI still has strong accumulation, but price is lagging. We continue to hold investment positions. Two long- term equity trend systems are positive and two are negative, suggesting a neutral stance. XLU has broken out, and is outperforming fixed income, per our report on this. This does NOT mean that dividend stocks will outperform the equity markets, however. XLP has improved and is a breakout. We are an Equal Weight as it has a strong accumulation model. Oil declined more than expected, XLE broke through the bottom of the trading range, and the rally back has been weaker than we would like to see. This could be weak into fall and we will revisit our Under Weight then. Page 3
The FRED Report – Monthly Review
Market Review: Price Charts – SPY – SP 500 ETF
SPY retested the top end of our target range and sold off: SPY has retested the top end of our 294 to 302 range and sold off. Traders sold positions, but we maintained investment positions, adding to them in the 285-area. Now this could be a bottoming pattern, with daily stochastic buy recycle underway. If the market holds this area on the daily recycle, it will be a higher low, and higher highs could result. A break of 282 would negate this pattern, and a break of 273 would concern us as it could set up a test of the December 2018 low, but this is unlikely due to strong breadth indicators. The low for this correction may have been struck back in August. Page 4
The FRED Report – Monthly Review
Market Review: Price Charts – MDY – MidCap SPDRS ETF
MDY is still weaker than Large Cap, but the pattern looks more like consolidation on MDY: MDY has a new weekly stochastic sell signal, and the daily is coming down as if a buy recycle is likely. MDY has become a short-term trading range, and a new high after this pullback would be strong. We are looking for Mid and Small Cap to do better in the second part of 2019. This is not a bad chart and it has potential if 345 can hold. Above 365 would be strong.
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The FRED Report – Monthly Review
Market Review: Price Charts – IJR – IShares S&P SmallCap 600 Index ETF
The Small Cap ETF is improving within a trading range: The daily stochastic is almost in buy mode. The weekly is a new sell recycle. Long- term trend systems remain negative on IJR, so relative under performance is not a surprise. The weekly low around 72 held and the long-term trend system went negative in the summer of 2015, before the last election, and is negative now. Value still is improving relative to growth in small cap (in fits and starts), and if this continues, there could be improvement in the second half of 2019. Breadth is also improving.
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The FRED Report – Monthly Review
Market Review: Price Charts – IYT - Transportation
IYT is still weaker than the broader averages, but it is improving: This index is our favorite measure of economic strength. IYT is trading worse than SPY and more in line with IJR and MDY. IYT has moved back up near the top end of the trading range and stochastics are improving. We prefer to see robust leadership in the Transportations, and we believe IYT will start to improve in the second half of the year. This pattern could be a setup for that. The weekly stochastic is in a buy recycle, a plus for IYT and possibly the general market The Trend System on IYT is negative. Like IJR, this went negative in the summer of 2015.
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The FRED Report – Monthly Review
Market Review: Price Charts – Daily - Fred’s Price Oscillator
50 3200 SPX 3100 45 3000 40 2900 35 2800 2700 30 2600 25 2500 2400 20 FPO DAILY Overbought 2300 15 2200 2100 10 2000 5 1900 0 1800 1700 -5 1600 -10 1500 1400 -15 1300 -20 1200 -25 1100 Oversold 1000 -30 900 -35 800 700 -40 600 -45 500 3- 20- 7- 24- 11- 28- 17- 4- 22- 8- 26- 13- 30- 19- 6- 23- 10- 27- Jul- Aug- Oct- Nov- Jan- Feb- Apr- Jun- Jul- Sep- Oct- Dec- Jan- Mar- May- Jun- Aug- Sep- 17 17 17 17 18 18 18 18 18 18 18 18 19 19 19 19 19 19
The daily FPO is neutral but a favorable pattern: This indicator gave a buy signal last month, suggesting some upside and is now in neutral to oversold territory. The 302-area upside targets for 2019 has been retested, and currently all of the indexes we follow are improving. Trend Systems on SPY remain positive so we would expect to see more upside. A buy point on this indicator would be a - 17 to -20 reading, and this hit that area two month’s ago. We had the peak in early August and many of the intermediate indicators are in better shape than we thought they would be at that juncture. New Highs/New Lows and breadth remain strong. We added to models in the 285 area, and so far, this second pullback is making a higher low. Page 8
The FRED Report – Monthly Review
Market Review: Price Charts – Weekly - Fred’s Price Oscillator
50 3300 SPX 3200 45 3100 3000 40 2900 2800 2700 35 2600 2500 30 2400 2300 25 2200 2100 20 2000 1900 FPO WEEKLY OVERBOUGHT 1800 15 1700 1600 10 1500 1400 5 1300 1200 0 1100 1000 900 -5 800 700 -10 600 500 -15 400 300 -20 200 100 0 -25 OVERSOL -100 -200 -30 -300 -400 -35 -500 20- 11- 30- 18- 6- 26- 14- 2- 21- 9- 30- 19- 7- 26- 16- 4- 23- 11- 30- 20- 9- 27- Feb- May- Jul- Oct- Jan- Mar- Jun- Sep- Nov- Feb- Apr- Jul- Oct- Dec- Mar- Jun- Aug- Nov- Jan- Apr- Jul- Sep- 15 15 15 15 16 16 16 16 16 17 17 17 17 17 18 18 18 18 19 19 19 19
The Weekly FPO is not yet oversold, but it is a buy pattern: The weekly FPO came down but may need more work. The pattern is positive, and many other intermediate indicators have looked stronger during this correction. Add money slowly, this indicator suggests the correction may not be over, but that it is very close to being over. The large caps are trading much better than smaller caps, but we are alert to a potential change. Transportations are also improving. Page 9
The FRED Report – Monthly Review
Market Review: Internal Momentum – Daily Fred’s Breadth Oscillator
3100 30 3000 SPX Daily 29 2900 2800 28 2700 27 2600 26 2500 2400 25 2300 24 2200 23 2100 2000 22 1900 21 1800 1700 20 1600 19 FBO Daily OVERBOUGHT 1500 18 1400 1300 17 1200 16 1100 15 1000 900 14 800 13 700 12 600 500 11 400 10 300 OVERSOLD 200 9 100 8 19- 28- 7- 16- 26- 4- 16- 25- 4- 14- 23- 2- 11- 21- 30- 11- 20- 30- 9- 18- 27- Jul- Aug- Oct- Nov- Dec- Feb- Mar- Apr- Jun- Jul- Aug- Oct- Nov- Dec- Jan- Mar- Apr- May- Jul- Aug- Sep- 17 17 17 17 17 18 18 18 18 18 18 18 18 18 19 19 19 19 19 19 19
The daily FBO has rallied and still looks attractive: The daily FBO became oversold, worse than after the 2016 correction. That level is consistent with where the market bottomed in 2016 just before the election. This suggests a good bit of upside was possible from the low, and that has occurred. The current indicator picture has improved. This indicator suggests an advance from right here is possible. See p.11 for more breadth commentary. Page 10
The FRED Report – Monthly Review
Market Review: Internal Momentum – Weekly Fred’s Breadth Oscillator
3100 40 3000 Weekly SPX 2900 38 2800 36 2700 2600 34 2500 2400 32 2300 30 2200 2100 28 2000 1900 26 1800 1700 24 1600 22 1500 Weekly FBO 1400 20 1300 1200 18 1100 16 1000 900 14 800 700 12 600 10 500 400 8 300 200 6 18- 6- 26- 14- 2- 22- 10- 28- 15- 4- 22- 10- 30- 18- 6- 26- 14- 1- 19- 9- 27- Sep- Jan- Apr- Aug- Dec- Mar- Jul- Oct- Feb- Jun- Sep- Jan- Apr- Aug- Dec- Mar- Jul- Nov- Feb- Jun- Sep- 13 14 14 14 14 15 15 15 16 16 16 17 17 17 17 18 18 18 19 19 19
The Intermediate FBO had a breadth surge and has corrected a bit: Weekly breadth momentum has improved, a plus for stocks, and looks strong. When combined with New Highs/New Lows, this suggests improvement and may suggest the market is ready to advance. It does suggest that the market could be stronger after this pullback. Short-term support is 290 to 280 on SPY. Below 270 would be a concern, but is unlikely without a rally attempt. It would not be a surprise if stocks make a higher low and advance from here. Page 11
The FRED Report – Monthly Review
Market Review: Internal Momentum – Fred’s New Highs/New Lows Indicator
3200 400 3100 SPX Weekly 3000 350 2900 2800 2700 300 2600 2500 250 2400 2300 2200 200 2100 2000 150 1900 1800 1700 100 NH/NL Indicator 1600 1500 50 1400 1300 1200 0 1100 1000 -50 900 800 700 -100 600 500 -150 400 300 200 -200 18- 6- 26- 14- 2- 21- 9- 30- 19- 7- 26- 16- 4- 23- 11- 30- 20- 9- 27- Oct- Jan- Mar- Jun- Sep- Nov- Feb- Apr- Jul- Oct- Dec- Mar- Jun- Aug- Nov- Jan- Apr- Jul- Sep- 15 16 16 16 16 16 17 17 17 17 17 18 18 18 18 19 19 19 19
New Highs/New Lows continues to improve short-term: This tool measures the difference between the amount of new highs and new lows on the NYSE. It fell off as the market corrected in February, after beginning to weaken before that correction started. Remember that this is a leading indicator that often goes negative first. So far, NH/NL has not weakened in front of the last correction, or in this odd news environment, which suggests another rally attempt is possible. The indicator is quite strong, and suggests the pullback is ending. This is a plus. Page 12
The FRED Report – Monthly Review
Market Review: Internal Momentum – McClellan Oscillator
3200 790 3100 740 SPX Daily 3000 690 2900 640 2800 590 2700 540 2600 490 2500 440 2400 390 2300 340 2200 McClellan Overbought 290 2100 240 2000 190 1900 140 1800 90 1700 40 1600 -10 1500 -60 1400 -110 1300 -160 1200 -210 1100 -260 1000 -310 900 -360 Oversold 800 -410 700 -460 19- 28- 7- 16- 26- 4- 16- 25- 4- 14- 23- 2- 11- 21- 30- 11- 20- 30- 9- 18- 27- Jul- Aug- Oct- Nov- Dec- Feb- Mar- Apr- Jun- Jul- Aug- Oct- Nov- Dec- Jan- Mar- Apr- May- Jul- Aug- Sep- 17 17 17 17 17 18 18 18 18 18 18 18 18 18 19 19 19 19 19 19 19
The McClellan Oscillator is in at the lower end of a consolidation pattern: The McClellan continues to make higher lows and is a favorable pattern. As mentioned earlier, the performance of the daily and weekly FBO are positive – but McClellan is more of a trading tool that we use to time entries for intermediate traders. It is close, but not at, a good buying juncture. There may need to be a little more drop to set up a strong buy pattern – but it could go from here also. Continue to add money to models. Page 13
The FRED Report – Monthly Review
Market Review: Sentiment – Put/Call Ratio
1.6 3100 3000 SPX Daily 2900 1.5 2800 2700 2600 1.4 2500 2400 1.3 2300 Put/Call Ratio Indicator 2200 2100 1.2 2000 1900 1800 1.1 1700 1600 1 1500 1400 1300 0.9 1200 1100 1000 0.8 900 800 0.7 700 600 500 0.6 400 28- 23- 16- 9- 1- 25- 18- 10- 5- 29- 22- 14- 7- 31- 23- 18- 11- 4- 27- Jan- Mar- May- Jul- Sep- Oct- Dec- Feb- Apr- May- Jul- Sep- Nov- Dec- Feb- Apr- Jun- Aug- Sep- 17 17 17 17 17 17 17 18 18 18 18 18 18 18 19 19 19 19 19
The Put/Call ratio has moved into buy territory: Sentiment indicators are “condition” indicators for us, and not timing tools. Put/Call is more of a short-term indicator. This indicator suggested a pullback should occur but never became super negative. Note that there have been some high readings over the last few days, so this indicator still is suggesting another advance is possible. In general, sentiment has been leading to the complacency side of things, as you can see on the next page, but this indicator has improved short-term.
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The FRED Report – Monthly Review
Market Review: Sentiment – Investors Intelligence % Bears Indicator (moving averages)
3200 100 3100 SPX Weekly 3000 95 2900 2800 90 2700 2600 85 2500 2400 80 2300 75 2200 2100 70 2000 1900 65 1800 1700 60 1600 1500 55 1400 1300 50 1200 1100 45 1000 % Bears Indicator 900 40 800 35 700 600 30 500 400 25 300 200 20 100 0 15 -100 -200 10 27- 6- 15- 23- 31- 11- 19- 27- 6- 14- 22- 31- 10- 19- 27- 4- 15- 23- 1- 11- 19- 27- Dec- Apr- Jul- Oct- Jan- May- Aug- Nov- Mar- Jun- Sep- Dec- Apr- Jul- Oct- Feb- May- Aug- Dec- Mar- Jun- Sep- 13 14 14 14 15 15 15 15 16 16 16 16 17 17 17 18 18 18 18 19 19 19
Investor’s Intelligence %Bears indicator is still weak long-term: This indicator had a rise as market behavior turned negative last year, but the rise was less, and it still suggests caution intermediate-term. The pattern in 2015 is what usually happens at major bottoms, and %Bears did not move up earlier in 2018. While it had a rise, this was less than robust, and recent data show the indicator is still falling. Overall, the indicator still suggests complacency and complacency can bring surprises. Sentiment suggests a bigger correction should occur before the 2020 election, but an advance is likely before this occurs. Page 15
The FRED Report – Monthly Review
Other Markets: Bonds – TLT – iShares Barclays 20+ Year Treasury Bond
The TLT has made new highs, but accumulation models are no longer confirming: TLT has made a short-term peak, and is stronger than we expected. Indicators such as accumulation models are suggesting 2016 was a major peak in bonds but lately the models have improved, suggesting TLT would stabilize. There has been a monthly stochastic buy signal on this, and that indicator is overbought but not in sell mode. A break of 143 would tend to confirm this advance is over, and target 130 or lower if 135 breaks. This reflex rally may be over. We would take some bond profits, as our alternatives (such as PGX and VRP) are yielding more and also are trading well. Page 16
The FRED Report – Monthly Review
Other Markets: Bonds – BWX – SPDR Barclays Capital Intl Treasury Bond
The BWX hit upside targets at 29: BWX broke the 27-area support and revalidated this. The first weekly stochastic buy failed, the second produced a rally, and the third has produced an advance into the sell area mentioned three months ago, at 29. The intermediate trend remains up as long as BWX is above 28.50. The dollar has resumed its rally and this could continue, so if you have been stuck in BWX for a while, it is time to sell. There are better instruments to consider. FXE is close to long-term downside objectives, so this could stabilize.
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The FRED Report – Monthly Review
Other Markets: Bonds – LQD – iShares iBoxx $ Invest Grade Corp Bond
The Corporate Bond ETF finally rallied along with TLT: LQD has rallied along with TLT. Intermediate support is now 122, and below this could suggest and end to this advance. Trading support is 125, and we would consider sale below this for aggressive investors. Our concern for 2019 is still a stronger than anticipated economy, and this could be the last rate cut for a while. We would take trading profits here on at least some of your position. This move is not supported by internals or accumulation models, so trade carefully. Page 18
The FRED Report – Monthly Review
Other Markets: Bonds – HYG – iShares iBoxx $ High Yield Corp Bond
The High Yield Bond is retesting the upper end of the 87 resistance area: HYG tested 84-area support and held it. The stochastics have produced lower highs on the buy signal noted last month, but the weekly gave a decent buy indication and the rally has helped it become overbought. Now, this is turning down and HYG could consolidate for a while. We think that ALL rates, including high yield, are in danger of a stronger economy than most are projecting in the second half. Below 84 would be a concern and suggest lower prices.
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The FRED Report – Monthly Review
Other Markets: International – EEM – iShares: MSCI Emerging Markets
EEM remains in a 37 to 45 area range for now: EEM double bottomed at our 37-to 38 downside targets, and this could be retested, although so far this has made a higher low. So far, this remains a range. International is less attractive than the U.S. but could be stronger in the second half. This could have a significant rally in the second half of 2019. This basing pattern could take more time, however. Watch carefully as there is a new daily buy signal on this. We still prefer the US for now but would look at EEM if we had to have international units. Look at PXH.
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The FRED Report – Monthly Review
Other Markets: International – EFA – iShares: MSCI EAFE Index
The EFA has improved vs. EEM but remains weaker than SPY: EFA is still a problematic chart but it has improved. EFA tested the 65 to 68 resistance. We realize that we are technicians, but charts can sometimes point out problems in the fundamentals. We remain concerned about European Financials and Deutsche Bank (DB), but this situation is improving for now. Much of what we have forecasted regarding DB has occurred, but the market is not reacting badly, as we feared. Above 68 improves this chart, but unless it moves through that area this is still lagging. Use individual countries such as Switzerland (EWL) for European exposure for now instead of EFA. Page 21
The FRED Report – Monthly Review
Other Markets: Currencies – FXE – CurrencyShares Euro Trust
FXE has hit downside targets at 105 and continues to weaken: FXE has broken down through targets in the 105-area and could test secondary targets at 103 to 102. Watch the dollar (see p. 25), as we remain concerned that it is having a sharp advance, even from these levels. We recommended taking some positions in the Euro in this area, especially for advisors going to Europe, but unless FXE is >110 it is a downtrend. Add on a test of 103. We are close. This should base for a while after a low is hit – no hurry in other words. Page 22
The FRED Report – Monthly Review
Other Markets: Currencies – FXY – CurrencyShares Japanese Yen Trust
The Japanese Yen ETF is in an intermediate-term base: FXY tested the 85-area short-term support and rallied. Now, FXY is challenging the 90 area resistance. The dollar is rallying again, even though it has moved up sharply in the first part of 2019. Chinese trade issues, or European turmoil could cause this, and affect FXY as well, but it looks like the effect on FXY will be much less. It has remained in the intermediate-term base since 2017. This should somewhat counteract the effect of a falling Euro. Page 23
The FRED Report – Monthly Review
Other Markets: Currencies – FXA – CurrencyShares Australian Dollar Trust
The Aussie Dollar has not traded up with gold, a concern: This currency trades with gold most of the time. The daily stochastic is oversold and a failed buy, and the weekly stochastic is “in the cellar”. Traders sold FXA around 80 eleven months ago. The break of 70 was a bit of a surprise, and this is weaker than expected. We have no reason to buy this now, unless FXA can move back above 70. This chart could go lower. A Chinese trade deal might help this chart, but for now we would stand aside. China looks better than FXA!
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The FRED Report – Monthly Review
Other Markets: Currencies – DXY - US Dollar Index (via UUP)
The Dollar continues to advance: Our forecast was that the dollar was going to decline in the first part of 2019, but this “surprise” is based on international weakness, so we would not be short this move. The dollar moved above 26.30, and corrected, this move back above there targets 30 on UUP, and 100 on DXY. Note that it has made higher lows on corrections throughout 2019, and the breakout of 98 targets 100 to 102 at least. Above 98.50 again confirms a major advance. Above 26.30 on UUP is equivalent. Page 25
The FRED Report – Monthly Review
Other Markets: Commodities – DBC – PowerShares DB Commodity Index
DBC is retested resistance in the 16-area and failed: DBC broke out above 17.50 last year and then gave it all back. The daily stochastic is coming down, and the weekly stochastic is also. DBC should have a better year in the second part of 2019. this period of basing should continue for a while, but this should have a better year as this ends. Support at 14.50 to 14 should hold, if not we would have some concerns. Above 16.50 would be quite strong. Remember, PDBC is the same index with a 1099. Page 26
The FRED Report – Monthly Review
Other Markets: Commodities – GLD – SPDR Gold Shares
GLD has done better than we expected this year but may have peaked: GLD broke above our 126 to 130-area target for 2019 This has been a bright spot in the commodities, but the rally to 145 is not supported by accumulation models. These improved since last month, when they did not confirm this advance in GLD, but the models are not supportive of this price at this juncture. The weekly is overbought, and when it turns down there could be a bigger correction in GLD than many are expecting. As long as above 130, GLD has potential for higher prices but be careful if it trades below 130. The drop below 140 could be quite sharp. Page 27
The FRED Report – Monthly Review
Other Markets: Commodities – USO – United States Oil
USO may have made a seasonal peak in July: The weekly stochastic is in buy mode but showing little momentum, and the daily is in sell mode. USO may have made a seasonal peak in July, and if so could fall or go sideways into October. While oil could rally on this weekly recycle, a failure of this rally would suggest a seasonal decline is underway. We maintain our $72/Bbl target on oil, the equivalent price on USO is around 15 to 16. This will most likely happen this winter, if oil makes higher lows now. So far, this looks like a sideways to down market. Page 28
The FRED Report – Monthly Review
Other Markets: Commodities – UGA – United States Gasoline Fund
UGA may have peaked, and below 27 would indicate a test of 22 is possible: This tested 33-area resistance during the seasonal strength. Now it has turned down, and the daily stochastic is overbought oversold. There is some support in this 29-area, but if this breaks a test of 27 is possible. If this breaks, then UGA could test 25 or lower. Careful in here, but a good set up is coming this fall, or earlier if the indicators suggest it. We would look at this carefully in late October/early November. Page 29
The FRED Report – Monthly Review
ETF Sector Charts: Consumer Discretionary (XLY)
Consumer Discretionary pulled back with SPY and is trading about equal to it now: Short-term support at 115 held, and next support is 110 to 107.50. Below 110 would be a concern. XLY is a strong equal weight chart but the accumulation model remains weak. Stocks in the sector are also acting reasonably well. This is a strong equal weight chart, but the accumulation model remains slightly weak, suggesting no over weight at this time. We might use this as an over weight for the second half of 2019 if there is improvement in relative strength and accumulation. This has a heavy weighting in AMZN, which may lag a bit going forward. EQUAL WEIGHT Page 30
The FRED Report – Monthly Review
ETF Sector Charts: Consumer Staples (XLP)
XLP lagged strong sectors but is now a breakout: XLP has broken above 57.50, and successfully retested it, as drawn. Intermediate-term support is the 57.50 to 55-area, as drawn. This defensive sector is improving, as there are more trade problems or other issues. XLP now has a stronger Accumulation Model than XLY, although it is a worse chart. This is changing, if XLP can maintain the breakout above 59. EQUAL WEIGHT Page 31
The FRED Report – Monthly Review
ETF Sector Charts: Energy (XLE)
XLE remains a 55 to 65 or so range: The daily stochastic is oversold, and the weekly is in buy mode. Let us see how this new weekly buy indication goes XLE has been weak in the face of a strong market and was weaker than the market on the last pullback. Oil looks like it has entered a period of seasonal weakness as well. We think a move back to $72 on oil is possible in the winter of 2019-2020, per our yearly forecast. We looked for a bottom on oil in October/November that would lead to a seasonal rally and the seasonal decline before the rally has started. Unless XLE moves above 65 this is a neutral pattern. It could continue to under perform for the rest of this month, at least. UNDERWEIGHT Page 32
The FRED Report – Monthly Review
ETF Sector Charts: Financials (XLF)
XLF tested the key 28 to 29-area and pulled back in the market correction: The daily and weekly stochastics are overbought but not in sell mode. XLF broke above 26 and this pullback is consistent with the current market pullback. The Accumulation Model on XLF is still very positive. TLT rallied more than expected but has started to retrace. Our concerns about European banking issues may have been overblown, but the Chinese trade war is heating up again. Europe still looks dicey to us, and this should benefit U.S. banks. We believe XLF will be a leading sector in the second half of 2019 and may have a Head and Shoulders pattern on the intermediate chart. If this pattern works XLF could make a big move up. Below 22.50 would be a concern but is unlikely. OVERWEIGHT Page 33
The FRED Report – Monthly Review
ETF Sector Charts: Real Estate (XLRE)
XLRE broke out above 34, held on a pullback, and has hit new highs in the recent pullback: The daily stochastic is up and the weekly is in slight sell mode, suggesting consolidation. XLRE made no net progress since 2016 relative to SPY, a key reason we had been underweight the sector. We raised XLRE to an equal weight in January, and the breakout continued – slow but sure so far. Since the accumulation model continues to confirm a strong advance, we raised this to an overweight in March. XLRE showed strong relative performance in the latest market pullback, and it continues to show strong accumulation. Please see the long-term charts of IYR as it is similar to XLRE but with more data. A good small cap idea, aggressive but interesting, is KBWY. OVERWEIGHT Page 34
The FRED Report – Monthly Review
ETF Sector Charts: Health Care (XLV)
XLV has continued to consolidate in the 85 --95 area: XLV held 80-area support and showed relative strength vs. the 2018 low. This was a stair step up pattern and it still made higher lows, unlike some other sectors. The pattern changed and is now a base rather than a strong uptrend. XLV has had a correction based at least in part on the politics. There is high potential for adverse news in this election season. The accumulation model continues to deteriorate. Below 85 would target 80 and would be a concern, but actually this looks more like consolidation for a while. EQUAL WEIGHT
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The FRED Report – Monthly Review
ETF Sector Charts: Industrial (XLI)
XLI still has a strong accumulation model, and the chart has improved: The stochastic pattern is similar to other sectors, and the price pattern is still strong. This failed at 78 to 80 area of resistance, now being retested. This could be a Head and Shoulders bottoming pattern, as drawn. The accumulation model remains very strong. A break of 72.50 would target 70, and below that would be a concern, but we feel this is unlikely. A breakout is possible on the next advance. Above 81 could be the start of a significant advance. EQUAL WEIGHT Page 36
The FRED Report – Monthly Review
ETF Sector Charts: Materials (XLB)
XLB is retesting 60-area resistance that has continued to hold this unit: XLB is a weaker intermediate-term chart, and while the accumulation model is still strong, this is still a downtrend, although 55 has held so far. This is more of an infrastructure play to us, and we expected legislation on an infrastructure build, but this is probably on hold until after the election. This is another example of a sector that has a strong accumulation model but continues to lag. Watch this sector carefully as it could do much better in the second part of 2019 than the chart suggests at this time. XLB is still intermediate term weak but improving short-term. EQUAL WEIGHT
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The FRED Report – Monthly Review
ETF Sector Charts: Utilities (XLU)
XLU has overbought stochastics, and this breakout is strong: This is a breakout above resistance and during corrective behavior, which is strong. One of the peculiar things about this market is defensive stocks are doing better. Income Investors buy this on pullbacks. XLU above 64 has legs, but a move below 64 could lead to a test of 61. We think that institutions are slowly adding stocks and selling bonds for income, contributing to the advance in XLU. Stock investors, we remain an equal weight. EQUAL WEIGHT Page 38
The FRED Report – Monthly Review
ETF Sector Charts: Technology (IYW)
IYW is basing along with the market: We have long-standing concerns about IYW. Most strategists are overweight the sector, and many individuals have embraced this – and it worked for much of 2018, and 2019 as well. Some key stocks are no longer making new highs. A change in leadership is positive but may lead to weakness in IYW in the second half, although so far this has not occurred. A successful test of 190 would be strong, if 190 breaks another test of 180 is possible. So far, this is holding. This chart does not have as much potential as XLF or XLI, in our view. No big changes but do note that the last weekly buy did not produce new highs, the first time this has happened. EQUAL WEIGHT Page 39
The FRED Report – Monthly Review
ETF Sector Charts: Telecom (IYZ)
IYZ flirted with 30-area resistance but has failed once again: We have been underweighting this sector and this has been working for us. IYZ broke the 27-area support but was a false breakdown. The trading action looks better, as long as 27 holds. AT&T (T) is trading better, a key ingredient for this sector’s success. We continue to feel there is limited downside, but the upside potential is less than other sectors. These stocks are buyable for income. We have no big changes here, but as T and VZ improve, we could see another, better advance in IYZ. No big changes here except to note that this continues to be a basing pattern. UNDERWEIGHT
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The FRED Report – Monthly Review The FRED Report – Monthly Review
Research Piece: Yield Curve Inversion Cheat Sheet – by Richard Bernstein Advisors’ Dan Suzuki, CFA
This month’s research piece is on the yield curve. I have known the author, Dan Suzuki of Rich Bernstein Advisors for over ten years, and worked with him at Merrill Lynch in New York. Dan’s work is thoroughly researched, and unbiased – he is not trying to prove a point of view. We thank Rich and Dan for allowing us to use this piece, and if there are questions on it, let me know – we can get answers!
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August 19th, 2019 Yield curve inversion cheat sheet
Why do people care? Many argue that yield curve inversions have led every US recession since 1950.
Has it ever been wrong? The accuracy of the yield curve as an indicator varies drastically depending on whether you’re trying to predict recessions or bear markets, and what constitutes a signal (e.g. a tick below zero, closing below zero, staying consistently negative for 1 month or 1 quarter, etc.). It also depends on whether you’re willing to wait 2-3 years before calling it a false signal. The yield curve inverted back in 1965 and the next recession didn’t start until 1969. If you’re trying to predict bear markets, the yield curve failed to invert before the 1987 market crash and didn’t invert until after the 1968-1970 and 1973-1974 bear markets had already begun. When the yield curve does lead, the market often appreciates meaningfully by the time the market peaks.
Why is it an important signal? The yield curve tells you that current central bank policy (short end) is getting too tight relative to the nominal growth outlook (long end). Also, because bank funding costs tend to be more tied to the short end of the curve while their revenues (and profit outlook) tend to be tied to the middle to long end of the curve, a flatter or inverted curve is loosely tied to bank lending profitability. The less profitable, the less incentive banks have to extend credit, which can further weigh on future growth.
What’s the bottom line? It would be wonderful it were as simple as being 100% stocks when the yield curve is positively sloped and 100% bonds when it’s inverted, but that’s just not the case. For the reasons mentioned above, we view it as an important indicator for liquidity, and as a clear sign that we’re late in the cycle and that the risks to growth are increasing. But it’s not a perfect indicator, especially when it comes to timing, so we’ll continue to incorporate it along with all the other indicators we monitor. We’ve already been highlighting the increasing risks for some time, and this is reflected in the defensive positioning of our portfolios. One thing is relatively clear though: investors probably shouldn’t get MORE bullish after the yield curve inverts. 10yr – 2yr yield curve inversions (red lines) vs. bear markets, profit recessions and economic recessions since 1965
WEBSITE: RBAdvisors.com PHONE: 212-692-4088 TWITTER: @RBAdvisors © 2019 RBA LLC 1
Source: Richard Bernstein Advisors LLC, Bloomberg, NBER, Federal Reserve Board, S&P
Dan Suzuki, CFA Portfolio Strategist
Please feel free to call your regional portfolio specialist with any questions: Phone: 212 692 4088 Email: [email protected]
For more information About Dan Suzuki, please click here. Recent & Related articles: Madonna, hair bands and protectionism A long December Why is corporate profit growth slowing? Look forward, not backward S&P 500® for the long run? Sometimes defense is the best offense Health Care for All Time to hang up your CAPE? Protectionism, profits and positioning Cheap cyclicals may be a warning sign The most important (and ignored) charts from the jobs report 为什么中国? (Why China?)
Dan Suzuki is registered with Foreside Fund Services, LLC which is not affiliated with Richard Bernstein Advisors LLC or its affiliates.
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WEBSITE: RBAdvisors.com PHONE: 212-692-4088 TWITTER: @RBAdvisors © 2019 RBA LLC 2
Below is a listing and definition of various proprietary and non-proprietary technical indicators we rely on during our analysis of the markets:
Moving Averages: Moving averages are one of the building blocks of Technical Analysis, and there are almost as many ways to use this indicator as there are technicians.
At the FRED Report we teach and use a dual moving average crossover system to determine trend. Our favorites are the 5 period and 20 period moving averages. We consider the trend to be up if the 5 is above the 20, and down if below it.
Stochastics: The Stochastic Oscillator is one of the commonly used momentum oscillators and is standard on charting programs. There are two lines on the chart below, %K and %D.
%K is the faster of the two lines and represents a mathematical formula that measures where the current close is in relation to the trading range of the last “X” periods of time. We use a 14-period look-back, so in plain English %K says where the current close is in the trading range of the last 14 days, expressed as a %.
At the FRED Report, we use it somewhat differently than is commonly taught. The standard way to use the indicator is to register a buy signal when it moves below, and then above, 20 (the lowest 20% of closing prices in the last 14 days). A sell signal is when the indicator moves above, and then below 80 (the highest 80% of closes over the last 14 days).
The other line, %D, is a 3-period moving average of %K. We have found that the Stochastic is sensitive, so we advocate taking signals only in the direction of the trend. When looking at the standard FRED report chart, this would mean taking buy signals when the 5 is above the 20 and sell signals when the 5 is below the 20 but using a different technique to exit positions. The reason for this is the Stochastic is quite sensitive, and can give early indications, especially in new trends. It also can get “stuck” in the direction of trends, which connotes strength and not weakness. Another, preferred interpretation is to use the indicator to measure risk. An example: buy in an uptrend, not when the stochastic is at 90% but rather wait until it falls below 50%, This way, even if a stock, commodity, or ETF does not give one of the “classic” signals, you can still use the indicator to assess risk, and leg into positions.
Fred's Price Oscillator (FPO): This is an oscillator that I invented, using a combination of high, low and closing prices. Unlike the Stochastic, which is sensitive, this indicator is designed to be less sensitive. Other than that, it is, of course, proprietary, so we do not disclose much about the construction of the indicator. One of the characteristics of the tool is that when the Oscillator moves below/above -15/15 the market often creates a divergence. For those of you who do not know that term it means that price will make a new low/high and the oscillator will not confirm it. That is usually the sign of a turn. On sharp strong market moves, a couple of these divergences can occur. We use weekly data in our examples for you, as we have that data going back to the 1970’s on the SPX, and farther on the Dow Industrials, which work the same way. We would note that we keep FPO’s on the commodities, but rarely publish these, as most subscribers are interested in stocks. Like most oscillators it is most useful at bottoms, so our examples show bottoms. We can, and will, show some analysis of tops as they occur.
Fred's Breadth Oscillator (FBO): This is an Oscillator that I invented. Unlike the McClellan Oscillator, which is sensitive and gives a lot of signals, this tool is more of a trend following indicator. It is proprietary to the FRED report, so we do not disclose much about the construction of the tool. It generally moves between 12 and 18. Moves below 12 or above 18 imply a divergence bottom or top is coming with high probability. This tool works best at extremes, and patterns can be significant. It also gives clearer signals at bottoms than tops, although when tops are perceived to be occurring, we will publish these charts, appropriately annotated. The FBO is only useful on the stock market, where advance/decline data is published.
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Disclaimer:
Research used in this report does not purport to be comprehensive or to contain all the information which a prospective investor may need in order to make an investment decision. The information is based on publicly available information and sources, which the publisher believes to be reliable, but does not represent to be accurate or complete, and it should not be relied on as such. The publisher may update any research report as it determines appropriate, in its sole discretion. Each reader of this report must make its own investigation and assessment of the information presented herein. No representation, warranty or undertaking, express or implied, is or will be made or given and no responsibility or liability is or will be accepted by Fredco Holdings, Inc. or by any of its directors, officers, employees, agents or advisers, in relation to the accuracy or completeness of this presentation or any written or oral information made available in connection with the information presented herein. Any responsibility or liability for any such information is expressly disclaimed. Any person or entity who does rely on this report does so at his/her own risk and by doing so assumes all liability for any such loss, harm or other detriment.
The information contained herein was prepared by Fredco Holdings, which is solely responsible for the contents of this report. Although Fred Meissner, Jr. is a registered representative of Global American Investments, Inc., neither Global American Investments, Inc. nor any of its principals, officers, affiliates, agents or employees is in any way responsible for the contents of this message.
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