Stock Market Outlook for August 28, 2019
See what the ratio between bonds and stocks has to say about the relative value of each asset class.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities. As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.
Stocks Entering Period of Seasonal Strength Today:
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Myriad Genetics, Inc. (NASD:MYGN) Seasonal Chart
LHC Group Inc. (NASD:LHCG) Seasonal Chart
National HealthCare Corp. (AMEX:NHC) Seasonal Chart
The Markets
Stocks traded marginally lower on Tuesday as the treasury yield curve between 10s and 2s inverted, once again. The difference this time, the inversion carried into the close, marking the first inverted close since 2007. The leading indicator to the health of the broader economy has many on edge for fear that it could be signalling a looming recession, but in our monthly report that will be released in the coming days we will show that this event is typically an ideal time to buy stocks. Don’t miss receiving this in depth commentary that highlights areas of the market to focus on for the month ahead. Subscribe now.
The S&P 500 Index drifted lower by around a third of a percent, trading down from its declining 20-day moving average that was hit at the highs of the session. This congestion around major moving averages, whether it be the 20, 50, or 200-day, is expected to persist until the bulls or bears can latch onto something definitive to sustain a trend. In this circumstance, we must gauge the bearish risks and the bullish potential in order to assure that we are appropriately positioned within portfolios. The bear case is that resistance around the 50-day moving average, a significant intermediate pivot point, holds, thereby sending stocks lower to long-term moving average support around 2800 before the next test begins. The recent trading pattern looks almost like a miniature version of the pattern seen in the fourth quarter, where an initial plunge below the 50-day moving average was followed by a month-long gyration below the intermediate hurdle. Stocks then sold off after as investors were unable to push the benchmark above the intermediate threshold. For now, the chance of a similar waterfall decline, such as the fourth quarter, is low. Best guess is that downside risks are to levels around the 200-day moving average.
On bull side of the spectrum, quite simply, the breakout of the short-term trading range between 2825 and 2940 would project a target of 3055, based on the magnitude of the span. Investors are overwhelmingly positioned in a bearish manner and any catalyst to shake loose defensive bets could fuel a move in stocks towards new all-time highs. In this environment, with trade policy seemingly being derived on a moment’s notice over social media, it is appropriate not to bet too aggressively in either direction, particularly with the most volatile time of year for stocks upon us.
One chart showing the relationship between bonds and stocks suggests that the recent risk-off tilt will end with an enticing buy point for stocks. Of course, the argument is already being made of the relative value of stocks over bonds given that they are now providing higher yields than their defensive counterpart. The chart below shows what you need to know about relative value between the two asset classes. The ratio of the 10-year treasury note price versus the S&P 500 index has been trading within a declining trend channel for a decade as stocks outperform the fixed income investment. Each touch of the upper limit of the trading range has resulted in excellent opportunities to rotate from bonds to stocks. Conversely, a test of the lower limit of the range has created better opportunities in bond versus stocks. Over the past two years there was a test of the lower bound in January and September of 2018, both excellent selling opportunities for stocks. Subsequently, the ratio hit the upper limit of the span around the end of December, allowing for the rotation back to stocks following the fourth quarter selloff. The ratio is now, once again, reaching towards the upper limit of the span, perhaps poised to trigger another opportunity to switch from bonds to stocks. But, beware, a break of the span altogether would indicate the end of the long-term trend of outperformance of stocks over bonds, as it did in 2007 and 2008. This is just one indicator in our tool chest to gauge the risk-reward of the long and intermediate-term trends for risk versus defense and, right now, it is indicating the potential for that shift from bonds to stocks to happen again within the confines of the present trend.
Sentiment on Tuesday, as gauged by the put-call ratio, ended neutral at 0.95.
Seasonal charts of companies reporting earnings today:
S&P 500 Index
TSE Composite
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