Don't Overreact to Headlines, Bull Intact; CME Has Potential
A major benefit of incorporating technical analysis into the investment process is that it provides a framework or perspective to help interpret the overwhelming amount of information investors have to digest. The monthly four-year cycle work that I follow continues to suggest equity markets should move higher through 2020 into 2021 before a cycle peak develops.
On a tactical basis, however, a multi-month pullback should not be a surprise following the surge through 3Q19. Weekly momentum indicators, which track one and two quarter shifts, have been turning down from overbought levels in the past three to five weeks, notably for more cyclical sectors such as EAFE, EM and US sectors such as financials, industrials and resources.
Given that the longer-term cycle backdrop remains bullish, I continue to view the pause/pullback currently developing to be a normal, healthy consolidation after the impressive rebound that developed in 4Q last year. I expect a choppy sideways market to develop well into the second quarter. The bottom line is to remain patient, don’t overreact to sensationalized headlines dominating the news cycle and to be prepared to redeploy capital later in 2Q when the weekly technical indicators unwind from their current overbought levels to neutral or oversold levels later in Q2.
This week’s stock chart is that of the CME Group (CME). What makes CME attractive technically? First, CME fits into the theme I’ve been recommending of adding steady growth stocks to a portfolio in anticipation of more rotation developing into 2Q20 away from higher beta, more volatile stocks such as cyclicals.
Second, while some investors may push back on the idea of buying CME given it has been in uptrend for years, I would counter the time to buy growth stocks is when they pull back to their long-term uptrends. After correcting through most of 2H19, CME is bottoming exactly where it should at its rising 200-day moving average and is beginning to rally with improving relative performance.
Lastly, note that CME’s weekly momentum (top panel) is in the early stages of turning up from oversold levels just as most equity market indexes show evidence of turning down. I view CME a timely long idea to help balance a portfolio through the pending choppiness we expect in markets moving into Q2.
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