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backing and filling

Global equity indices continue to show evidence of improving after 20-months of sideways to down price action, the so-called “going nowhere” market. The Standard & Poor’s 500 index is again testing the upper end of a broad 2018-2019 consolidation range, while emerging and European markets seem to exhibit signs of completing cycle lows. In the short-term, I expect some backing and filling following the recent broad market rebound back to resistance. The far more important point is that the cycle backdrop is steadily improving. Of course, the ongoing US-China trade discussions and this weekend’s Brexit vote remain obvious binary events facing equity markets. Despite those concerns and weak economic macro data, most cyclical groups reflect a healthy progression from bear trends to bullish trends. I have illustrated the incremental improvement in this space over the past few months by highlighting a progression of leaders to laggards in semiconductors, truckers to large-cap cyclical bellwethers (JPM, ITW, CAT). I’m shifting my focus this week to banks, which are following the same bullish pattern that is consistent with a broader cycle backdrop transitioning into another 4-year bull market cycle. See chart below. In the top panel, the high-quality leader JPM, is breaking out of 2-year consolidation, followed by C showing evidence of accelerating from its long-term uptrend (200-week simple moving average with STT in the bottom panel beginning to reverse its 2-year downtrend.) Banks: Transitioning from bearish to bullish trends Bottom line: The technical progression developing in the banking group confirms the broad-based improvement developing across risk assets following 20-months of correction. Use near-term weakness to increase exposure to equities in general and to cyclicals including banks specifically. Noteworthy Technology leadership takes another short-term pause within an ongoing uptrend Meanwhile, cyclicals, financials, industrials and materials rebound from oversold level but they have yet to break or reverse their 2018-2019 downtrends, which is necessary to support moving to an overweight position. As I noted above, I expect to see financials, notably banks, lead the upside reversal.

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Illustrations by Karl Wimer.