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Bullish Backdrop

“Trade what you see, not what you think” was good advice passed on to me early in my career by a institutional portfolio manager with over 40-years experience managing global equities. I caught up with him recently and asked whether he would ever see markets as unusual as they are today, or given his tenure, have markets always seemed in turmoil? His response? “Every period seems unique, and weird, inflation of 15% in the 70s, Japan/Taiwan bubbles in the 80s, technology and momo in the 90s, deflation and bankrupt banks in the 2000s…remember TARP (Trouble Asset Relief Program)?, aggressive central banks and negative rates the past 10 years. Thus there is no normal … just learning to deal with each crisis as it occurs … and keep in mind advice I got around 1982, the US has survived and prospered 230 years … I wouldn’t bet against it.” That pretty much sums why investors and traders should “trade what you see, not what you think,” when using technical analysis, always. With that in mind, the technical backdrop for equities remains bullish despite the ongoing concerns over the economy, trade and the pending U.S. federal election in 2020. Long-term cycle indicators continue to build to the upside in what looks to be a very normal emerging bull market. Pullbacks are likely to remain shallow with the next important tactical pause likely in mid-Q1 at which point we expect our weekly momentum indicators to peak. Once the weekly data begins to peak, I’ll reevaluate the technical backdrop. But I would expect a broad consolidation to develop that would support a more balanced/diversified portfolio into the summer and fall of 2020. Along those lines, I’m featuring PPG Industries (PPG) this week to reinforce the point of trading what you see. PPG makes a long list of chemical products including protective and decorative coatings, glass related, metal cans, closures, plastic tubes, used by automotive, aerospace, marine, architectural and general industrial companies. Put simply, PPG is deep in the gearbox of the economy. What does the chart suggest? I think the message is simple: After 5-years of trading in a broad range, PPG has broken out and is beginning to trend to the upside, signaling business is getting better for this economically sensitive company. Yes, it has rallied over the past few weeks, but what’s wrong with owning stocks that are going up? Long-term relative performance versus the S&P 500 is turning positive in a classic bearish-to-bullish reversal. Bottom line: Accumulate pullbacks as part of an emerging bull cycle.

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Illustrations by Karl Wimer.