Watch for Cyclicals bottoming for sign of new up cycle
You have to be impressed by the persuasive power of price movement on sentiment and headlines. I’m obviously just a bit biased, but the sudden reversal from bearish to bullish headlines only reinforces the importance of including technical analysis in one’s investment process. Why? Well, despite the short-term wiggles that have developed through the summer, the longer-term technical backdrop has served as a very helpful steadying perspective through all the headline noise.
Pull up a monthly chart of the S&P 500 on your favorite charting software for a longerterm perspective that steps back from the near-term wiggles that dominate headlines. What you’ll see is a market index that has traded in a very narrow range following a major rebound from its secular uptrend using the 200-week (4-year) moving average. In fact, as I’ve regularly highlighted here, 2019 looks very similar to 2016 which was another period when equity markets stalled in the shadow of pending global recession… that never happened.
Now, of course, I can’t state for sure there won’t be a recession, but if you believe equities are reasonably good at discounting events 6-12 months ahead, then the S&P’s chart pattern is hardly bearish, at least not yet. If you been reading this space regularly, my view remains unchanged expecting a Q4 upside acceleration by stocks into yearand well into 2020-2021. Until I see otherwise, equity markets are tracking a very normal bullish 4-year cycle acceleration. For active traders, I’m expecting one more short-term pullback from current levels given daily momentum indicators are becoming overbought. Pending pullbacks are viewed as buying opportunities in anticipation of an upside surge through Q4.
The focus of the three stock charts this week reinforce the broader market cycle commentary above. JPM, ITW and JPM are good proxies for companies moving money globally, manufacture ‘stuff’, and digging and building respectively. These monthly chart profiles are broad consolidations to important technical support at their rising secular uptrends defined by 48-month (200-week) moving averages. If the economic backdrop is truly deteriorating, as many forecasters are warning, why are these global cyclicals merely in relatively shallow consolidations and beginning to bottom at major support.
In the interest of keeping these charts easy to read, I didn’t include monthly momentum indicators which are is a useful way to view the longer-term cycles. If you were to add them to each of these charts, you would see they are all in the very early stages of a cycle upturn after peaking in late 2017/early 2018. If you are interested seeing these indicators added to these charts feel free to contact us and I’ll forward them.
The bottom line is that these cyclical stocks appears to be have simply consolidated for 12-18 months after a strong bull cycle between 2016-2018 and are showing technical evidence of bottoming as part of a new up-cycle. As part of a diversified portfolio, I would encourage investors to add some cyclicality back to your portfolio particularly if the current positioning is heavily over-weighted in bond proxies.
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