Technically Speaking, May 2020

The Twin Cities Chapter of the CMT held a virtual meeting on April 21 in accordance with Minnesota guidelines for social distancing during the pandemic.

The guest speaker was Mark Newton, CMT, President and Founder of Newton Advisors LLC.  Newton Advisors has provided technical analysis subscription services to clients since 2016. Mark has more than 25 years on the buy and sell side, including stints at a hedge fund, Morgan Stanley, and as an options market maker at the CBOE.

The last few weeks have seen a sharp drop and rebound in equities.  Mark highlighted some important warning signals prior to the drop, including:

1. very low put/call ratios,
2. weakening momentum as the market reached new highs,
3. divergence in the McClellan Summation Index,
4. divergences in February between the S&P 500 at new highs but not small-caps/mid-caps/equal weight indexes
5. a breakdown in Treasury yields.

The divergence in Treasury Yields can be seen in the chart below: Treasuries yields and equities are moving in tandem from August-December 2019. Starting mid-December stocks kept climbing while Treasury yields started to drop.

Mark sees the recent sharp upswing in equities as a rally in the context of a bear market.  He highlights technical positives, such as a short-term uptrend, strength in technology and healthcare sectors, and subdued sentiment. Technical negatives include weakening breadth and momentum, weakness in financials, energy, and transportation, and time-cycle negative factors such as election and decennial year tendencies.

Breadth and momentum weakness has appeared as a narrowing of the rebound into large cap growth stocks, and lagging performances during the rebound by various small- and mid-cap indices. Semiconductors have been strong on the rebound, but weakness in bond yields caused financials to drop sharply.

Although this market has looked like the 1929 crash in some ways, Mark’s comparisons indicate that equities are tracking stronger than we did in 1929.

Treasuries yields have broken sharply lower and remain in a negative trend. The VIX remains elevated while investor sentiment is neutral.

The US Dollar has been strong, but especially against Latin American currencies like the Brazilian Real. Emerging market equities have also shown weakness as evidenced by the EEM lagging the SPX, NDX, and other developed markets.

Commodities have been sinking as measured by the CCI. Crude oil especially has been weak and looks like it will stay lower for longer. In precious metals, gold is bullish but silver has been diverging.

Mark spent some time discussing cycles. Students of Fibonacci ratios and time cycles will find the AAPL charts below interesting.

Mark illustrates how the prior major move in AAPL from 1/28/16-10/3/18 lasted 979 days, and the duration of the 1/3/19-1/17/20 rally was 379 days, or ~38.2% the length of the first rally. Meanwhile, the 161.8% projection of the prior rally would target a top around $322. Fibonacci time and price cycles helped identify a potential turning point in AAPL.

Mark left us with these takeaways: (1)  Study sentiment and cycles, (2) equities seem to be stalling out, (3) elevated fear measures will prevent the market from quickly returning to new lows, (4) a 16-24 month bear market appears to have started in February 2020, and (5) one should be highly diversified, tactical, and short-term in decision making due to the volatility.