Well, if we look at world equities as a whole as represented by the ACWI – All Countries World Index ETF, below, things don’t look that bright any more.
Major support was broken on Monday on above average volume. The index is now trading below both the 50 Day Moving Average and the 200 Day Moving Average and the latter is now flattening. Not a pretty sight but there is still potential for a rally.
The EEM – Emerging Market Index, above, looks even worse.
Against this picture Australia as per the ASX 50, above, still looks quite good. The index broke out of a one year trading range and has a technical profit target of another 400 points of around 7 % (plus dividends). The real outperformer so far is still the US with small caps as expressed in the Russell 2000 stealing the show and the tech heavy NASDAQ of leading growth stocks following suite.
We had some churning on the days marked with an arrow in the NASDAQ, above. That means that volume was way above average but it did not lead to a price advance but basically unchanged prices. This is a sign that bulls and bears are battling it out with the bears liquidating. Monday’s sell off was the worst in the major indices but the whole picture isn’t quite as bad yet. The index is still trading above the 50 Day Moving Average and the 200 Day Moving Average and the index is just coming off a recent all time high. So what’s driving all this price action? Beginning of the year we had a scare of rising interest rates (and they did rise). Markets believed that once 3 % in the 10 Year Treasury Notes was reached a major sell off would occur. Well, we exceeded this magic level for a few days but the market calmed down quickly and recovered. The market then worried about North Korean Nuclear activities but calmed down after a Trump / Kim meeting that had not much of a result. We then worried more or less about an impending trade war at first thinking that Trump is just bluffing but on Monday fearing that a blown out trade war could really happen. Neither Trump nor Xi nor the EU want one and I think this will me more of a game of chicken and who will blink first. Trump is quite flexible and changes policy quite easily (e.g. separate illegal immigrants parents and children rebuke) and there are more noises in China that a hard line tit for tat is not helpful. On top of that the Fed is going to reduce their balance sheet even further with soon taking out of the economy $ 40 Billion (instead of $ 30 Billion) by not rolling over maturing bonds. On the positive side the soon to be released quarterly US earnings should be quite good and provide a potential narrative for an advance. That means we can make a case for a continuation of the bull run (at least in the US, the rest of the world doesn’t look that good, particularly in US Dollar terms) but also for the beginning of a US bear market. This comment, I admit, is not particularly helpful so the question remains how to trade the current state of the markets.
Australia now look relatively good and we have exposure to a small circle of growth stocks, mostly mid caps, and they are behaving relatively well. Our US portfolio still outperforms the benchmark, i.e. the S&P 500 Total Return Index, but the performance is somewhat underwhelming. As such I would refrain from initiating new positions for the time being until either the trade war issue is resolved in a positive way or the market reacts very strongly on the upcoming quarterly earnings results. With regards to current open position I wouldn’t jump the gun and guess which way policy is going to develop but rather, quite simply, continue applying our trading strategy and not being smart and anticipating any moves. That means that we get out of losing positions with our usual stop loss (make it somewhere between 5 % to 10 % from entry) and take profits according to our system. I have several proposed profit taking strategies. You could simply take profits at around 20 % from entry (that where stocks after a decent move often go back into a trading range). Alternatively you can use some kind of a trailing stop and get out if and when that stop is triggered. I prefer a close only stop. We have a tighter trailing stop based on volatility (3 times average true range) or on reaction lows (stochastic buy signals) or simply based on the 200 Day Moving Average (getting out once stocks trade below a flattening 200 DMA). The point I am making here is that you have to have exit rules, that you don’t try to be smart and guess the future but simply react to what the market is telling you and apply consistently exit strategies (any of the ones discussed above) that fit you and your preferred time frame (You have the choice to take smaller profits more often and risking getting out too early. Or you can take larger profits less often with through a trailing stop but beast giving back some unrealised profits). Which way you do it doesn’t really matter that much as long as you do it consistently.