Robert Colby, Chief Investment Strategist at Robert W. Colby Asset Management, sets out the technical environment for US equities at the beginning of 2020.
Colby points to several factors that are in play:
1) The S&P 500 remains systematically bullish for the long term, because price remains above both the rising 50-day and the rising 200-day Simple Moving Averages (SMA), and the 50-day SMA remains above the 200-day SMA (see Chart). Though keep in mind that trend following using moving averages always lags at price turning points.
2) Technically, the S&P 500 index remains overbought at 3.5% above its 50-day Simple Moving Average (SMA), the upper envelope in the Chart. An overbought condition is not always followed by an immediate downside shakeout, however.
3) RSI and MACD oscillators eased off their highest levels of the year (see Chart), indicating somewhat less strong price momentum. Extremely strong momentum can’t continue forever, of course, and some fluctuation is entirely normal.
4) Stock market sentiment has been overly optimistic for some time, rising to levels beyond overbought extreme greed for some indicators. Sentiment is not always useful for precise trade timing, however, and it certainly has not been useful since early October as bullish price momentum overwhelmed all other considerations.
5) The Dow Jones Industrial Average rose to a new closing price high on Thursday 2 January but the Transportation Average (Chart 2) again failed to rise to a new closing price high. Such a Dow Theory non-confirmation often indicates a split market. It means that the stock market is not entirely in gear, with its key parts not pulling together in the same direction.
6) Long-term U.S. stock sector rotation shows a mix of Defensive and Cyclical sectors, indicating investor uncertainty about long-term economic prospects. The following best-performing sectors are demonstrating the greatest trend strength: Technology, Financial, Health Care, Industrial, and Communication Services. Cyclical sectors such as Technology and Industrial tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
7) The following sectors are relatively weak for the long term: Energy, Real Estate, Consumer Discretionary, Materials, and Utilities. Cyclical sectors such as Consumer Discretionary and Materials tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
8) Stock prices typically advance most of the time in the months following major Middle East crisis events. This may seem counterintuitive to many investors. Much of the market’s behavior seems that way. For further details, see CNBC article.
Read the full report.