U.S. equity markets rejected a gap to new highs and closed on Friday with a bearish engulfing pattern. Engulfing patterns are notoriously unreliable except when they are not. This is similar in concept to the October seasonal where several devastating high sigma events have occurred (1929, 1987,2008). Normally, October is a pretty strong month, however when it’s not, its life-changing if you are caught on the wrong side of it.
Considering that the massive run up in equities over the past decade has led to historic valuation metrics that could all change. The convergence of a new year, a new decade, and the bearish short-term pattern is noteworthy and requires immediate action. This includes moving stops to lock in gains and re-evaluating the big macro picture. Soft commodities led by sugar is on the verge of a major breakout from a massive bottom which closed this week above key long-term moving averages. Did I forget to mention that Sugar is at 100-year lows compared to equities?
On the geopolitical front, tension with Iran backed down from boiling to just a simmer. Interesting to note is that Russia has been main beneficiary of the recent geopolitical stress, leading the worlds equity markets over the past three months, up over 15%. Putin’s major holdings in gold have helped while it’s enhanced position in the Mideast has not hurt either.
This week’s highlights are:
- Risk Gauges improved marginally, but it will not take much to flip negative
- Most Key US Equities benchmarks made new all-time highs, however IWM was down on the week and the new year,
- Bullish market phases remain strong across all time frames for US equities
- Value stocks continue to lag
- Volatility continues to drop despite global stress
- Gold holds firm, digesting its recent run up
- Emerging markets confirmed a weekly breakout, especially relative to established markets (EFA) and held its ground verses the S&P 500
- Market Internals are diverging from price and a yellow flag