THE WEEKLY TOP 10
Table of Contents:
1) The market acts great, but it’s also getting expensive, overbought and over-loved.
2) The key tech ETFs…& several key tech stocks…are beginning to show some cracks.
3) Ditto for the high yield market…especially at the bottom of the quality scale.
4) Having said this, a “melt-up” into year-end is not out of the question. It’s just not likely.
5) Another bullish development is the rise in copper…which is now testing key resistance.
6) Watch the XLY to see if the consumer will remain strong through the holiday season.
7) The biotechs are overbought near-term, but any further rally will be quite bullish.
8) The Fed’s most recent QE program began with very different market conditions than usual.
9) Crude oil rallies, but the energy stocks continue not to care.
10) Summary of our current stance.
1) The stock market acts great…and thus human nature leads a lot of people to believe it will continue to rally strongly. However, the stock market is becoming very overbought. More importantly, it is becoming very expensive…especially if you look at the most accurate reading: the price-to-sales ratio. Therefore we believe the stock market will have a very tough time rallying a lot further from current levels…and could/should see a pull-back soon…..Also, we continue to believe a willingness to stay nimble will be the key to success for investors in 2020.....To read more about this issue and to see the chart on the price-to-sales ratio, click here to subscribe to "The Maley Report" (TheMaleyReport.com).
2) The tech group has provided great leadership for the stock market all year. However, they’re starting to show some cracks on a technical basis. The XLK & SMH tech ETFs are coming off of overbought conditions…and their MACD charts are beginning to roll-over. Therefore, if they see any downside follow-through from last week’s weakness, it will indicate that a material pull-back in the group is in the offing......To see more details on this issue and to get this report every weekend, click here to subscribe to "The Maley Report" (TheMaleyReport.com).
3) Speaking of small cracks, we’re seeing some of those in the high yield market as well. First of all, over the past 2.5 years, the HYG has actually declined by a small amount…while the S&P 500 has rallied more than 25%.....Also, more recently, as the people from Elliott Wave Int’l have pointed out, the lower-end of the high yield market has been falling in recent months. History tells us that a decline in this part of the HY market is usually followed by a decline in the stock market.
4) So as you can see from our first three points, we think the upside in the stock market from current levels is limited. In fact, we’d expect a bit of a pull-back over the near-term. HOWEVER, we readily admit that the stock market acts very, very well. Things like “FOMO,” “performance fear” and “positioning” can create situations where the markets push higher and become more divorced from their underlying fundamentals. Therefore, a pull-back from here is not guaranteed. This will be especially true if the tech stocks can bounce-back…and take-out their recent highs. To see this weekend's full report AND to get our daily piece ("Morning Comment"), please click here to subscribe to "The Maley Report" (TheMaleyReport.com).
5) Another point on the positive side of the ledger is the recent rally in copper. “Dr. Copper” is now testing a couple of key resistance levels, so if it can rally much further from current levels…especially if it can rally above $275…it will be a positive signal for global growth in 2020. Needless to say, that kind of move would lead us to reconsider our cautious stance about global economic growth.
6) We’d like to reiterate what we said about the consumer last weekend…after we got some very different results last week from several different retailers…….There are some cracks showing up in the consumer. They’re not big ones yet, but if they grow, it’s going to raise some serious questions about the economy & the markets. Therefore, we’ll be watching the XLY consumer discretionary ETF closely in the days & weeks ahead. It has formed a “symmetrical triangle” pattern…and whichever way it breaks out of that pattern should be quite important. To see the chart on the XLY and the other 26 charts we have provided this weekend, please click here to subscribe to "The Maley Report" (TheMaleyReport.com).
7) We highlighted the XLV healthcare ETF recently and we’d like to turn to the IBB biotech ETF this weekend. It has recently broken some key resistance levels…and is now testing an even more important one. The group IS getting quite overbought on a near-term basis, but if it can rally further (after a probable “breather”), it’s going to be bullish for the group for both the short-term AND the long-term on a technical basis. Yes, we understand that politics could create headwinds next year, but any upside follow-through will definitely be bullish for the group on a technical basis.
8) “Don’t fight the Fed”….With the Fed engaged in QE, it makes sense to think the markets will rally on a continuing basis. However, we also have to remember that all of the previous QE programs were initiated when the stock market was VERY oversold AND washed-out on long-term basis. That was not the case this time around. Therefore, now that the markets have very quickly become overbought on a short AND long-term basis, QE might not have the same kind of exceptional an long-lasting impact it has in the past. To see more details on this issue and to get this report every weekend, click here to subscribe to "The Maley Report" (TheMaleyReport.com).
9) Crude oil has rallied 2.3% over the past 3 weeks…and 10% since the October lows. However, the energy stocks continue to badly underperform. If crude oil breaks above its sideways range (above $60) and holds, it’s going to be very bullish for the energy stocks. They have been lagging behind the price of crude oil all year, so if the XLE can finally break meaningfully above its 200 DMA and the XOP can break its 15 month trend-line, the group is going to take-off. Therefore, we believe investors should be prepared in advance…and be reading to buy their favorite stocks if those levels are indeed broken.
10) Summary of our current stance…..We have seen a very nice rally recently…and a great one YTD. However, we question whether the underlying fundamentals…even if they improve to the degree the consensus says it will next year…will be enough to push it even higher. (If it does rally further, it will only create a bubble in our opinion, so investors need to be careful what they wish for.….Yes, the Fed is providing liquidity, but this QE program started at a condition in the market place that was MUCH different than previous QE programs, so it’s impact might not be as strong or long-lasting as previous ones…..Either way, the stock market is quite overbought…over-valued…and over-loved. Therefore, we think investors will need to stay nimble over the rest of the year…and throughout 2020........ To see this weekend's full report AND to get our daily piece ("Morning Comment"), please click here to subscribe to "The Maley Report" (TheMaleyReport.com).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.