Happy Friday Everyone!
I hope you’ve all enjoyed a good week. It’s been a fairly unremarkable one for equity investors, with the S&P 500 index having traded within a 20 point range (just 0.6%) around 3100. That said, in light of our more negative fundamentals reflected in our Checklists, this relative calm will be welcome. The recent resilience and all-time high suggest that bulls are pricing in stimulus and an upswing in the business cycle beyond the current tumult of trade wars and deteriorating economic conditions.
Here’s a reminder of the broader economic picture represented by our Business Cycle Checklist, which remains negative for now at -1.5.
In spite of this, US equities continue to grind higher and seemingly appear to be capable of levitation (remember - when it comes to making money, price is the only thing that matters!).
This has been reflected in demand for safe havens such as gold, which had staged an impressive rally through $1550 before peaking in late August. Having anticipated much of this rally, our corresponding Gold Checklist recently turned negative and has also correctly called the break below $1500.
Here you can see the breakdown showing how we arrived at our total score of -1.5 earlier this month.
This was also supported by a ‘risk-on’ bias indicated by our Market Risk Checklist, which shows a positive score of +1.
The coincident outperformance in ‘risk trades’ such as Industrials vs Consumer Staples stocks (ratio chart below) has validated this.
The key takeaway that I wish to impart on you from this is that it pays to be selective with your trades. Of course, you shouldn’t abandon your process as on balance it will keep you on-side and profitable in the long run. But you do need to utilize some discretion from time to time and accept that ultimately the market is never wrong! We see this playing out in equities currently, and whilst I am not long, I am not necessarily attempting to short the market either (despite the negative Checklist scores). This reminds me of the title of a great book I was given earlier in my career titled ‘Being Right or Making Money’ by Ned Davis. Trading often isn’t a profitable pursuit if played for the ego. I can accept being ‘wrong’ in my opinion, and act according to what I see on the screen in order to make money (or just as importantly, first, avoid losing it).
Time will tell how this all plays out in the coming weeks. If you would like to join us for our full analysis including new insights each week or learn from the ground up with online tuition from Lex in our Million Dollar Traders online course, then join us today and take your financial knowledge to the next level right away!
Have a great weekend,
James Helliwell | Chief Investment Strategist