The following is a summary of our recent interview with Louise Yamada of Louise Yamada Technical Research Advisors, which can be listened to on our site here or on iTunes here along with our weekly market wrap-up and Big Picture.
The picture remains murky when it comes to U.S. equities, and market observers aren’t sure what to make of current conditions, noted Louise Yamada on Saturday.
The current situation is hard to decipher, Yamada noted: “It’s very complicated for everybody, even for the professionals at this point.”
She proposes three scenarios likely to emerge: a 40 percent chance of a trading range forming, a 40 percent chance for a breakout to new highs, and a 20 percent chance for a resumption of the bear market.
Looking back for historical precedent, Yamada noted that the first interest rate increase in 1946 coming off the deflationary pressures preceding that time saw the market suffer a 23 percent decline. After that, though, the market traded sideways into 1949.
This might indicate we’re looking at an emerging trading range around 11 to 13 percent, Yamada said, somewhere between the May high and the January low around 1850 to 1875 on the S&P 500.
“It’s conceivable that we continue to fluctuate and frustrate within this range for a period of time,” she said. “The other possibility is that we garner enough strength to move to new highs, but we don’t really have a trending leadership.”
No Clear Leaders Yet
We’ve seen a quick rotation between sectors from defensive to offensive, Yamada noted. As of last week, the only sector that’s outperforming the market is healthcare, which likely won’t be enough to lift the broader market to new highs, she said.
Part of the difficulty is that performance hasn’t been homogeneous even within a given group or sector, and it’s adding to the confusion, Yamada stated.
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Consumer discretionary has seen an enormous divergence between companies that have already corrected and moved up, and companies that went higher and are starting to roll over, she said.
“You’ve got internal diversity between the patterns that are looking positive and patterns that are looking negative,” Yamada said. “Net-net, you go practically nowhere.”
Certain Commodities Changing Their Tune?
Both oil and gold appear to be doing better, recently, but Yamada isn’t sure a new trend is established in either market.
“I think that we’ve probably seen the low in oil,” she noted. “Often when you have that dramatic drop, you have a lot of bargain hunters and you get a very good percentage bounce.”
The oil price could pull back towards 42 and make a right shoulder, Yamada said, potentially forming a short five-month head-and-shoulder bottom and then possibly making a move up, though she thinks more consolidation is needed.
When it comes to the gold market, Yamada noted that from a monthly momentum perspective, she did get a buy signal for gold.
“We rather doubt in our hearts that it’s the beginning of another structural bull market,” she added. “Historically gold and equities … have moved inversely as a ratio.”
When the Dow does very well, gold is generally underperforming, though she noted that this doesn’t mean gold is necessarily declining, but only that it isn’t gaining ground as fast as the stock market.
However, Yamada does see negative interest rates around the world driving demand for the precious metal.
“If rates start going up, generally that’s a negative for gold because you have to offset the cost of holding something that doesn’t yield anything,” she said.
Navigating Difficult Waters
For investors seeking insight into how to play this market, Yamada offered caution.
“I think the investors today may have to get used to facing more of a trading market, and less of a trending market,” she said. “If you’re not a good trader, I would suggest perhaps you don’t play it.”
However, for those who follow technical indicators, there are stocks that are trying to base and move out through 3- to 5-year consolidations, she said. These might have some potential over time.
“I certainly wouldn’t put everything at risk here under any circumstances, but then I’m very conservative,” Yamada said.
Listen to this full interview with esteemed market technician Louise Yamada on the Newshour page here or on iTunes here. Subscribe to our weekly premium podcast by clicking here.
