Thoughts from our recent Technician podcast featuring John Kosar and Greg Weldon, which can be listened to in full on the Newshour podcast page here or on iTunes here.
Uncertainty persists both in U.S. stock markets and around the world, as analysts and technicians debate whether we’re in a correction or a new bear market.
According to John Kosar, chartered market technician and director of research for Asbury Research, we’re emerging from a 12 percent correction coming off of years of quantitative easing with no correction prior to this one.
Kosar sees several things that he wants to see get better to indicate we’re leaving the corrective phase and resuming into a bull market.
First, sentiment is key for Kosar, and he keeps track of a dozen different indicators, including surveys of professional trend followers. All have reached negative levels in the last four to six weeks.
“Going back 10 years, that’s when you look for bottoms,” he said.
Volatility also spiked, Kosar noted, and put/call ratios are at extremes. If we were in a bear market, he expects we would have bounced off the bottom and continued to roll over, which hasn’t happened yet.
The most important item on Kosar’s list is his desire to see ETF asset flows become stronger. He doesn’t like the flattening yield curve we’ve seen over the last 2 months, and he also doesn’t like 10-year yields at 2 percent.
“If those two things can kind of repair themselves between here and Thanksgiving, I think we’ve got a very good shot at making (or) at least testing the old highs of this year or maybe even making new ones by the end of the year,” he said.
ETF asset flows will indicate a good entry point for gold and other commodities. He also feels the 200-day moving average is a good general indicator of the current trend in several commodities markets.
“We’re at the inflection point now,” he said. “The more we stay up above the 200-day (average), the more it looks like a trend change and not just some bounce in a bear market.”
Kosar suggested looking at the tech sector through the end of the year. If the rally holds up, he sees the broader indexes including the Nasdaq 100 and the Nasdaq Composite leading the way.
Financial Sense also had the opportunity to speak with Greg Weldon, president and CEO of Weldon Financial, about the Fed’s intentions to hike. With the quantity of money actually contracting, Weldon notes that the Fed’s balance sheet assets peaked in December.
“This is a taper turned to tap out,” he said.
The Fed’s balance sheet is no longer expanding, and in fact has contracted over the last 9 or 10 months, Weldon noted. Stock market returns are flat at best, retail sales have stalled, and the only thing going up is consumer credit, he added, which has risen at unprecedented rates.
Considering all of this, there are many issues that could come up if the Fed does raise rates, Weldon said.
“You can say all you want that’s it’s not a tightening,” he said. “It sure as heck is a tightening when you’ve been at zero for so long.”
The idea of normalizing rates is fallacious, he argues, because zero-bound rates have become the new normal. If the 2-year note were to go back to a normal range around 2 to 3 percent, Weldon thinks we would see a deflationary wave that would be dangerous and devastating to the stock market.
Both uncertainty and complacency are high, and the Fed has lulled markets into a false sense of security, Weldon said.
Expectations for Fed Fund rates have been declining, and at one point in 2014, expectations were for the Fed to already have raised rates three or four times by now.
“They were pricing in a normalization of rates which would theoretically take the 5-year note back to the 4 or 5 percent range,” he said.
This would lead to a number of substantial problems, from issues with the U.S. deficit, fiscal funding, rollovers of old debt, and a record amount of government debt outstanding that has doubled since 2008, Weldon noted. With the European Central Bank discussing QE and China cutting interest rates, it’s a dangerous environment to be raising rates, he said.
The market is waiting for the Fed to act, and the Fed isn’t showing up, Weldon said.
“I think this is about as tough a read as I can remember seeing in my 31 years of doing this,” he added.
Weldon doesn’t see much that looks attractive in this environment, and he has observed a giant compression of returns, with some hedge funds going out of business.
“I’m not surprised by failure in the industry,” Weldon said. “If you ask me, it’s just another sign of deflation.”
Listen to this full broadcast by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.
