Potential Stock Market Trend Break
Summary
Many major U.S. stock market indices appear to be breaking their bullish trend.
10 Year Treasury Continues to Rise
As the 10 Year Treasury continues to rise it puts more pressure on U.S. stocks, in particular long duration (high valuation) growth stocks. This will continue to be a head wind for the stock market. Also, the Federal Reserve Bank is ending its’ money printing plan and that has taken away key support for U.S. stocks.
Potential Breakdown for Major U.S. Stock Market Indices?
Many of the broadly diversified U.S. stock indices have been losing momentum, recently some stress has developed in light of the recent increase in interest rates. In fact, some of the indices have shown a lot of weakness.
$NYFANG – The FAANG+M Index has been one of the most important over the past 10 years because it is comprised of the market leading, large, mega-cap technology stocks that have produced impressive returns (they have also attained very high valuation levels). This week the index has broken its’ long term bull trend (as signified by the red dashed line). Unless the index rallies it will likely fall into a bear trend. This would not be good for the stock market overall since these mega cap stocks have the ability to offset the returns of many, many other stocks. (chart courtesy of www.stockcharts.com)
$COMP – The NASDAQ Index has recently broken trend as well. The NASDAQ Index is a key growth market and if it breaks into a bear trend that would be negative for U.S. stock market investors. (chart courtesy of www.stockcharts.com)
$SML – The S&P 600 Small Cap Index has broken its’ long term bullish trend after treading water for the past 11 months. This loss of momentum has been a concern, the hope was that small cap stocks would consolidate their gains and eventually resume an uptrend. It appears now that this small cap index could be breaking into a bear trend. (chart courtesy of wee.stockcharts.com)
$XVG – The Value Line Geometric Index has broken its’ long-term average and unless prices move back up into a bull trend this could signify a break down. This is significant in that this index represents over 1,600 large cap, mid cap, and small cap stocks in the U.S. and they are equally weighted, telling us that the average stock in the U.S. could be slipping into a bear trend and confirming what we have seen in the other indices. (chart courtesy of www.stockchartscom)
Caution is Warranted
Investors should be aware that the Federal Reserve’s plans to turn off the money printer and to raise rates, in an effort to combat inflation, is posing problems for stock market investors. If the aforementioned stock markets do not rebound above their long term averages and instead we see a failed rally a bear market in stocks will likely be confirmed in my opinion.. Investors should consider learning about Highcroft’s Wealth Shield, a rules based discipline that can help preserve capital.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
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DEFINITIONS
CBOE 10 Year Treasury Index - The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The index tracks the current interest rate (yield) for the 10 year Treasury on a daily basis.
NASDAQ Composite Index - is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities.
NYSE FAANG+ Index - An index that provides exposure to 10 of today’s highly-traded tech giants. The index launched on 09/26/2017, prior performance (09/19/2014 to 09/25/2017) is based upon backtested index calculations. Gross total return variants are shown for all of the indices in the chart. The NYSE FANG+™ Index is an equal-weighted index.
S&P 600 Small Cap Index - The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
Value Line Geometric Index - The Value Line Composite Index is a stock index containing approximately 1,675 companies from the NYSE, American Stock Exchange, Nasdaq, Toronto, and over-the-counter markets. The Value Line Composite Index has two forms: The Value Line Geometric Composite Index (the original equally weighted index) and the Value Line Arithmetic Composite Index (an index which mirrors changes if a portfolio held equal amounts of stock.)
Wealth Shield – A rules-based discipline that has capital preservation as its’ primary objective. The program exits investments that have broken a bull trend, shifting those investments into cash which is then ready funds to be reinvested into those investments that have superior momentum characteristics.
The discipline can lock in gains or minimize losses, preventing further declines. Wealth Shield acts as a brake when investments and markets generate downward momentum. Please note that this service is only provided on the Strategic Asset Management (SAM) accounts that Gerald Asplund manages with discretion, it does not apply to any non-discretionary accounts such as brokerage, 401k, or insurance accounts.
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