Last week was a roller-coaster ride for traders and investors. After a long holiday weekend, traders were greeted with concerns originating in Italy regarding political stability and the potential that any further issues could result in a collapse of the EU. Even though the risk of this happening was somewhat minor, the US markets tanked near 2% as fear seemed to override common sense. The rest of this week has been a wild ride of price rotation within a range. We’ve been reading all types of news and comments regarding all types of “what if” scenarios from analysts and researchers while scratching our heads at some of the comments.
As we stated in our earlier article regarding the Italy political crisis, the one important aspect to trading and investing is to not lose focus on the true perspective and true market fundamentals. Yes, if you are an intraday trader, these wild price swings can either be great profits or wild losses as you try to swing with these rotational moves. As a swing traders/investor, though, we care about the overall stability and direction of the markets. We are willing to ride out some rotation as long as our core analysis is sound and the technical and fundamental basis of our trades is still in place.
In our opinion, there are three things that are core elements of our analysis at the moment and these three things are likely driving the economic future of the US equity markets.
- The US Dollar continues to strengthen as the US economy shows solid signs of a broad-based economic increase.
- Oil/Energy prices have continued to decline recently, now down nearly 10% from the recent peak, and this decrease relates to supply and demand expectations throughout the end of this year (roughly 4~6 months into the future).
- The Transportation Index is pushing higher as stronger economic activity is expected throughout the rest of 2018 and into 2019.
These three key elements cross-populate as follows:
- The strong US dollar is acting like a magnet for foreign capital investment as the strength of the US dollar in combination with the strength of the US economy/equities markets creates a triple-whammy for foreign capital investments. Not only are foreign investors trying to avoid capital devaluation (currency price devaluation) and debt risks in their own local markets, they are trying to find ways to achieve ROI and stability for their capital investments. With almost nowhere else to go, the US equities markets and debt markets are pretty much the only place on the planet for this triple-whammy opportunity.
- The strong US jobs numbers and robust economic activity, in combination with the past capital market stimulus and lowered interest rates, are creating a fuel heavy economic environment in the US not that President Trump’s deregulation and policies have injected the Oxygen needed to create the “economic combustion” that is driving this current growth. Energy prices are moderate and dropping as a result of the shift in technologies attributed to electric and hybrid transportation enterprises. All of this, jobs growth, earning growth, economic growth, moderately low interest rates and a true combusting economy, provides for much greater opportunities for an advancing US equities market.
- The US equities markets are rotating higher throughout the global weakness and debt concerns while the Transportation index pushes higher as a sign that US investors expect the US economy to continue to grow. Transportations lead the us equities markets by about 4 to 6 months (on average). Lower oil prices, strong jobs numbers, dynamic opportunities in the US economy and a stronger US dollar drive continued US and foreign investments into the US equities markets and debt markets.
As we have stated in earlier research posts regarding “capital migration”, capital (cash) is always seeking the best environments for stability, growth and opportunity in a continual effort to balance risk vs. reward. Capital is capable of moving across the planet relatively quickly in most cases and is always seeking the best opportunity for ROI and stability while trying to balance unknown risks and devaluation. Right now, the only games in town are the established economies, the US, Canadian and UK markets.
As you can see in the graph below US investments continue to grow as the best risk/reward for capital.
Our opinion is that until something dramatic changes this current global economic environment and risk unknown, capital will continue to rush into the US markets even if the US dollar continues to climb or oil continues to fall. The only thing that can change this equation is the one key factor in understanding risk vs. reward – when does the opportunity for reward outweigh the risk of complete failure by applying capital into any other foreign or non-established market environment? When investors believe the reward of moving capital out of the US equity markets in search of new opportunities or advantageous risk/reward setups in foreign markets exists, that is when we’ll see a change in investment dynamics resulting in more downside pricing pressure in the US markets – and we don’t believe that will happen within the immediate 4~6+ month span.
Pay attention to our most recent research as we have been dead-on in terms of calling these market swings. The NQ chart, below, shows how the tech heavy NASDAQ is leading the breakout while the YM and ES markets lag a bit. We believe all of these US majors are in the process of breaking to new all-time price highs and as the foreign market turmoil slowly unfolds, we may see some moderate price rotation. Yet we believe the global economic dynamics that are currently in place create a very opportunistic, rich, green opportunity for continued capital infusion into the US equity markets and a continued moderate advance of the US Dollar.
Remember, there is now over $12 trillion in capital that has been created and introduced into the global markets over the past 10+ years. All of this capital is searching for projects and investments to develop suitable ROI and gains. Where do you think this capital is going to go for the most stable, most capable and most successful ROI available on the planet? Think about that for a minute – where else would you consider putting capital to invest for safe and consistent returns right now?
This weekend could prompt a massive upside price breakout early next week on continued positive economic news or lack of any foreign market concerns. The bias of the US equity market is, and has been, bullish – just as we have been telling our members. If you have been fooled by this recent price rotation or other research posts, please consider Technical Traders Ltd. services to learn how we can help you profit from these moves.
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