The Stock Market’s Breadth Is Narrowing
Weekly Notes With Tiho — Issue 14
Location: Perast, Montenegro
You’ll probably think that this week’s cover image is a National Geographic award-winning photograph from a remote, never before heard, ancient stone town.
While I didn’t take this exact photo, there are plenty on my iPhone that look just as beautiful — if not better.
So far through my European travels, I have been fortunate enough to visit many places.
Recently, I found myself visiting a small southern Balkan country called Montenegro.
Locals call it Crna Gora, which means black mountain.
The country, which is a former Yugoslav state, uses the European Euro as the form of exchange and has a flat tax of 9% for its residents.
It was extremely interesting to see real estate developments popping up left, right and center… and the cost per square meter (or square foot) is very attractive.
The most prestigious development is called Port Montenegro in Kotor Bay.
(In Porto Montenegro talking real estate returns, rental yields and taxation on income & capital gains)
For those not familiar, Kotor Bay is one of the most amazing places you’ll ever see in your life. The water is a mix between coral green and ocean blue, while the mountain ranges could give The Alps a run for their money.
For those interested to discuss real estate opportunities in Kotor Bay or rest of Montenegro, do not hesitate to contact me.
The Week That Was
After a sharp sell-off last week, we saw mixed performance over the trading week.
While the US equities continued to decline for the second week in the row (Small Caps are down 4 weeks in the row), foreign markets managed to rebound.
Emerging Market and Frontier Market stocks lead the rally. China was doing the majority of the heavy lifting.
Safe havens — like Japanese Yen, Treasuries, and Gold — were either flat or slightly down for the week.
The United States Small caps were the worst performing major asset class, for the second week running.
As the chart shows, the closely tracked small companies & enterprise index is now down over 5% from its all-time high.
Foreign Stocks Outperforming
I have mentioned the importance of tilting portfolios towards foreign stocks on multiple occasions throughout the year.
The trend seems to be continuing this week, again.
Chinese small caps were the best performer this week, up almost 5% in US Dollar terms.
Emerging market country indices made up 12 out of the 13 best performers.
Two-thirds of the countries were positive this week, which shows that US equities did not lead rest of the markets down.
While 16 country indices were up by 1% or more, only six were down by 1% or more.
Pakistan has been selling off dramatically in recent months and continued its decline this week.
Market’s Breadth Is Narrowing
Days before the correction started, I wrote a post which issued a warning that stocks were prone to the downside in the short-term.
One of the topics I touched up was deterioration in stock market breadth.
During the first week of August I wrote:
“While initially, 90% of all S&P companies were trending in a bullish manner, this has been decreasing over time and now only about 70% of the companies are able to trade above this short term moving average.
At this rate to breadth deterioration, the index will eventually roll over and the correction should start.”
This is exactly what happened. Stock market breadth narrowing became significant and eventually dragged major indices down.
The correction has started.
It is not a secret that the number of 52 week new lows has been rising.
You are right.
The bulk of those is coming from the weak Energy Sector — down 16.2% year to date.
Nevertheless, Consumer and Industrial Sectors are displaying rather poor participation, too.
Retail stocks have also been very weak in 2017 and struggling since the middle of 2015.
There are an abundance of “Retail Death by Amazon” charts doing the rounds on the internet.
However, I ask myself if this is the sole reason for Retail Sector weakness? The support at $38 for the ETF is definitely one to keep a close eye on.
Interesting Charts To Watch
Here at The Atlas Investor, I am always watching important price pivots and breaks.
However, today I would like to share a few interest breadth charts — all of which are showing breaks.
New Highs versus New Lows ratio has broken down from a coiling triangle pattern.
Shallower pullbacks see this indicator bottom out around 40%, while major sell offs require a real wash out as the indicator drops to an extremely oversold level of 20% or less.
The new trend seems to be down.
The other two important breadth indicators I track are also giving us a similar message.
It is an understatement to say that I am closely tracking these charts.
You are probably wondering what are the price implications as stock market internals continue to breakdown?
Is the breadth signaling more downside to come?
How much of a correction could we expect, before internals become oversold?
I am anticipating a correction. And starting to position for it, too.
Tiho Brkan, 09th of August 2017
It is quite possible that — the strategy which delivered first half positive performance — might not work as well in the second half.
At the same time, we have entered a weak season period.
If you would like to know how I am positioning my client’s portfolios for the second half of 2017 and which asset classes I’m overweight/underweight — get in contact by clicking below and filling out the brief survey.
Weekly Reading For High Net Worth Individuals
- UFC billionaire is mystery buyer of $70M penthouse at 520 Park Avenue
- German Businessman Lists 65-Acre California Vineyard for $16M
- Billionaire Brett Blundy’s Hawkesbury River weekender sells for $18 million
- Santa Barbara Equestrian Estate Asks $26.5 Million
- Singapore beats Hong Kong in liveability rankings for first time
- Africa’s richest billionaire wants to buy Arsenal and sack Arsène Wenger
- Trump disbands business councils as CEOs flee after Charlottesville remarks
- Africa’s Richest Man to Invest Up to $50 Billion in U.S., Europe
- Kenya’s new crop of Dollar Millionaires spends big on High-End Luxury Goods
- Druckenmiller Exits Barrick as Templeton, Adage Boost Stakes
- Hedge Funds Break Up With Long-Adored Apple and Facebook Shares
- Paulson And Other Hedge Funds Rewarded as Angst Fuels Gold