As investors look forward to the new year, I thought it would be good to share my thoughts on 2020.
After a big finish to the year, there’s much to look forward to in 2020.
And there is a growing list of both bullish and bearish themes, catalysts, and indicators to be aware of.
Below you will find two lists – one including bearish “concerns” and the other bullish “reasons for optimism”. Happy New year.
For my full 2020 Annual Technical Report, you can visit newtonadvisor.com
TECHNICAL REASONS FOR INVESTOR CONCERN in 2020:
1) Daily and weekly momentum are back in overbought territory yet monthly momentum is well below levels seen in January 2018. Thus, after a near 36% rally off the lows in December 2018 into 2019, monthly momentum is “weak” enough to not even be able to reach overbought levels.
The negative divergence (prices higher, momentum lower) on long-term timeframes like this is troublesome towards expecting returns to be extrapolated into 2020 given “Earnings and the economy are OK. and progress is being made in the Trade deal” etc. Both 2000 and 2007 showed similar but not as extreme divergences that led to bear markets. It’s thought that this flattening out in momentum should produce the same between 2020 and 2022.
2) Most of the world has not been nearly as robust as the US in powering onto new record highs. As charts below show, the “World Ex-US” has not even rallied over 2018’s fall highs much less back over 2007 highs to new all-time high territory.
3) Technology which makes up 22% of the stock market, was up nearly 50% on the year, and very stretched, while Healthcare and Financials are both up to poor risk/rewards for entry. Combined these sectors make up more than 50% of the S&P 500 Index, and it wouldn’t take much pullback in these groups to have a material effect.
4) Treasury yields remain trending lower, not confirming the recent strength in the Equity rally. After a failed breakout in November, yields plunged back lower and have largely been in a consolidation trading range, within their ongoing downtrend from last year. After losing nearly 140 bps from last Fall, yields still aren’t showing convincing signs that the lows are in, purely from a yield perspective.
5) Market cycles which had been positive for 2019 now take a negative turn into 2020, with the combination of both an Election year cycle along with a Decennial “year ending with 0” Historically, years like this have proven sub-par. It’s thought that long-term cycles turn down this year for 2-3 years.
6)Â Demark based exhaustion is present on long-term charts of DJIA, CCMP, SPX right at the highs on an annual basis (TD Sell Setups on 8) and weekly 9-13-9 patterns as markets finish out the year.
7) Ongoing weakness in both Small-caps and Mid-caps has persisted throughout 2019 with both styles selling off to the lowest relative levels in over 10 years vs the SPX, relatively speaking. Thus, really only Large-Cap is working right now. This often can occur before markets make larger tops.
8) January Barometer- Election year seasonality for January has been decidedly mixed, with January coming in flat for the S&P 500, and negative for the Dow Jones Industrial Average since 1950. While January ranks as the 5th (S&P 500) and 6th best (Dow Jones Industrial Average) performing during January, during an Election year this falls to 8th and the performance is been far less robust. Thus, performance this month could be key for the so-called January barometer.
9) Equity Put/call ratio has weakened to the lowest levels in over 10 years on monthly charts to end the year. While this bounced a bit on 12/27, the act of getting down as low as this did, while the 13-week moving average has plummeted in recent months is a concern.
Note that you can see the entire 2020 Annual Technical Outlook in full at https://newtonadvisor.com.
TECHNICAL REASONS FOR INVESTOR OPTIMISM in 2020:
1) Price remains at/near all-time highs, with zero signs of any real technical deterioration and uptrends remain in good shape, with no trend damage on daily, weekly, nor monthly basis. Until momentum begins to rollover on a daily and/or monthly basis, trends remain positive.
2) Seasonal cycles still show a positive bias into early January, and while the Santa Claus Rally period is not yet complete, we’ve seen positive performance for the first three days of this period. Historically, gains in the first five days has preceded gains for the year ahead over 83% of the time according to Stock Traders Almanac.
3) Overall seasonality remains bullish from now into Spring 2020. It’s thought that while a serious pullback is overdue, it likely would prove short-lived, bottoming in late February before a rally into the Spring.
4) SPX is set to close the year up potentially 30%, which could be the best return since 1997. Historically, markets have been up the following year 10 out of 12 times with an average return of +15.2% since 1950.
5) Credit spreads have tightened massively in the last two months, with Bloomberg’s High Yield Average Option Adjusted Spread (OAS) tightening to just 330 bps over 5-year Treasuries. Historically, bear markets have been led by deteriorating credit which causes a widening in Spreads. As of now, we’re certainly not seeing that.
6) The arithmetic long-term uptrend line from 2009 lows has not been violated on this decline in SPX, DJIA, nor NASDAQ Composite, and prices would need to violate SPX 3000 to expect more meaningful intermediate-term weakness.
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Twitter: @MarkNewtonCMT
Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
