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Part I: The World Market Model
The same headline and market type as last month? How boring!
Though things may seem calm, there’s dynamic movement just under the surface. What’s going on underneath? Movement towards more strength, more weakness, or net break-even? Van’s World Market Model gives us insights. Let’s take a look and see.
US stock market segments went from mostly yellow last month to mostly brown this month. The S&P is still yellow, with large cap tech (QQQ) now as the only green in this section of the table. The Microcap (IWC) segment is very weak.
Stock markets in the rest of the Americas remain similar to last month, but both emerging markets and global equities, minus the US (CWI), are no longer green like they were in March.
Like the US market segments, the sectors have turned from mostly yellow to mostly brown. Homebuilders remain green as does gaming and technology. But that’s it for sectors with stronger positive scores.
In the region view, Europe continued to weaken as it has for several months but remains the strongest of the regions.
Asia & Pacific markets went from mostly green last month to mostly yellow and brown this month.
The US Dollar ETF is less weak than last month, so the rest of the currencies are weaker as a result. Bitcoin shows convincing strength—it sits atop the entire database’s scores. Is that convincing enough for people to get back in and drive the price higher?
The most talked about sectors really only have one symbol to talk about besides GBTC. The weakest symbol in the database in April is MJ—the marijuana industry ETF. The super weak score comes at the tail end of a two year decline. MJ is off about 90% from its high two years ago.
How are commodities doing? As usual of late, they are a mix. Blended commodities (DBC) are very weak as is natural gas (UNG). Meanwhile, gold and water are strong.
Real estate is weakly positive and nearly all the symbols in the debt category have turned green.
Europe rules the Top 15 List this month with 10 of the symbols relating to Europe ETFs or individual European country markets. What does that say about Euro-land? The top symbol in the database is GBTC—a Bitcoin ETF.
On the weakest list, natural gas (UNG) is at the top with a recurring theme of banking symbols showing up among the various other symbols.
Overall, the “bulge” in the World Market Model histogram shifted down in the last month. In March, the bulge was in the Bullish/Sideways category. But now, almost 80% of the database is in Sideways/Bearish:
- Very Bullish: 0%
- Bullish: 11%
- Sideways: 41%
- Bearish: 38%
- Very Bearish: 9%
Part II: The Big Picture
What’s the dominant big-picture influence? The Fed. What will it do? How long does it continue absorbing liquidity from the economy? The first order effects are interest rates, and follow-on effects include a range across the board.
One of the effects so far has been on the banking system. Were the SVB and Signature Bank closings back in March one-off incidents? The more recent developments at Credit Suisse and First Republic would indicate other banks are at risk.
Systemic risk? There’s no whale surfacing yet, so another round of hike(s) seems in order.
Part III: The Current Stock Market Type is Sideways Normal
Only one time period changed market direction in April:
200 days – Sideways (Sideways last two months)
100 days – Sideways (Sideways last three months)
50 days – Sideways (Sideways in four out of the last five months)
25 days – Bull (Sideways last two months)
The weekly S&P 500 price chart continues to look quite sideways.
The Market SQN chart below shows the corresponding sideways type with the line dancing around the light blue zone and dipping into the bear zone once during the month.
The 20-day ATR% continued its long, slow trend downward and almost reached “Quiet”.
The primary indexes are all positive with the Russell only basis points over zero. The Dow is up almost 3%, the S&P is up nearly 9%, and the NASDAQ is up by more than 26%, though it’s still below its highs in 2021.
Part IV: Van’s Four-Star Inflation-Deflation Model
Prices for the inputs to the model did move some in April but not enough to change them in Van’s Four Star model. The last time every single input to the model remained the same was…I don’t recall when that happened last—it would have been a long time ago.
The model shows a relative balance of inflationary and deflationary forces for the third month in a row.
Part V: Tracking the Dollar
The USD continued to move mostly sideways in April.
Continuing sideways, a drop below recent lows, or a retest of the recent high? Yes, one of those will happen in May.
Conclusion
The sideways market direction and decreasing volatility might cause some traders impatience, and on others, have a lulling effect. Either way, risks to the economy and markets in the near term lurk close by:
- The Fed raising rates “too far”.
- Customer fears about specific banks and the banking system generally.
- Miscalculation between the executive and legislative branches getting a budget deal and avoiding default – or even significant fear of default.
- The war in Ukraine spreading.
Where are the surprises? The black swans? We can speculate all day long but we don’t know. But there’s a tool for traders to help them sleep at night in regard to big risks within the market and exogenous risks. Van wrote about Portfolio Heat—an idea he learned from Ed Seykota. The idea is to limit your total risk exposure to the markets with a prudent maximum amount. This may be less of a concern if you are on the sidelines currently, and more relevant for traders with systems that trade sideways markets* now. Portfolio Heat applies across market types.
So yes, there are risks even as we move sideways. Conversely, you might think through where to find upcoming tradeable opportunities given the big picture. A short list of broader themes might include:
- Where to be long and where to be short when the Fed “pauses” the rate increases.
- In relation to the banking sector risk and approaching budget negotiations: Where Big Money is moving within the banking system and out of the banking system.
- The sectors or companies that are driving AI and/or the sectors or companies most benefiting from AI.
- The defense sector and companies in response to increased geopolitical tension.
Where might you look within each of those areas? How might you time the trades? What kind of system* would you employ for capturing such opportunities?
How long will the markets continue sideways? You can wonder, worry, or even try to predict. Instead, what if you ask a higher-quality question? Which systems do I trade now and which need to be ready to switch to as the market type changes?
Trade well.
*To learn how to think about and develop systems for all of the market types, register for the upcoming Systems Development Workshop, beginning in June.
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P.S. We’d like to acknowledge a piece of software used in the production of Van’s World Market Model and Market SQN charts that you might find useful. The Excel plugin, called XLQ, essentially eliminates the work of importing price data from multiple sources and calculating technical indicators in Excel spreadsheets. There’s a free trial of up to 45 days and Van Tharp Institute clients get a nice discount by using the discount code “IITM” in the checkout process. VTI receives no financial benefit from anyone purchasing XLQ. We simply mention the software to you as XLQ has proven to be a useful and dependable tool for us over many years, for which we are grateful.
You can find more information at https://qmatix.com/index.htm