Weekly Market Update by Retirement Lifestyle Advocates
Stocks rallied again last week for the second consecutive week with the Dow Jones Industrial Average climbing 2.84% and the Standard and Poor’s 500 advancing 2.13%. This two-week rally comes on the heels of a fairly significant decline of nearly 10%.
A couple of weeks ago, we noted that since markets typically don’t go straight up or straight down, a price rebound was likely. That has now happened and happened rather robustly.
Our analysis now shows that stocks are at a critical juncture. Chart One is a chart of an exchange traded fund with the investment objective of tracking the price action of the Dow Jones Industrial Average.
On that chart, we have drawn lines over the price action; these lines are known as Fibonacci price retracement lines. They are often used to estimate possible market reversal points.
If you’re not familiar with Fibonacci price retracement points, they were developed based on the work of an Italian mathematician who was known as Fibonacci.
Fibonacci number sequences appear often in mathematics. They are used in computer algorithms and also appear often in biological settings like branching in trees, the arrangement of leaves on a stem, the fruit sprouts of a pineapple, the flowering of an artichoke and the arrangement of a pine cone’s bracts.
They also often appear in the price movements of markets.
When looking at Chart One, you can see that the Dow reversed last week when prices reached the Fibonacci price point.
This could define a price reversal point for stocks. Should stock prices fall from here, it may be confirming that the new trend in stocks is down.
Our technical measures have stocks in a ‘no trend’ zone at this point with longer term moving averages signaling that stocks remain in an uptrend and shorter-term moving averages telling us that stocks are in a downtrend.
This next week should go a long way toward defining the trend in stocks.
Metals, as one might expect, fell last week as stocks rallied.
US Treasuries rallied as yields fell. Last week, the long bond made up all the ground it lost the prior week.
While the U.S. economy is recording growth, the economy in Europe is lagging.
Economic growth in Europe fell to an anemic .2% in the third quarter. As one might suspect, Italy’s economy recorded zero growth as the country is on the verge of a debt crisis.
This slow economic growth has many calling on the European Central Bank to once again engage in bond purchases, a.k.a. print money, but the central bank has already done that to a great extent and it hasn’t worked.
Zero Hedge (https://www.zerohedge.com/news/2018-11-10/european-central-bank-panic-mode-economy-stalls), the widely read financial blog had this comment:
There were some bullish spots in the Eurostat report, but it was primarily bearish. What happened?
The Royal Bank of Canada (RBC) placed the blame on Germany’s lackluster manufacturing for dragging down the economy. But Chinese demand, which was up nearly 20% last year, has cooled to just 3% this year, causing many businesses to fear that the U.S.-China trade spat is creating a ripple effect.
Figures also pointed out that industrial output declined, with overseas sales taking a hit.
Some are eyeing Italy as a key scapegoat because not only is the country embroiled in a debt crisis, but its manufacturing sector is about one-fifth smaller than it was in 2008. But some analysts say that these trends are affecting global financial markets more than the main street economy – for now.
With the ECB on the cusp of raising interest rates, at a time when governments plan to increase spending and slash taxes, there are concerns that debt levels will spike in the coming months. This might impact spending by consumers and companies; a European Commission survey found that business and consumer confidence dipped to its weakest level in more than a year in Q3.
The Centre for Economics and Business Research (CEBR) says that the risk of a global recession by 2020 has jumped from one-fifth in 2017 to one-third this year.
In the immediate aftermath of the last financial crisis, governments and central banks sprang into action. Politicians spent recklessly, and central banks enabled it by adopting low rates.
Since the Great Recession, Mario Draghi and the ECB have tried to spur growth through quantitative easing (QE), the act of buying government securities from the market to decrease rates and introduce new money into the economy. With record low rates and hundreds of billions of new euros in the market, Keynesians would expect a rallying economy. But growth has been subdued.
A recession is inevitable – both in the United States and in Europe. Unlike the last economic contraction, the ECB will be out of bullets, unless it wants to experience rampant inflation and a currency crisis. European nations are deeply in debt, running budget deficits and witnessing putrid results. There isn’t much left for these bloc members to do, except employ pro-market measures, like rolling back aggressive spending efforts, paying off the debt, and cutting taxes.
Draghi and Co. have only exacerbated the eurozone’s problems by adopting easy-money, inflationary policies. Now that it has fired all the big guns to barely achieve 2% quarterly growth, the ECB is out of bullets, unable to do anything more. Governments can only raise the white flag of surrender and propose their own secession from the currency bloc. To save yourself from drowning on this sinking ship, an exit from the eurozone may be the only reasonable solution.
For a long time, we have held the view that the Eurozone is in for trouble economically speaking and it seems that day is getting a lot closer.
Italy, Europe’s problem child, may be the straw that breaks the proverbial camel’s back. As we discuss in our November print newsletter, the “You May Not Know Report” distributed to clients and subscribers Italy will be a huge problem for Europe, possibly leading to the breakup or extreme modification of the Eurozone.
Italy is both too big to fail and too big to save.
We are forecasting significant economic and political change in Europe moving ahead. And, the fallout will be felt around the world.
It is for that reason that we advocate that many investors consider a non-traditionally correlated portfolio that contains cash and metals along with more traditional investments.
We will discuss this in detail in our revised “New Retirement Rules” book to be released early next year.
We are currently working to put together additional, new resources to be made available to our clients and friends next year. We will be discussing what these resources are and when they will be made available here in “Portfolio Watch” over the next couple of months.
“Pleasure in the job puts perfection in the work.”
“Opportunity is missed by most people because it is dressed in overalls and looks like work.”
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