Markets have continued to trade in a range over the last few months and deciphering the moves doesn’t appear to be getting any easier as the fundamentals become even more confusing. One of the few strategies that has worked in a range-bound market has been charting (read more on technical analysis & charting here). Let’s take a look at a few important charts.
Few markets have served as a better leading indicator than China’s Shanghai index. China led us out of the recession and markets have traded sideways since the Shanghai peaked last summer. Since then, the Chinese equity market has slowly unraveled piece by piece. China led the equity markets lower in the summer of 2008 before the bear market struck and bottomed several month in advance of the S&P 500. At the time we said:
“China led us into this recession and it’s likely that China will lead us out. And after a 70%+ decline, China’s not looking like a bad long-term bet to me.”
After a 50% rally the risk reward is not nearly as enticing. The Shanghai only recently breached its 200DMA on the downside for the first time since it did so two years ago. Investors would be wise to take note.
Dr. Copper is also showing its first signs of weakness since the bull market stared last March. Dr. Copper isn’t in bear market territory just yet, but cracks are forming in the foundation for the first time in years.
The biggest risk to the equity markets in recent weeks has been the rally in the dollar. The dollar remains firmly in bull territory and with problems in the Euro unfolding the dollar remains the best house in a bad neighborhood among the big three currencies.
No indicator has displayed the bi-polar market better than the VIX. Over the last month the VIX has spiked over 40% on two different occasions spanning just 3 days. Each time, however, the equity market has slowly crawled back as investors shift from bullish to ultra bearish in no time. This has been one of the primary characteristics of the bull market since it began last March. Thus far, the trend is well intact. As the VIX sinks lower, however and investors become increasingly confident in the uptrend, the likelihood of sharp movements to the downside become more and more likely.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.