A Global Recovery in Markets

Published: Wed, 12/18/19

The Truth About The Markets

Like it or not, it is Global

If the nature of the market is to stay ahead of the economy then it should make you wonder what the global markets are indicating. The stock market is a leading indicator of financial cycles, has become an old adage. For this reason it has been included in many leading indicators to predict future turns in the economy early enough. Still its proper understanding may not be fully grasped unless it is properly modelled based on behavioral patterns as stipulated by the Elliott wave model.

After years of fear and weak data surrounding global growth we are finally seeing some of the worst sentiment since 2009 in many financial markets. Despite this following the sell of in global equities last year, stocks have started a silent recovery that is no more country specific but involves most of the emerging markets. This is also rubbing off on high yield bonds and riskier corporate debt that has gone from a falling trend to a rising trend. While the reasons behind this in my understanding of global macro have been detailed in this months long short report, the charts that follow below show you that most financial markets have turned around and gone beyond looking like a nascent recovery. Some are breaking out to all time highs after many many years, or breaking out of multiyear consolidation pattern is indicating that something has changed. However news flow and data still impacting sentiment to the point where no one believes in the markets current direction.

In the end it is either the lagged the data or the stock market itself that is going to be right. If the stock market is truly a leading indicator of potential future outcomes than it is already telling a story that is 6 to 12 months in advance, about a coming recovery. The hard part then is to accept this trend in the face of the worst sentiment in years. It may not appear as the logical outcome at this moment but it is what is happening.

The Truth About The Markets

High Yield Credit - HYG

Last month I wrote about High Yield credit and it broke out of the small triangle this month. But the big picture is even more interesting. For all the bad news around US debt that you may have heard, starting last year we completed a triangle and have not broken out of it on the upside. The implications are very bullish for corporate bonds from riskier lenders. Makes no sense but true. Rising stocks and rising crude oil [owners of large part of energy debt that is high yield], is making this segment appears lucrative to investors pushing down further again the spread between riskier and zero risk govt bonds yields. The spreads have been at the lowest at times but that does not appear to be changing as the risk on trade takes shape. The markets do not consider corporate bonds risky today and for months to come, like it or not. Even if we think wave D is still forming it may have months to develop before it rolls over and it could go to the high of wave B. So this buys us lot of time.

hyg 171219

Bank of New York ADR index

The area index continues to rally impulsively, and doing so it has reached 61.8% of the previous bear market. It is early to say that prices. The though a minor five wave advance may complete after one more rally resulting in some consolidation. In the big picture there is a chance that we may have started a multi month advance and should be open to wave extensions.

adr 181219

Canada

The Canadian stock market has been forming a triangular pattern for years. If bearish it should have resulted in an ending diagonal on the brake on the lower side however it ended up holding the lower line and is now breaking out of the upside. The alternate scenario therefore is to consider this as a running triangle in a very large degree 4th wave, and the breakout amounts to resumption of the upward trend into a final blow off move that typically follows 4th waves.

Canada 181219

Shanghai Composite

China is holding its own when it comes to the stock market despite all the news flow around it. The key retracements holding make it like like a developing up move with impulsive rallies and the next move is wave III of 3 back to the highs. Does this mean we have a trade deal? Who knows that the trigger will be, the charts know something till proven otherwise.

shanghai 101219

Bank of New York ADR index

The global ADR index went past the wave III high setting itself up to start wave V up and given the size of the earlier rallied it should have way to go higher before it is done. This is indicative of the gradual improvement in global equities and the investment climate in general.

adr 121219

DAX

DAX started wave V up from the bottom end of the channel for the 5 wave advance developing. The 5th wave V=I goes to 14340 near the top end of the channel based on simple fractal calculations. So are European stocks now optimistic about Brexit? Or the real thing some earnings growth expected next quarter for Germany? A mix of things that shape the trend despite negative news flow.

dax 131219

Russia RTSI

Russia started another rally after a small consolidation. Clearly making higher tops and bottoms over the last year and breaking out above the grey line from 2008. 3=1=1700 for the Russia RTSI index

russia 091219

S&P 500

The momentum on the S&P 500 did not go back below the zero line, and that can be one reason why US stocks are still consolidating ahead of the FED and other Central bank meetings and the Deadline for China trade. Technically a pullback to test the 40dema again in wave c of 2 is an open possibility before the next wave higher.

snp 101219

Brazil Bovespa

Brazil stocks fell in 3 waves or A-B-C since I called the top, so I have to go back to the earlier bullish wave count as shown below. This means that Brazil has a bull market in 3rd wave that is going to continue. Note the they cut interest rates 50 basis points last night.

brazil 200919

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