Germany, South Korea and Breadth

8/6/2019 Germany, South Korea and Breadth

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I would like to touch on two topics in this weeks summary: first being the globalgrowth outlook judged by stock markets of leading economies; and second being

the internals and breadth of the S&P 500.

Germany & South KoreaSell in May and go away is the famous quote about stock markets seasonality as itlooks to be holding some wisdom this year. Consider that S&P 500 has topped on02nd of May, on the first trading day of the month, at 1370 and so far is downapproximately 9 percent, while the more cyclical oriented Dow Transportation isdown almost 13%. While the the market might be worried about the US GDPcoming close to stall speed, the action elsewhere might be more important. Thereason I say this is because US experienced an average growth period in 2009 and2010, so any stop and go swings are to be expected within the growth rates.

What we do not want to see is a major slowdown in powerhouse economies whichpropelled the recovery since 2009 in the first place. Some of these includeGermany - European powerhouse exporter; and the South Korea - Asianpowerhouse exporter. I would also like to think that the equity markets of thesetwo countries tend to be a great leading indicator of the global economy.

Looking at the chart of the Xetra DAX 30 from Germany, we notice quite a fewwarning technical signals. First - the trend line that has been in place since March2009 lows has now been broken powerfully; second - the price is now trading wellbelow the 200 day moving average for the first time since July 2009; and third -the peak in late June and early July is the first weekly lower high since theuptrend began in March 2009.

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The whole philosophy behind following the DAX 30 and its companies comes froma view that the German economy is one of the main barometers to globaleconomic cycles. Therefore, seeing euphoria of confidence close to all time highsnot seen since 1992 in the German business conditions survey of 7,000 CEOs could

be a little worrying if one is a contrarian. The question now stands as to weatherthis is the peak in the economic cycle, similar to the ones we have seen in 1998,2000 and famously in 2007.

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Looking at the chart of the KOSPI Composite fromSouth Korea, we notice a similarsetup to the DAX, but as if its back in time by a week or so. Warning signals showthat first - the trend line that has been in place since March 2009 lows holdingbut being attacked at present; second - the price is trading above the 200 daymoving average but its also being attacked at present; and third - the peak in lateJune and early July is the first weekly lower high since the uptrend began inMarch 2009.

South Korean companies are also a great barometers to global economic cycles,and in recent times a very strong clue on the state and health of the Chineseeconomy. South Korean economy is highly cyclical with exports accounting for

more than 50% of the GDP, with one quarter of all exports going to China.Therefore, a breakdown in KOSPI would be an early warning signal that all is notgood in the worlds main growth engine.

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S&P 500 BreadthAre we in a bear market? That is the main question everyone is asking each other

or even themselves, but remember you shouldn't be asking a barber if you need ahaircut. Lets have a look at the internals of the S&P 500:

It has been a known fact for quite some time that the rally since August 2010intermediate low has shown less and less stocks participation with highs in

November 2010, February 2011 and May 2011 all showing a declining number of 52 week new highs.

However, declining 52 week new highs are just a warning signal of a potentialcorrection or bear market ahead, as the rally is not as broad as it should be. Onthe other hand, the increase 52 week new lows is a signal that the correction or abear market is close as hand as bears take over the main trend from the bulls. Wecould be at the early stages of this, with at least a potentially strong correctionat hand.

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The percentage number of stocks trading above their respective 200 day movingaverage within the S&P 500 stands at about 36%, which is signal of weak breadth.Bulls will point that this reading is also quite oversold, however we can remainoversold for a decent amount of time during downtrends.

The cumulative advance decline line has now shown any divergences with themarket as it made new highs on the recent peak and it remains above its bullishtrend-line from March 2009. This indicator needs to be monitored closely, becausea break of this line could signal a breakdown in breadth.

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Moving away from the medium term perspective towards the short term, we cansee that the percentage of stocks above the 10 day moving average is nowreading one of the lowest readings since the flash crash in May 2010. Thisindicator is a good proxy for early signals of short term rallies, which we are nowoverdue for.

The percentage of stocks that are oversold (RSI below 30) within the S&P 500 areshowing the highest readings since the bull market began in March 2009. Whilethis could be seen as a favorable reading for a short term bounce, it is also a signthat the bulls are handing over a trend towards the bears. During bull markets,majority of the stocks become overbought on regular basis - that is what bullmarkets are all about. However, during bear market, stocks become oversold.

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With a break of 1,250 on the S&P 500 we are obviously signaling a correction anda downtrend as we are now making lower lows and lower highs. The question nowis: is this a start of a small bear (strong correction and a slowdown) or big bear(serve bear market with a recession)?

Note: Please do not think that I would blindly just short stocks here, even thoughit might have some merits to short term traders. My reasoning looks towards Fed interference where QE3 could be implemented. Therefore, short sellers will be

fighting the Fed once again, just like in July 2010. Also to note is that marketsare extremely oversold in the short term , where we should expect a strongbounce.

Finally, some wisdom to consider this week:

"It is better to be out wishing you were in, than in wishingyou were out." ~ Albert W. Thomas

"Don't ask the barber whether you need a haircut." ~Daniel S. Greenberg

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Germany, South Korea and Breadth

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