foxex: Bears Step Back

Chart Advisor | Focus on the Price

Wednesday, October 09, 2019

1. Market Bears Step Back in Anticipation of Earnings Season Ahead

2. Safety-First Investing Rules Q2 and Q3

3. Warren Buffett May be Worth a Look Now

Market Moves

Yesterday's strong sell-off in stocks didn't find any follow through as bearish-minded institutional sellers seem to have taken a break from their activity. Whether because of mildly positive news from the trade-talk rumor mill or because of the release of Fed minutes tomorrow, none of those in the persistent seller camp found the need to play their hand just yet. In all likelihood the major market indexes could exhibit range-bound trading until earnings season begins officially next week.

If the chart of J.P. Morgan (JPM) is any indication of what could be going on in the heads of investors, it appears that the stock, which has held on to a choppy, upward trend through 2019, is in a good position for investors to consider it. The price remains above the trendline (shown in the chart below) but is still near enough to it for investors to consider that the stock might be competitively priced relative to similar assets. With this company kicking off earnings season, there will be a lot of attention given to the details of its quarterly report. It could set the tone for investors over the next two weeks. If the news is good, investors may remain optimistic for the months ahead.

Safety-First Investing Rules Q2 and Q3

If you measure from the beginning of 2019 until now, it seems as though stocks have had a relatively good year, being up around 20% for the year. However, most of those gains are accounted for in the rapid rebound that followed the violent 2018 sell-off. If you compare asset prices beginning in the second quarter of 2019 until now, you see a different story. (See chart below.)

The S&P 500 (SPY) has barely kept up with cash (DXY), meanwhile the price of gold (GLD) and 20-year treasury bond prices (TLT) have topped a robust 16% increase since then. Oil prices have declined significantly despite factors that might have constrained supply in recent weeks. All of these appears to indicate that investors have been, and appear poised to remain, seeking safer investments before anything else.

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Warren Buffett May be Worth a Look Now

Shares of Berkshire Hathaway (BRK.B) have not performed well over the past year, underperforming the S&P 500 by as much as 15% at times. However the value of this famous fund run by the world's most famous investor has had plenty of occasions over the past twenty years where its relative weakness to the S&P 500 has become a signal for potential reversal of trend.

The chart below diagrams a weekly chart of BRK.B divided by the price of SPY. This price market has a Keltner Channel study applied to it. This depiction outlines how, over the past twenty years, the price of Berkshire Hathaway shares pierces the lower band of the Keltner Channel (yellow line), and then subsequently crosses back above the 20-week simple moving average (green line), it has led to an outperformance of 10% or more by the Berkshire Hathaway fund in comparison to the S&P 500.

In the last 16 such occurrences, the gain has been accompanied by less drawdown than 10% over the course of a year. The three occasions where this did not happen are marked on the chart with a red arrow. The fund is currently showing its same setup. It will be interesting to observe which dynamic plays out this time around.

The Bottom Line

U.S. stock indexes took a pause from selling. Nervous investors may have decided to sit on their hands until bigger news events arrive tomorrow (Fed minutes), Thursday (Trade talks), or next week (earnings season). Investors appear to be interested in safer investments over the past six months. Berkshire Hathaway shares have underperformed but may be ready for a reversal of fortune.

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