INSIGHTS

On March 18, 2019

AAM Viewpoints – Checking All the Boxes

The indefatigable bull market may be a pleasant surprise to some, but certainly a nagging disappointment to perennial bears. For the ardent bulls, its elasticity is without precedent and very rewarding for those with the conviction to stay the course through periods of heightened volatility. To the naysayers who have trumpeted fear-headlines for more than a decade, it has been a mostly fruitless and frustrating ride. The price resiliency which has ensued following countless declines both large and small in this cycle, is impressive and underscores a powerful underlying technical foundation bolstered by accommodating monetary policy and an unbroken chain of years of upside corporate earnings surprises. It is the unrelenting forcefulness of its internal features that make this bull market arguably the most extraordinary one in history. And, if it is assumed that history repeats itself when it comes to the sequence of events in a market cycle, then it is quite possible that the full potential of this bull run has yet to be fully unleashed as a buying stampede.

This bull market checks three key technical boxes. First, the price architecture from the beginning of this bull market has been depicted by distinctive cup-and-handle formations. These patterns have historically presented durable and sustainable trends that illustrate well-formed base configurations that have consistently acted as launching pads for higher levels. These technically desirable patterns regularly reform following general market retracements. They are on full display again in the aftermath of one of the most intensely volatile periods in history – last year’s fourth quarter. Cup-and-handle formations indicate an orderly environment of high-conviction buying, rather than knee-jerk buy and sell reactions often reflected in saw tooth, range-bound patterns.

Secondly, in the year-to-date advance, our net money flow studies indicate the non-institutional buyer may have been a forefront participant. When this non-institutional actor leads the buying, especially at a pivotal point for the market such as the December 24 low, it can be a sign that there is critical buying confidence and excitement about the economy’s long-term prospects. The prevailing net money flow trends are reinforcing this year’s recovery dynamics by providing greater substance to the structurally bullish price architecture. As a sidebar, the Dow Jones Transportation Average (DJTA) is leading the Dow Jones Industrial Average (DJIA) by several hundred basis points year to date, presenting a nascent Dow Theory confirmation that the early 2019 recovery may have enduring qualities for the long haul.

Third, the leadership that drove the market higher leading up to last October is essentially the same core leadership that has led this year’s recovery. This characteristic serves to define the fourth quarter decline as a correction (even though several of the major stock averages fell by 20%). The depth of attractive individual stocks representing the leadership sectors remains substantial. Sectors such as Consumer Discretionary, Health Care, Manufacturing and Technology continue to deliver high relative strength performances.

CRN: 2019-0304-7285R

Opinions in this piece are those of Peroni Portfolio Advisors and are not necessarily that of AAM.