|By: Doug Fabian | Editor, Successful Investing | President, Fabian Wealth Strategies|
|The Black Cross Society |
In technical analysis parlance, a black cross (sometimes known as a death cross) occurs when an index’s falling 50-day moving average meets its rising 200-day moving average. And as the ominous name suggests, this is not a positive development for a sector. In fact, it usually signals the return of a very serious bear market.
Well, let’s take a look at the chart below of the iShares FTSE/Xinhua China 25, the key index that measures the health of China’s stock market. As you can see, the 50-day moving average (blue line) has fallen down to just about where the 200-day moving average (red line) has climbed.
This near black cross could be a very bad sign for stocks in what until recently has been one of the hottest financial markets in the world. If we do see this black cross take place on FXI, then inverse exchange-traded funds (ETFs) that move higher when the Chinese market falls will be the place to collect some really big profits.
Back Home in the U.S.A.
Back home in the U.S.A., we have a much different technical picture. After sinking below its 50-day moving average, the S&P 500 Index now has fought its way back to the 50-day average. But before this broad measure of the markets can break through this short-term, technical resistance mark, we’ll have to see a lot more buying on convincing trading volume.
In my ideal market world, I would like to see the S&P 500 pull back to its long-term, 200-day moving average. I think that kind of shakeout would set investors up for a very nice buying opportunity. So, if you’ve been waiting to put money to work, then I would certainly recommend that you stay patient and wait to see if we do get that most-advantageous market pullback.
Of course, there is more to assessing the markets than just the S&P 500. Two other key measures I’ve been telling you about during the past several months are the value of the U.S. dollar vs. rival foreign currencies, and the direction of long-term Treasury bond yields.
In the chart below, we see that the U.S. dollar has mounted an impressive rally since it hit its December lows.
The move higher in the greenback is not good news for international equities and, as such, it behooves you to make sure you don’t have a lot of international equity exposure in your portfolio right now.
Finally, we can see that yields also have been on the move since December. The chart below shows the 30-Year T-Bond Yield just below its 52-week high.
The surge in yields, and the concomitant decline in long-term Treasury bond prices, tells us that there is tepid demand for bonds. This halfhearted demand for buyers means bond yields likely will continue rising. It also means that if you are a big holder of U.S. Treasury bonds, you might want to think about setting a stop loss on your positions to protect yourself against a further decline in bond prices.
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