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Technical Nuggets: Geopolitical Mess Favors Stock Pickers

The first round of the French presidential election is over and the far right was forced into a runoff that it will probably lose in May. The results encouraged global markets, which shot higher on Monday.

Few things are certain in investing, but one certainty is that bull markets climb walls of worry. Success in this bull market is not based on what you know or think you know about the economy or geopolitics. More than ever, current investment success is actually based on which particular stocks you own. Given the uneven nature of stock prices, it’s equally possible that an individual portfolio could be losing money while others may be thriving.

The litany of worries providing the support for the wall of worry and higher stock prices is familiar and should be enough to make anyone hide under the bed. Consider some of the components of this list: Trump’s unpredictability, ISIS terrorism, Russian mischief, North Korean bellicosity, the U.S. government’s potential shutdown, higher interest rates from the Federal Reserve, the hazards that far-right French presidential candidate Marine Le Pen poses to the European Union, and on and on. Yet, despite these legitimate concerns, to the befuddlement of many experienced investors some areas of the market continue to rise.

The answer is that higher stock prices, albeit in select sectors, are still being driven by ample liquidity from central banks, to the tune of $1 trillion in the first quarter alone according to a recent report from Bank of America Merrill Lynch. Be that as it may, it’s not certain how much central bank money is eventually making its way to the stock market, although its presence is being felt.

More stunning is the fact that the Federal Reserve isn’t even a big player in the money printing game any more. The biggest chunk of this newly printed liquidity is from two entities: the Bank of Japan, though ETF purchases, and the European Central Bank, which is buying everything else, kitchen sink included.

Lagging SPX Hurts Indexers

The down side is this: in a central bank liquidity fueled momentum market, passive investors are getting hurt badly. Indeed, the Standard & Poor’s 500 Large Cap Index (SPX) has been a poor gauge of this activity, largely due to the weakness in health care and energy stocks dragging down the index. Spectacularly, the only reason SPX hasn’t fallen off the cliff altogether is the robust action in the technology sector.

The most worrisome technical factor for SPX is the continuing down slope of the On Balance Volume (OBV) indicator, because it suggests that the sellers in the unfavorable sectors are overpowering buyers in the popular sectors. The net effect is a beating for the passive index investor who is not adjusting his portfolio to include an overweight allocation of the winning sectors in the mix. Furthermore, there is yet no sign of a reversal of this trend.

RSI continues to make lower highs and lower lows, as any bull willing to take a chance on the broad index, such as through index ETFs, seems to give up and sell. The Rate of Change Indicator (ROC) continues to roll over as well, signaling that there is little likelihood of a trend change or a rate in momentum. Simply stated, unless something changes, SPX is more likely than not to continue to grind lower, one miserable day at a time.

Advance Decline Line Tells Different Story

And while indexers struggle, all is coming up roses for stock pickers who are in the right sectors. The NYSE Advance Decline Line (NYAD) continues to give the all clear signal, making higher highs and remaining in an uptrend as indicated by its rising trajectory and its levels above the 20, 50, and 200 day moving averages, signaling short-, intermediate-, and long-term up trends. Consequently, while sellers overwhelm the indexes, it’s clear that stock picking investors are putting serious money into the slightly higher number of stocks in winning sectors, creating momentum in these areas of the market.

Microsoft’s Stealth Bull Run

A perfect example of the current and selective positive flow of money is the action in Microsoft (NSDQ: MSFT), an old school software stock that’s been off the front pages for years as its Windows platform has become a part of everyday life, similar to a refrigerator. Yet, as MSFT has moved its business toward the cloud and modified its software offerings into a subscription-based model, both earnings and the company’s outlook have improved, and investors have been steadily piling in.

The stock broke out from a multi-month base on April 21 on above average volume. The RSI indicator shows the stock is moderately oversold, with ROC suggesting a turnaround in momentum while On Balance Volume seems to be reversing a down trend.

Conclusion

It’s hard to be outright bearish when the global central banks continue to print money, which in turn makes its way into the stock market. What is clear is that money is aggressively moving into select areas of the market. This means that even as the indexes may be in bearish trends, there are still places where investors can make money on the long side as long as they look for areas of strength and positive momentum.

This can’t go on forever, but there is no way to know when the merry-go-round will stop. Remember that if the NYSE Advance Decline Line starts to mirror the S&P 500, all bets are probably off for the bulls.


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