Sideways Normal Market Type: Market Update April 5th, 2023 By, RJ Hixson

rj headhsot flowersIf you would like to read this article in a downloadable pdf format, click here.

Part I: The World Market Model

What’s happening? Scan the noisy news headlines to get an idea of what’s transpired in the last 24 hours. For a better idea, however, you can look over market information for a stronger signal. Let’s see what’s happening around the globe, at the end of March, in Van’s World Market Model.

1147 MU Chart1

There are no major changes in the model from February.

Here are some of the highlights for stock markets:

  • US market segments weakened slightly in March, with micro-caps (IWC) going negative.
  • In the rest of the American markets, you see slight weakening with Brazil (EWZ) becoming very weak.
  • In the US Sectors, there is less green this month with more yellow and brown. The Regional Banks ETF (KRE) is one of the weakest symbols on the chart as a consequence of the SVB and Signature Bank closings in March.
  • Europe remains the strongest region globally, though many of the darker green countries from February moved to lighter green in March. Africa remains weak.
  • In contrast to the rest of the world, Asian countries’ markets strengthened slightly. There is more green and India is now the only country with a negative score.

In currencies, the USD grew weaker and is now so weak that one of the USD ETFs in the database made the bottom 15 list this month. Europe’s strengthening markets translated into a stronger Euro (FXE).

In the “Most Talked About Sectors” table, Robots and AI (BOTZ) is very strong while Marijuana (MJ) is very weak. Would you guess the hopes for federal legalization of marijuana in the US have been dimmed a bit by the more conservative control of congress?

On to commodities. The blended commodities ETF weakened, signaling the trend for the area in March. Gold had a huge one-month jump in score (related to the banking situation?). Natural Gas was weak in February but now ranks as the weakest symbol in the entire database at the end of March. Time to buy yet? If so, be sure you don’t mind a lot of volatility as natural gas has shown in the past.

1147 MU Chart2 1

Real estate symbols remain weakly positive, just as they were in February.

Bonds went from entirely brown and yellow scores in February to almost all green in March—quite a conversion. What does that market signal indicate? What happens to bonds if (when, really) the Fed were to pause its rate hikes? Be prepared.

Thirteen of the Top 15 symbols in the database last month were related to Europe but there are only five European ETFs on the list this month. Muni symbols started moving on to the list and there are also several emerging market ETFs now. Again, the entire Top 15 list is dark green like last month, which hasn’t happened for quite some time.

Finding themes in the Bottom 15 list is a little hard for March. There are a few regional banking symbols and India/Pakistan symbols, but after that, the list seems mostly a hodgepodge.

Overall, the World Market Model histogram has a normal shape with a bullish skew:

  • Very Bullish – 7%
  • Bullish – 37%
  • Sideways – 35%
  • Bearish – 14%
  • Very Bearish – 7%

Part II: The Big Picture

A month ago, concerns over systemic risk in the banking sector globally were low to non-existent for most. The effective nationalization of the US banking system has far-reaching consequences. Did it forestall a broader or deeper banking crisis or did it instigate a different kind of slow-rolling crisis?

Other more familiar big-picture elements remain:

  • Inflation continues to slow.
  • The Fed is expected to raise rates again by 25 basis points at their next meeting.
  • The USD has entered a sideways mode (until it breaks up or breaks down).
  • The Chinese economy is expected to rebound in the coming quarters and help boost the global economy.
  • A US recession remains a strong possibility (possibly that it has started or that it will start shortly).

Part III: The Current Stock Market Type is Sideways Normal

Van determined the market type by using the 100-day period. Looking 100 days back puts us in early November 2022 and the Market SQN score for that period was Sideways. Actually, every period we look at has a Sideways measurement at the end of March:

  • 200 days – Sideways (Sideways last month but it was Bear for the previous three months)
  • 100 days – Sideways (Sideways last two months)
  • 50 days – Sideways (Bear last month but sideways for the previous three months)
  • 25 days – Sideways (Sideways last month)

The weekly S&P 500 price chart looks quite sideways through November 2022 and all the way back to May of last year.

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The Market SQN chart below shows the S&P to be high in the Sideways zone again at the end of March. The score would need to stay in the Bull zone for more than five straight days to shift the official market type.

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The 20-day ATR% rose in March and it’s back in Normal after visiting the Volatile zone.

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With the end of the first quarter last Friday, the primary indexes are all in positive territory now, though their performance is varied. The NASDAQ is up 26% from the start of the year, while the DOW is up only 38 basis points.

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Part IV: Van’s Four-Star Inflation-Deflation Model

Two model component inputs changed in March but the Four-Star model still says inflationary forces, and deflationary forces, are balanced or close to balanced at the end of March. The model scored the same in February.

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Is balance in this model a good thing or a bad thing? Yes. Good or bad is a value judgment. This model produces a numeric result. What meaning do you give the result? That tells you it’s good or bad.

Part V: Tracking the Dollar

In March, the USD index gave up much of the reversal gains from February. If it breaks the early February lows, we should not be surprised to see it go lower. If it doesn’t break the recent lows, we might see it continue in a sideways mode for some time.

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Conclusion

News in the last month was pretty interesting and potentially impactful:

  • AI is becoming accessible to the masses. (For proof, see AI images generated below by this member of the masses).
  • OPEC announced oil cuts.
  • Russia’s invasion of Ukraine remains stalled.
  • China’s reopening after Covid lockdowns may not be as initially strong as expected.
  • The Biden administration effectively nationalized the US banking system after rescuing SVB from failure and pre-emptively closing Signature Bank.
  • The Fed raised its benchmark interest rate by another 25 basis points.

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An AI-generated image from the openai.com service DALL-E

Those last two bullets are perhaps the most interesting for the economically conscious. The bank run on SVB (more like a bank sprint?) had the potential to advance into panic throughout the US banking system. Backstopping the entire US banking system prevented a large short-term crisis but is it producing a longer-term, slower-moving crisis instead?

Then on the interest rate hike, we are going to mix metaphors for a moment to talk about black swans and whales.

  • You never know where or when a black swan might appear, unless conditions might invite one.
  • Last summer, analyst Charles Gave wrote a piece likening the Fed raising rates to tossing lit sticks of dynamite in the water. They will continue tossing until a whale floats to the surface. Think back to 1982 – Mexico, 1997 – Long Term Capital, and 2007 – AIG. So far, some big fish are coming up, but no whale sightings yet. Hold tight, one is out there swimming somewhere.
  • For some, the whale that surfaces will look very much like a black swan.

Meanwhile, the stock market and the USD are moving sideways for the moment without a compelling directional trend up or down. What are traders and investors thinking? Are they waiting? Are there no good opportunities in this type of market?

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An AI-generated image from the openai.com service DALL-E

On a 100-day basis, yes, the market is in sideways mode. For patient investors, this is just a period where money won’t be made.

For traders willing to look at shorter timeframes, however, the recent market conditions have provided plenty of great opportunities for swing trading and day trading in the last few months. In just the last week, Dr. Ken Long shared several double-digit R multiple trades his systems are finding in the stock market. Gabriel Grammatidis just finished teaching his Forex workshop where he identified many very profitable swing and day trades recently in currencies.

The question is: Do you have the ability and the knowledge to trade shorter term in this kind of market type? Trading is challenging both psychologically and technically. Training helps on both fronts and if you aren’t trading right now, consider focusing on training* to prepare yourself for better trading soon.

*Van’s foundational workshop for traders, Peak Performance 101, starts next week (April 2023) where you can acquire the psychological tools to become a profitable trader. Learn more…

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