Free Trend Following Trade Ideas For December 2018 (Part 4):

Well, that was ugly! Heading into the Christmas holiday, stock market bulls sure don’t have much to celebrate this December. Because from start to finish, sellers were in control of the tape this week.

So today I want to survey the damage, and look at where we might go next…

Plus…

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With the market acting so soft here, this might be the first time in the three years I’ve been writing these weekly updates that I don’t have breakout ideas to share. So today I want to recap the big picture damage and discuss where we might be likely to go from here. After all, the trend is your friend!

December 2018 – End of Year Market Update:

If this is your first time here, then Welcome! But I also encourage you to go back a few weeks and look at the blog archives. Because you’ll see I’ve been raising cash and getting defensive as the market deteriorated.

Yet even though I was largely in cash this week, I was still surprised at the intensity of the selling! Not only did bears push prices down significantly, but there really weren’t many places to hide, either. From tech stocks to utilities, and whether you’re looking in North America or Europe, prices were heading down.

But don’t take my word for it. I want to give you a tour of some key charts to help show you what I mean. First, let’s start with the SPY ETF, which is an actively-traded proxy for the S&P-500

Free Trend Following Trade Ideas For December 2018 (Part 4) SPY

To put it bluntly: ouch! This most recent weekly chart candle really stands out in terms of magnitude. This one single week wiped out months of gains from 2017! And with this most recent drop, it looks like we’re going to finish 2018 in the red.

Of course, it’s not just the headline index that’s suffering right now. Next, take a look at the Nasdaq 100 ETF, QQQ, which has more of the same:

Free Trend Following Trade Ideas For December 2018 (Part 4) QQQ

I think the relevant point here is that these are leading growth stocks that helped the market charge higher during the last leg of the bull. Now, with these former stalwarts petering out, will they drag the rest of the market down with them?

Along the same lines…

I’m also very alarmed by the action in small cap stocks, as shown by the IWM ETF (representing the Russell 2000 index)…

Free Trend Following Trade Ideas For December 2018 (Part 4) IWM

Once again, this is a group of stocks that topped out before the rest of the market in early September. So the fact that it’s continuing to unwind at a rapid pace is cause for concern in my opinion. And it’s hard for me to feel optimistic until we see some stability here.

Looking overseas for a minute, things are actually even worse (believe it or not!) Just check out the way European stock indexes (as summarized by the VGK ETF) are continuing to hit new 52-week lows…

Free Trend Following Trade Ideas For December 2018 (Part 4) VGK

When you look at this in the context of Italian political uncertainty and yellow vest protests, it’s reasonable to believe this down trend could continue. So I’m really not rushing to call a bottom here, as there very well could be more downside ahead.

Perhaps the “best” looking group of stocks right now are emerging markets. And that’s only because they’ve already gone down so much there might simply be an exhaustion of sellers…

Free Trend Following Trade Ideas For December 2018 (Part 4) EEM

Notably, EEM has avoided making a higher low in recent months (unlike the other parts of the world). So while the absolute performance here is still lacklustre, on a relative basis EEM might be starting to put in a bottom. Keep an eye out for higher highs.

All that said, the global picture of equities is pretty dire in my view. The All-Country World Index weekly view, as seen via ACWI below, looks much closer to a top than a bottom (at least in my humble opinion)

Free Trend Following Trade Ideas For December 2018 (Part 4) ACWI

First, consider the quiet bull run-up in 2017 and the volatile sideways range in 2018. I think it’s conceivable sellers have the edge here and a global pullback might still have some ways to go.

Because don’t forget, the bearish price action is also impacting oil in a big way. And given the ubiquity of this commodity, there’s a case to be made this is a poor indicator for the global growth narrative.

Here’s the chart of West Texas Crude, where you can see the unwind continued this week. Brent looks much the same.

Free Trend Following Trade Ideas For December 2018 (Part 4) WTIC

Given the rapid fall in prices here, I think the risks of contagion can start to tick up a little bit. Plus, with the Fed still intent on hiking rates a couple times next year, debt-servicing for these oil companies might become a concern. It could even spread to the rest of the corporate debt market.

At least, that’s what the high-yield/junk-bond market seems to be implying:

Free Trend Following Trade Ideas For December 2018 (Part 4) JNK high yield

On a related note, last week I pointed out that senior loans were really starting to come off the rails. And that trend only accelerated this week, wiping out substantial gains as shown by the SRLN ETF:

Free Trend Following Trade Ideas For December 2018 (Part 4) SRLN leveraged loans

When you look at just how intense the magnitude of all this selling has been, it’s hard to imagine prices stopping on a dime and rallying to new highs in a V-shaped manners. I just think the technical damage is too much for dip buyers to buck, and it’ll take some time before we recover.

On the other hand, the selling this week did have a little bit of a panicky feel, especially towards the end of the week. So it’s natural to wonder…

Could Capitulation Be Close?

At some point, sellers will become exhausted. The trick of course, is figuring out when that is. So until we see some stabilization I’m not willing to try and catch a falling knife. The risks are just too high in this volatile and highly-correlated market.

But you know, it’s also tough to short stocks at these levels since price has already come down so far so fast. The risk/reward is tough at current levels and the risk of whipsaw is high. Plus, I think the calendar adds another dimension that’s worth your attention.

Think about it…

After a rocky year, I think it’s reasonable fund managers and active investors will rebalance their positions back to their target allocations (at least!) This week likely also saw some tax-loss selling, which may have added fuel to the fire.

That’s why I prefer to wait for the new year and a clean slate, rather than try and force any big moves this week. I also want to have a relaxing holiday more than I want to pick bottoms. So all that to say I don’t have any fresh ideas this week! It’s the first time in three years but I just don’ see the point of pushing the envelope until we see how 2019 starts to unfold!

Now before we finish…

I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.

They might be of interest because everything is laid out in charts so you can easily see what’s what.

Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.

And plus…

I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.

Speaking of…

While I’ve obviously shown you some of my favourite picks for the week ahead, I can also help teach you how to fish for your own trading ideas!

Just keep reading.

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