Global Stock Markets Look Dangerous as Rates Head Down

FNGS is an ETF which tracks the performance of the leading mega-cap stocks. I have added in the lower half a chart of the Coppock indicator which is turning down. The creator of this indicator did not attach significance to downturns in Coppock but a falling indicator in 2022 was associated with falling share prices.

Wait for Coppock to Say Buy

He did value the subsequent buy signal marked on the chart with a vertical purple bar. The horizontal purple bar is a notional buy zone where the indicator is negative. At the very least we can see that we are not in a buy zone.

In the more conventional chart, we can see that the blue moving average has turned down. Shares are not a buy and using my leaders and laggards approach, I am fully liquid.

The change has come rapidly and is associated with a dramatic increase in expectations of lower interest rates. In the UK rates have already come down 0.25pc of a point. In the US expectations are growing of a 0.50pc cut in rates in September.

The Elastic Band Theory

The elastic band theory of economics says that policymakers do something, e.g. tighten monetary policy by raising interest rates and for ages nothing happens. Then wham, the metaphorical elastic band having grown ever tighter, the results hit you in the face.

In these circumstances, it is easy for policymakers to overdo the tightening; that is just what people feel may have happened in the US. They suspect that too high interest rates for too long may lead to a deeper economic setback than necessary.

Bond yields are beginning to fall sharply in anticipation of a sharp fall in interest rates.

This chart shows that US 10Y bond yields have been tracking sideways for around two years after climbing sharply since 2020. If the chart is a top and breaks down rates could be headed much lower – say to 1.5pc.

This could only happen if the post-Covid surge in inflation is a temporary spike and a return to near-deflationary conditions lies ahead. The spike theory could be right. The lockdowns combined easy money, government pump-priming and a huge build-up of liquidity in an economy where people could not spend.

This money flooded into the economy, inflation soared, the authorities reacted by a ferocious rise in interest rates and the elastic band began to take shape. Now the scene is set for inflation to fall and stay down.

Bonds Boom First, Shares Boom Later

The classic pattern is for a bond boom to be followed by a share boom but the lag can be considerable, especially if we are in the early stages of a recession. The Coppock indicators for shares are rolling over from high levels and will take months to turn negative let alone turn higher. The message is that shares generally are unlikely to be at a buying point, especially with the monthly moving averages rolling over and turning down.

Markets are moving fast. According to my charts, Microsoft is set to open sharply lower, perhaps around $393 versus the $408 on the chart. I don’t think this is a buy-on-the-dips opportunity. It feels more like a chart breakdown to me with lower prices ahead.

Bitcoin is an indicator. We can treat it as a measure of the animal spirits of US and global investors and the message is not a happy one. Coppock buy signals have worked well in the past for Bitcoin and we are nowhere near such a signal presently. The chart looks like a breakdown.

Remember King Lear

When after a torrent of bad news King Lear heard that his beloved daughter Cordelia was dead he uttered his famous peroration – ‘Never, never, never, never, never, say things cannot get worse’ or words to that effect. Stock markets are sometimes like that; you think it is all over but it isn’t.

Strategy – Be Very Careful

I am like the canary in the mine. Because I operate with maxed-out leverage and do not have to worry about capital gains tax I tend to sell at the first sign of trouble. My Leaders & Laggards approach means that initially, I switch from lagging stocks to new leaders but if there are none of those I go 100pc liquid which is where I am currently.

My hunch is that interest rates could fall as fast as they rose in both the US and the UK especially if accelerating technological change is going to have a deflationary impact on the global economy. Shares in chip makers are being hammered. Look at Nvidia and Arm Holdings. Nvidia has scared investors by finding a flaw in the much-vaunted Blackwell chip and Arm’s results, although excellent were not quite as effervescent as investors were hoping for.

I cannot pretend that the Nvidia chart presents a happy picture. Coppock is falling, a necessary precursor to a new buy signal which looks some way off. The monthly moving average has rolled over and is clearly falling.

It is not a buy. Is it a sale? That is a hard one. I sold it a few days ago when it became a Laggard. The shares (Leaders) I switched to did not do well so I found myself with nothing to buy. For long-term investors, this may well be just a blip. I think it probably is but I don’t have a crystal ball.

The future is what it is, hard to predict. What I do think the future may hold is a big fall in interest rates, which should be good news for people with mortgages and may ultimately give a big boost to asset prices and the global economy but that is some way down the road.

Private investors can take to the sidelines or focus on £-cost-averaging programmes.

Leveraged ETFs like QQQ3 are suffering brutal setbacks. These look like breakdowns with lower levels ahead. The Coppock momentum indicator is behaving in a way that in the past has seen it drop into or near negative levels and that will take a while given that it has just begun to fall.

If it is any consolation the next buy signal should be rewarding.