It pays to know when to play offence, and when to batten down the hatches. Luckily, I’ve been on defence for the last couple weeks with a high cash position and even more patience. So…

Let me share a little more insight into why I think this defensive posture makes sense…despite the fact futures are pointing lower right now,

Friday’s Stock Market Analysis: Week in Review

As we head into the end of another trading week, it feels like the stakes have only gotten higher. The uptrend in US stocks is bending, emerging markets are collapsing, and volatility is still high. So to summarize how all this has played out so far, I want to start with the weekly view of global stocks.

Here’s the big picture of the all-country world index, via the ACWI ETF:

In Monday’s note, I said I was cautious any rally from ACWI would stall as it headed towards resistance. And in hindsight, that’s exactly what’s happened. In the meantime, price is now below the 50-week moving average, (which by the way is also starting to flatten out!)

So heading into the last day of the week, I’m curios if global stocks can catch a bounce, or will they fail to hold the line and just collapse completely? It seems like the long-term uptrend is facing it’s biggest test yet. This is a big part of why I’m happy to have so much dry powder.

And I don’t mean to sound hyperbolic, but if global indexes do finish the week at new lows, it’s worth thinking about a potential leg down. If you haven’t lightened up your book of long ideas, it could also make sense to reduce exposure into rallies.

Now to help parse out what might happen next with global stocks, I think it makes sense to look at the major components of the ACWI: Emerging market, European, and North American stocks. So let’s start with the domestic picture.

Unfortunately though, it’s an increasingly ugly one. Here’s the SPY weekly chart to how you how the bounce we had earlier this week has completely fizzled…

In terms of levels, the first thing I’ll be watching for at 4pm today is whether SPY ends the day above or below last week’s closing price. Personally, I’m still a little hopeful bulls can hold the line, because when you zoom into the daily chart buyers have been able to defend the rising 200-day MA (at least for now)…

Yet today might be do or die. SPY needs to put in a meaningful bounce or the damage to the trend will only accumulate. Because currently, it’s this long-term uptrend that has kept me at least partially invested in the current market. If it breaks though, I’ll be selling out and starting to look more seriously for short ideas.

For today though, I expect to see more volatility and will watch the close carefully to try and see if it’s bulls or bears who deserve the benefit of the doubt going forward. After all…

Over the last few years now, stocks have charged higher and enthusiastic bears have gotten tricked again and again as any potential dip was furiously bought up. So could this time be different? Well…

I strongly believe it’s worth considering. Even though the underlying economy and macro data look strong to me, there are also no shortage of concerns bears can point to either. So that’s why I like to defer to price. And it’s why I’ll be watching the slope of the 200-MA as my next major indicator.

Further, US small caps, tech stocks, and Canadian stock indexes all have a similar look as SPY, further casting doubt on the near-term bull case. But the bad news is, as we continue our tour around global markets, you’ll see it only gets worse…

So next up in ACWI components, I feel quite comfortable saying Europe appears to have topped out. Here’s the weekly VGK chart as a proxy for European indexes:

That sure looks like a top, doesn’t it? Because after nine months of sideways action, European stocks were unable to take out their prior highs. And now they’re putting in new 52-week lows… so that’s not what bulls want to see!

To make matters worse:

The news flow coming out of Europe isn’t encouraging either. Brexit talks continue to stumble, Italy’s government is testing the ECB, and Angela Merkel’s ruling coalition might be starting to splinter. Yikes!

And in the case of Italy in particular, these challenges appear to be manifesting in the credit markets too, as shown by the increasing spread markets are demanding for Italian vs. German debt:

To put it simply: markets are starting to demand Italy (black line) pays a higher yield on their debt, making it more expensive to borrow. Now since debt-to-GDP and unemployment are already high in Italy, this could spell big trouble for the third-largest Euro economy (and the rest of markets too).

The other problem though is, emerging markets look even worse. To be frank with you, I couldn’t imagine a more textbook downtrend:

Now I know longtime readers are probably sick of looking at this chart. Because it’s something we’ve been watching for months already. But that doesn’t mean it has to end, either.

And yeah, while there’s sure to be a bottom at some point, I don’t think we can count on EEM to support global equities anytime soon (especially when you start thinking about some of the narratives coming out of China, Turkey and Saudi Arabia lately!)

So keep in mind…

Before this recent bout of SPY weakness – indeed for the first 9 months of the year – US and Canadian stocks kept shrugging off the rest-of-world weakness. But in the last two weeks it looks like that trend might be changing. And it’s hard to imagine ACWI getting much help from overseas investors, isn’t it?

Now that means going forward, my expectations are slowly shifting from US stocks outperforming overseas markets, to the latter dragging down the former. And actually, while we’re talking about US vs Rest is World, there’s another trend that’s worth looking at…

USD vs. Everybody:

As much as I try to focus on US stocks, capital is global and doesn’t exist in a vacuum. So while I understand everyone has their strike zone and you might not trade currencies, it can be helpful to think about global money flow trends, especially at times of potential trend change.

After all, stocks are priced in US dollars, so the price of US dollars should impact the price of stocks for global investors. Make sense? The thing is, right now USD is up about 9% YTD, and I think there’s a strong case for why the USD could continue to trend higher.

To quote some research shared in the Financial Times:

“Neels Heneke and Mehul Daya at Nedbank find that the supply of dollars has become increasingly scarce. This is thanks in part to a stronger US dollar and economy, slowing credit growth in China, protectionism and explicit moves from the Fed and Treasury to remove money from the financial system” 

As earnings results come in, especially from big multinationals, I’ll be curious to see if the dollar is quoted as a headwind. If this narrative sticks, we could see more resistance for stocks should the USD trend gains steam. You might remember 2015 was a tough year for stocks, following a big run in the dollar…

Alright, I know this dollar talk was a little bit of a detour from our usual focus on stocks and ETFs. But I think it’s an important piece of evidence that could contribute to the growing bear case, especially considering the Emerging and European market stresses.

Now on that note, I don’t have any new trade alerts for you today. I’m afraid yesterday’s broad selling kept me from finding any entry signals as new highs were quite scarce. But maybe we’ll see a little more stability into the weekend, as futures suggest. For now though, I think sitting on your hands is the right move unless you’re a very agile trader with time to watch the screens during the day.

So if you are inclined, here are a few charts that have my eye, including some of my existing positions that are holding up well. Please do just double-check earnings dates.

Friday’s Charts Of The Week:

ROKU looks like a good one to start us off this morning. It’s ready to bounce this morning after pulling back in an existing uptrend, and catching an upgrade from RBC. This is a fast-moving stock but could get going again if we see some momentum come back into the market

ISRG could be one to buy the earnings reaction if it pops at the open. I like the long-term potential and this is a great business. But given how the market is acting I only want to be long if it’s moving higher.

AAPL looks interesting here with support nearby. As one of the biggest names this may also offer relative safety in stormy waters. If you’re okay holding longer-term you could buy here, otherwise I’d wait for a more convincing bounce. It also caught a new $310 price target, which probably doesn’t hurt!

REGI is one of my more recent buys in the last week or so and it’s holding up surprisingly well. If it can close the week up here I’d expect it can keep running…

CME is another name of mine that’s been able to hang near 52-week highs. It’s not overbought or extended, and I think if the market gets going again hopefully this one can participate to new highs.

FCAU may be one to watch on the short side. The stock is down a little in the premarket and looks like it could continue to keep falling if it breaks below support.

So all that considered, I’m currently quite comfortable with about 50% cash. It’s enough to help me participate in upside. But if we do see more downside I have some insulation and dry powder.

Further Reading:

“Italy’s expansionary budget plans are drawing the ire of the European Union (EU). A confrontation could destabilize the Italian economy, one of the EU’s largest, and potentially plunge Europe back into crisis.” Does Italy Threaten A New European Debt Crisis?

“There are few things more bearish than a poor reaction to a strong earnings report. The earnings season is still young but this is exactly what we have been seeing lately.” Earnings Reactions Have Been Lagging

“Higher rates give the Fed room to cut during the next downturn. That’s good. Higher rates have caused most downturns. That’s bad. Continue this exercise until you’ve gone crazy.” Rube Goldberg

“The only benchmark any investor should care about is whether they’re on track to reach the goals they set up their portfolio for in the first place.” How To Stay In The Game

“We need to move quickly in a direction that has us look for greater flexibility in where and when we work. By offering even a day or two to work form home, we can start to unlock the 1.8 billion man-hours spent on commuting and apply them to other activities that either make us more productive, happier and healthier.” Commuting Sucks

“We think that being constantly busy without having the pause, the meandering of thought, the marination in the moment; we think that we’ve just got to be constantly on and that’s a good thing. But it’s not.” Being Busy Is A Habit 

Alright, that’s it for now! Let’s see how things shake out at the close after the close I’ll be trailing stops in both personal and model portfolio accounts, and I’ll be back at the same time for you Monday morning with another update for you.

For more commentary and ideas throughout the day, you can find me on StockTwits and Twitter sharing ideas. Any questions or ideas of your own? You can shoot me an email or comment below. Have a great weekend!