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May 13, 2024

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Is rising unemployment really bullish? 

The S&P 500 stock price index (symbol: $SPX, 5,222.68) rose 1.85% last week. The short-term trend remains bullish but is overbought. $SPX now has recovered most of its recent loss from 3/28/24 to 4/19/2024. Sentiment indicators (which generally follow the latest price trend) have turned toward bullish optimism for the short-term. Short-term trends change frequently, however, and $SPX may encounter upside resistance around its March-April highs. Trading volume has been declining over the past two weeks as price rose, indicating relatively tepid demand for stocks at higher prices. “Stocks have reversed April’s declines as Wall Street has grown more confident that the Federal Reserve will begin cutting rates this year,” according to The Wall Street Journal. Is such confidence justified? Should investors simply dismiss the major risks to the outlook that we have been pointing out?

As we continuously weigh and measure all the technical and fundamental data, we conclude that a conservative long-term investment strategy with emphasis on preservation of capital is rational and prudent when market risk is high. Speculators and traders who wish to play short-term momentum need to pay very close attention to risk control because short-term trends are fickle and change frequently. 

New claims for unemployment benefits rose by 22,000 to 231,000 for the week ending May 4th, the highest in 8 months, since August, 2023. The financial markets rose on that news because a cooling labor market, if it continues, is generally expected to help in the Fed’s fight against inflation. 

On the other hand, if rising job losses tip the economy into a recession, that would depress corporate earnings and would be bearish for the stock market and lower-quality corporate bonds. 

The RealClearMarkets/TIPP Economic Optimism Index in the US unexpectedly fell to its lowest level in five months, falling to 41.8 from 43.2 in April, pointing to economic weakness ahead. 

The University of Michigan Consumer Expectations unexpectedly plunged to 66.5, down sharply from 76 in April. This drop points toward lower consumer spending in months ahead. In addition, year-ahead inflation expectations rose to 3.5%, the highest since November, up from 3.2% in April. Expectations of a weaker economy plus higher inflation points toward stagflation. 

Next Wednesday, 5/15/2024, the consumer price index for April will be released. We are expecting an above-consensus number because the price of Crude Oil rose in April. The price of Crude Oil is critical because oil products are used in the production and distribution of most goods and services. 

Our Colby Economic Expectations Index turned down in April and May, indicating actual data releases have turned weaker than the consensus of economists’ forecasts. 

Financial Stress has lost downside momentum since 1/19/2024 and now appears to be neutral.

Summary of Current Issues Impacting the Financial Markets 

  • Stock market momentum indicators for the short term turned upward after 4/19/2024, but some have reached overbought.  
  • Longer term, stocks have been overbought and overvalued for months after the price run-up since October.
  • Recent earnings reports have been adding to stock price volatility and whipsaw losses for short-term traders.
  • Overall risk (including war risk, which is the worst kind) is high and rising.
  • Global Fund Managers are the most bullish on global equities since the top in January, 2022, according to the latest April survey by Bank of America. Fund managers expect a stronger economy, and some predict an economic boom. Higher inflation is seen as the biggest risk, followed by geopolitical risk. Inflation expectations have increased sharply to the highest point since April, 2022.
  • The CNN Fear & Greed Index rose to Neutral, up from moderate Fear. Other sentiment indicators have returned to bullish optimism, which suggests an overbought condition for the stock market....

See The Colby Global Markets Report (click herefor our complete analysis of global markets and specific investment rankings.

Every day, we use technical, fundamental, and quantitative analysis to judge the Reward/Risk probabilities of trend continuation or reversal. We strive to control risks and to make sure that all of our clients are safe and protected from large losses. If you want to earn reasonable returns while avoiding large losses, move your wealth to our professional fiduciary asset management. We always put our clients’ best interests first, and we are always here to help you in times of stress.

We are always happy to discuss your goals and concerns and answer all your questions.
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Robert W. Colby Can Manage Your Account

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11-Year Outperformance by the
Top 10 Exchange Traded Funds
Weekly Rankings of Major Trend Relative Strength

My weekly Top 10 ETFs ranked by the Major Trend Relative Strength outperformed the S&P 500 by over an 11-year period of real-time weekly tests. Click here for a graph of simulated performance.
Please note that my ETF rankings are available by subscription--NOW WITH A NO-RISK FREE TRIAL.
See The Colby Global Markets Report (click here).

My latest book was named one of the top investment books by Stock Trader's Almanac 2005. This book also received an excellent review in the November 2003 issue of Futures.

My ETF Rankings are not investment advice. Rather, they are an objective ongoing research study.

Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my
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According to CFTC Rule 4.41, hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. "The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States."

Robert W. Colby is America's foremost authority on testing market indicators."
--Bill Meridian, top-ranked investment analyst and international fund manager, www.billmeridian.com

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Ranking ETFs
"Robert Colby has evolved a system that, while hardly foolproof, is pretty clever," wrote Daniel Fisher, "Surfin' ETFs", Forbes, Investment Guide, Special Issue, June 4, 2007.
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INTERVIEW of Robert W. Colby in Technical Analysis of STOCKS & COMMODITIES magazine, December 2006 issue.
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"Gold's next move: History, logic, and intermarket relationships. See if testing gold's relationship to different markets over a 32-year period provides possible trade signals for the yellow metal."
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"Which gold indicators are best? Divining gold's next move."
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"Applying the Relative Strength strategy to ETFs."
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"PUTTING CANDLES TO THE TEST, How Profitable Are They Really?" by Robert W. Colby, CMT. Published in SFO, STOCKS, FUTURES AND OPTIONS MAGAZINE, Volume 5. No. 8. August 2006, pages 91-94. Please click here to buy this article. (Scroll to bottom of linked page.)

TradingMarkets.com interviewed
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Active Trader magazine September 2004 interviewed Robert W. Colby. 4 pages. "Robert W. Colby: Technical collector. A discussion with Robert W. Colby about technical trading and his revised Encyclopedia of Technical Market Indicators, Second Edition. By Active Trader Staff."

For information about
methods that would have performed substantially better than systematic trend-following in back-testing simulation dating back 32 years, email me by clicking on the following link:
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