The HCM BuyLine® Remains Strong, But We Are Overbought

January 15, 2020

The HCM BuyLine® remains strong, but we are overbought. Tactical headwind, of course, is managing a portfolio through pending intermediate-term pullbacks and consolidations. Weekly momentum indicators, tracking 1-2 quarter shifts, are increasingly overbought for the S&P, and are progressively turning negative for lagging indices such as EAFE, the Russell 2000 and more cyclical sectors such as Financials and Industrials. 


However, intermediate-term, multi-month uptrends do remain intact. We caution investors from becoming prematurely negative at this, given the bullish longer-term backdrop. In strongly trending markets, momentum indicators remain overbought, similar to what developed in 1H 2017. So far, and despite the recent pause in many cyclicals, intermediate-term uptrends remain intact for most sectors. 


Growth stocks continue to re-accelerate following Q3-Q4 pullbacks. Growth continues to drive leadership, as many aggressive growth Technology stocks accelerate following steep pullbacks back to longer-term uptrends near 200-day SMAs. Cyclicals have generally paused over the past 3-4 weeks following Q4 surges, but relatively few are showing evidence of breaking below key trend support at rising 15-week SMAs. Large-caps are just one example of this behavior. Their recent pullbacks over the past 2-4 weeks has helped unwind some of their overbought condition heading into earnings, which we view as a positive setup for the balance of earnings season.

The Consumer Price Index (CPI) increased 0.2% in December, below the consensus of 0.3%. Core CPI, which excludes food and energy, edged up 0.1%, also below the consensus of 0.2%. The advance was led by price gains in shelter, medical care, apparel, recreation, and new vehicles. Notably, medical care commodities spiked a record 1.5%, led by prescription drugs. In contrast, prices for used cars and trucks, household furnishings and operations, and airline fares declined.

  • On a y/y basis, CPI moved up 2.3%, the fastest pace since October 2018, while core CPI eased marginally to 2.3%.
  • Headline inflation was only slightly higher than at the end of 2018, and averaged 1.8% per year over the past decade, while core inflation averaged 1.9%.
  • At the end of last year, core CPI commodities prices eased further to just 0.1% y/y, while core services prices picked up 3.0% y/y, near the upper end of its range since early 2018.
  • Shelter remains the biggest contributor to services and core CPI.
  • But core CPI ex-shelter is also rising, up 1.5% y/y, near its fastest pace since 2013.
  • This suggests that while inflation remains subdued, the risk is to the upside, not downside.

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