David Keller: Neutral on the S&P 500, Bullish on Gold

David Keller, President of Sierra Alpha, was on TD Ameritrade's Morning Trade Live with host Oliver Renick this past Thursday where they discussed the S&P 500 trading levels, breadth, momentum and Gold.

To begin, David and Oliver hit on the overall indecision and lack of clarity in terms of the lack of direction in the market right now. In early January, 2,600 was the key intermediary-level of overhead resistance for the S&P 500 to get through. As we look back, price made it through there with relative ease. David agrees, saying "there have been so many levels of resistance above and they keep finding a way to be broken through."

As market participants, it's important that we analyze all different indexes and market sectors to give a full weight-of-the-evidence to our analysis. So while the S&P 500 has been on a tear, what could be even more bullish is the Technology sector rotation. Tech, including Semiconductors, were market performers for all of Q4 2018. That has slowly began to change to market outperform. Considering 20% of the S&P 500 is Technology, this potential change in leadership "could be a big change in market dynamic, away from late cycle leadership" says David.

Zooming out on the S&P 500, we are simply seeing a series of lower highs and lower lows. To grow more bullish, price needs to break above this downtrend line, which we are arguably at right now. David also likes the idea of a higher low but he won't be too excited about the market until either one of this scenarios happen. He states "this feels like a market that needs to spend more time backing and filing than we would all like."

Sometimes the simple answer is all you need to which David notes "the most bullish thing the market can do is go up." Looking at market breadth can help investors out with this. Currently, only 4.2% of S&P 500 stocks are hitting new 52-week highs. While this number is low, it is an improvement from the 0% we saw in Q4. More than half of the S&P 500 components are below their 200 day moving average. While these numbers are not great, we are starting to see improvement and want to continue seeing these numbers rise in the next few weeks.

Another factor to look at is the Relative Strength Indicator, or RSI. RSI is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock. RSI is displayed as an oscillator and can have a reading from 0 to 100, with above 70 overbought and below 30 oversold. Looking at the S&P 500 today, only 10.7% of it's components are above 70 on a daily timeframe.

The RSI of the S&P 500 itself is above 60. Mr. Keller notes "this is where one would expect it to top out *if* we are in a bear market." For bullish investors, they will want to see more than 10% of S&P 500 get above the 70 level. If both the market and RSI can continue higher, it could very well be a sign of broader participation going on opposed to a FOMO-driven market.

To finish the discussion David and Oliver cover Gold. This was a great part of the segment. While Gold has been a strong asset lately, many investors view Gold solely as a bearish bet on equities, the economy and world peace.  David negates this stating "we sell ourselves short if we think Gold has direct relationship to 20 different things. It really is it's own asset and you have to analyze it's supply-and-demand characteristics by itself. 

With that said, David does not disagree that Gold and the Dollar can have a negative correlation: "from a technical perspective, you can see the combination of a weaker dollar, stronger gold and it does not seem like it's going to go anywhere anytime soon."

The broader equity markets and Gold are both rallying but Gold has the best short-term strength with higher highs and higher lows. David thinks Gold's strength is "encouraging, building momentum and going against what people expect it to do."

If you would like to view the video in full, you can do so here.