*The following Premium Post was issued to members of The Lyons Share on October 28, 2020.*

Stocks following pre-election road-map…here’s what we’re doing about it.

As reiterated in all of our recent posts, including today’s DSS, our outlook in the short and intermediate-term remains the same. Specifically, our intermediate-term Risk Model is still positive and, in fact, has firmed in recent weeks with the improvement in market breadth and chart posture among broader stock indices. In the shorter-term, however, we have continued to warn of elevated risk due to concerns related to the volatility market as well as investor sentiment. For that reason, while we have been nibbling on some longs and covered 1/4 of our hedges, we have refrained from getting too aggressive in adding net-long exposure. Today’s selloff is resulting in a number of high relative strength areas testing compelling entry levels as well as a healthy increase in investor fear. For those reasons, we have kicked up the aggression.

Here’s what we’ve done so far today:

Shifted our short-term Outlook to “Bullish” for the first time since mid-September

Covered the following hedges at listed levels:

Covered another 1/4 of original Russell 2000 short near ~1555 on the RUT or ~154.50 on the IWM (i.e., sold RWM ~32.70)

Covered another 1/4 of original Europe short near VGK ~49.95 (i.e., sold EPV ~24.54)

We also increased our allocation to the following:

Small-Cap Growth IWO ~226.84

Taiwan EWT ~45.40

Copper CPER ~18.84

Software IGV ~314.90

Inverse Long Bond TBT ~15.98

We also looking to add to Mid-Cap Pure Growth RFG among others. The next compelling levels we are looking at as potential bounce areas — and, thus, a good spot to cover shorts and add to longs further — is near ~3260 in the S&P 500, ~26,250-26,500 in the DJIA and ~462 in the Value Line Geometric.

Of course, near-term risk remains, especially out to election day. Then again, it seems as if the consensus is coming around to our outlook for near-term risk into the election, followed by an eventual solid intermediate-term rally, as we saw around the 2016 election. We don’t like being in the consensus so that is one thing that gives us pause. However, it is possible that where the consensus will be wrong is if the market bottoms before the election. Our moves now certainly would welcome that development.

As always, stay tuned to our DSS posts for further developments — they provide the most current updates to our investment portfolio and outlook.

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Long-term chart resistance may slow the pace of the European stock rally.

We have been noting of late the relative improvement among international equity markets. This even includes a recent pickup in the perpetual laggard, Europe. Now, there are several markets in Europe that, in our view, actually look very attractive, as members of The Lyons Share know. However, the broad European measures (that are heavily weighted toward core countries) have, for the most part, lagged for many years, if not decades. That has not been the case since December, however, as the continent has been on a solid run. That run may at least see the pace of its advance slow down here, though, based on the charts.

A couple weeks ago, we suggested that the rally in the Dow Jones Industrial Average (DJIA) may have “Reached Its Speed Limit”. Our reasoning was that the index was hitting the upper bound of its post-2009 rising trend channel. And while not a roadblock to further gains, we surmised that it may serve to limit the pace of advance. As it turns out, its progress has slowed in recent weeks as the DJIA has actually drifted lower since that post. We see a potentially similar limiter in the European stock rally as well.

From Fall 2011 through 2015, the Dow Jones STOXX Europe 600 Index was supported by a well-defined Up trendline, with no fewer than a half a dozen nearly-precise touches. These included October and November 2011, June 2012, October 2014 and August and September 2015. At the beginning of 2016, the trendline was finally broken. Subsequently, the former support began to serve as resistance, repelling prices in March and April 2016. One year later, the STOXX 600 has again returned to challenge the underside of this broken post-2011 Up trendline.

Will this trendline pump the brakes on the STOXX 600 rally as a similar line did for the DJIA? That remains to be seen. The rally in Europe still has some decent momentum behind it so it very well may continue its upward trajectory. However, again, the rally may see its speed limited by this trendline.

That is, of course, unless the index can accelerate its ascent and reclaim the top side of the trendline. In that case, the European rally may well be merging onto the Autobahn.

Like our charts and research? Get an All-Access pass to our complete macro market analysis, including tons of charts and ideas like this EVERY DAY, at our new site, The Lyons Share.

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For arguably the first time in years, Portugal’s stock market has registered a positive chart development.

For much of this year, our “Trendline Wednesday” feature on Twitter and StockTwits (follow us on both at @JLyonsFundMgmt) has included examples of indices and securities testing their Down trendlines extending from their 2015 peaks. By this summer, nearly every domestic and international equity market that we track had broken up through their respective trendlines, if not exceeding their 2015 peaks altogether. One conspicuous exception is Portugal.

In fact, the Portuguese PSI-20 Stock Index never even made a new high in 2015. It made a post-2012 Eurozone Crisis high in 2014 near 7800 before plummeting into 2015. The best level it could reach in 2015 was roughly 6400. Therefore, the PSI-20 has not been contending with its post-2015 downtrend, but a post-2014 downtrend. And what a trendline it has been. The index has been precisely repelled by the trendline so many times over the past few years (we count about 10 touches), it would make even the most ardent technical analysis atheist say “hmmm”.

The latest touches occurred in August and September following a brief foray below the index’s 2012 lows -- and 20-year lows, at that -- following the Brexit affair. Contrary to our byline above, that quick reclamation of those lows was probably the 1st positive event in the PSI-20 in years. The 2nd has developed in the past 2 days as, finally, the index has broken its post-2014 Down trendline.

Now we’re not going to get carried away and label Portugal the beacon of the global equity world here. As relative strength proponents, this chart doesn’t even come close to getting us interested yet. However, when looking for deeply oversold turnaround candidates, this one would have to qualify.

The country (and its continent) obviously have major issues that have not been resolved, or even addressed, yet. Eventually, those issue will assuredly re-emerge. However, at least for now, the Portuguese stock market has begun to potentially rebuild its badly damaged technical structure...even if it is only the foundation.

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More from Dana Lyons, JLFMI and My401kPro.

European stocks attempted breakouts of key short and longer-term trendlines earlier this month; each of them appear to be failing. 

With the past week’s global equity selloff, a great number of notable trendlines came into play across the stock universe. Most of them were of short-term consequence, although yesterday, we touched on the fact that U.S. small-caps and mid-caps were testing trendlines stemming back to 2009. In general, most encounters saw prices hold above their respective trendlines. It was not unanimous, however. One area where we are seeing a potential breakdown of key trendlines -- 2 of them, in fact -- is in European equities. Specifically, we’re talking about the Dow Jones STOXX Europe 50 Index.

The STOXX 50 broke out above several key areas earlier this month and appeared as if it was poised to join in the global equity rally to a larger extent than it had. However, after a week of selling, the index is closing this week with the appearance of failed breakouts on several fronts.

In the short-term, the STOXX 50 looks to have failed the breakout above its post-2015 Down trendline.

From a longer-term perspective, since the beginning of 2015 the STOXX 50 has been dueling with a Down trendline originating at the 2000 top and connecting the 2007 top. After breaking out above the line for most of 2015, it has spent much of 2016 back below it, with the trendline alternating as support and resistance. Recently, it appeared as if the index was making another attempt to recapture the topside of the trendline. Alas, as of the past few days, it looks like this trendline too has failed.

The STOXX 50, along with most European equities has done relatively little during the post-February rally. The breakout above the 14-month downtrend and the 16-year downtrend a few weeks ago looked as if it might provide a springboard for European stocks to finally play some catch-up. As it stands today, however, it appears as if it was simply another failure in a long running comedy of errors for the continent’s stocks.

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Image from Laurel & Hardy’s film “The Second Hundred Years” (1927)

More from Dana Lyons, JLFMI and My401kPro.

After lagging considerably during the post-February rally, European equities are threatening to break above major chart resistance.

Among the dynamics that have served to perpetuate the post-February rally in global equities has been rotation. While the concept is probably overused among the media and analysts, it genuinely appears to fit the current rally’s circumstances. Various sectors and groups have taken turns in the leadership role over the past 7 months and that rotation has kept the stock averages headed in an upward trajectory. There are some areas of the market, however, that have failed to take the lead in carrying the weight of the rally. Included among these laggards is Europe. Although, the region may be getting another opportunity now to step up.

We say this because, as of today, one of the continent’s broadest indices -- the Dow Jones STOXX Europe 600 Index -- is threatening to break out above a major confluence of resistance.

As our Chart Of The Day reveals. the STOXX 600 closed at, or slightly above the following layers of potential resistance:

The Post-2015 Down Trendline ~346

The 38.2% Fibonacci Retracement of the April 2015-February 2016 Decline ~346

The 50% Retracement of the December 2015-February 2016 Decline ~345

The Series of Tops from March to August ~346-351

The STOXX 600 closed today at 350.44, so it is seriously threatening a break above this resistance cluster. If the breakout is successful, the index could probably trade up to the mid-370′s, or about 7% higher, without a lot of trouble -- that is, if the rest of the global stock market isn’t rolling over.

A breakout by European stocks, however, could help prevent the global market from rolling over. As long as one major region is pressing on, the odds of a widespread global collapse is unlikely. Thus, by finally charging ahead, Europe could step into the leadership rotation and fill the void that is threatening to develop so late in the rally.

Then again, should the STOXX 600 fail again here, it could be adios, au revoir and auf wiedersehen to the post-February rally.

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More from Dana Lyons, JLFMI and My401kPro.

The post-2009 cyclical bull market in European equities is facing a critical test for survival -- though, the writing may already be on the wall.

After last week’s Brexit bombshell, obviously all eyes are on Europe. It’s not that other markets, like the U.S., are not vulnerable. However, the current global contagion obviously began in Europe; therefore, the sooner the source can be contained, the better it will be for everyone. The question is, can the patient (Europe) make a recovery or is the situation terminal? In terms of the European equity bull market, we would not pull the plug just yet -- but it is definitely on life support.

Now, readers may be asking, what bull market? With last week’s carnage, that is a legitimate question, especially considering the action in the PIIGS markets (e.g., Italy and Spain were down 12% on Friday and Portugal closed at a 20-year low!). Thus, one might be surprised to see the term “bull market” applied to Europe. However, if we look at a broad measure of stocks across the continent, e.g., the Dow Jones STOXX 600, we do find the post-2009 cyclical bull market intact...barely. At least, it’s intact if we use a basic trendline as the criteria.

Here is a weekly chart of the STOXX 600 since the 2009 low.

We like the STOXX 600 as a gauge of European equities as it conforms very well to technical charting analysis. And there are a couple of interesting things to note about its present circumstances.

First and foremost, the index is testing the Up trendline extending from the low in 2009 and connecting the lows in 2011 and this past February. Presently, the trendline (on a linear scale) is in the vicinity of 310. The STOXX 600 closed today at 308.75. So, allowing for a little leeway in drawing the trendline, the index is squarely testing the trendline at the very moment. We will note that the chart is a weekly candlestick chart. Therefore, the index could theoretically drop below the trendline during the week, yet close above it on Friday for an arguable “hold”. However, given the fact that the previous touches in 2011 and February were both weekly “lows” as opposed to closes, even an intraweek break would be a change of character.

Secondly, note the significant Fibonacci Retracement levels in the vicinity of current prices. Again, Fibonacci refers to a mathematical sequence that, in this case, often contains retracements of rallies from significant lows to subsequent highs. In this case, the significant lows are the 2009 low and the 2012 low. The 2012 low coincided with Mario Draghi’s “Whatever it takes” proclamation pertaining to the ECB’s pledged support to the markets and economy. While the 2009 low is essentially ubiquitous in its significance around the globe, we have found the 2012 low to be especially pertinent to the movement of European markets.

Specifically, the 38.2% Fibonacci Retracement (the 2nd most important % of the sequence) of the 2009-2015 rally sits near the 315 level, which marked last Friday’s low. The close confluence of this level with that of the trendline obviously makes this area key. Additionally, the 61.8% Fibonacci Retracement (the most important) of the 2012-2015 rally lies just below, near the 302.50 level. This area incidentally marked the October 2014 and February 2016 lows, on an intra-week basis. Thus, should the index fail to hold the trendline, it is important that it holds the 302-ish area. Although, again, even a hold there may involve some further technical deterioration if the index closes this week below the 3-year weekly low close from February of 312.41.

Speaking of technical deterioration, we noted in the intro that the bull market may be doomed, even if it is able to hold these technical levels for now. Why do we say that? Simply by looking at the proximity of peaks and troughs. Even if one takes the stance that the pullback since the 2015 highs is a minor wave, and thus the lower highs since then are not consequential in the longer-term -- we still run into a problem with the troughs. Assuming the STOXX 600 is making higher highs, in the longer, cyclical-term, the lows in October 2014 and February 2016 are horizontal. Thus, the failure to make a higher low in February already indicates a breakdown, or at least the precursor to a breakdown, in the post-2009 bull market trend. Especially if prices test that 302 level again, and even hold temporarily, it may just be delaying the inevitable. Plus, it would trace out another potential bearish head-and-shoulders pattern, post 2013.

And why do we say another head-and-shoulders? If we scroll out to view the history of the STOXX 600, one can see why -- and can also see why this 300-ish level is important on a historical level as well.

From this long-term perspective, the STOXX 600 has enough compelling aspects to make a chartist salivate (it looks like an EKG for heaven’s sake). First of all, while “triple tops” are few and far between on a short-term scale, this potential decades-long version is pretty much staring us in the face. If it is not a triple top, the 25% drawdown since the 2015 top is a pretty good head-fake.

Furthermore, as we mentioned, the index’s history with head-and-shoulders patterns sticks out like a sore thumb. The symmetry of the prior two, which saw their peaks (i.e., heads) in 2000 and 2007 is unmistakable. The necklines of each sat near the same 300 level presently in play. One look at the similarity of the current potential head-and-shoulders pattern is enough to give even the most TA-atheistic observer some technical analysis religion.

By the way, the imagery of the White Cliffs of Dover, England is intentional. For the considerable support near present levels may well hold, temporarily. However, if prices do break the neckline and prior lows around 300, the STOXX 600 might once again fall off the proverbial cliff.

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More from Dana Lyons, JLFMI and My401kPro.