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The Word from Main Street

Market Update for the Week of March 4th, 2019

Reports that the U.S. is close to finalizing a trade deal with China initially boosted stocks on Monday morning, but the strength quickly began to fizzle. Could it be that markets may have largely priced in a positive trade outcome? We’ve had a sharp recovery since the December lows; it wouldn’t be too surprising as we’ll explain below. We might need another catalyst(s) if the S&P 500 Index (SPX) is to break through the current level of resistance to a higher level. The SPX is currently trading around the 2,800 level.

Last week, the SPX rallied to 2,810, a level of resistance that has proven to be quite significant for the Index over the past 6 months. After failing to move any higher, the SPX exhaled slightly to 2,780 this past Wednesday (2/27/19). So why is this recently-tested (and failed) 2,810 resistance level significant? Take a look at the past few quarters of price action on the SPX’s technical chart. Recall that the SPX hit an all-time high in late September, 2019 at 2,940 then sold off to 2,710 a few weeks later. When the index attempted an initial rebound in mid-October, demand was only able to carry the SPX as high as 2,810 before experiencing another pullback. The 2,810 resistance level was established at that time. In early November, the 2,810 level was tested a second time, with this test coming after the Index had given two consecutive buy signals. Although demand appeared to be in control at the time, the Index failed to break through overhead resistance. The SPX then moved lower to 2,710, but rallied three weeks later, resulting in an upside move to 2,800. Here, the Index tested its bearish resistance line which sat at the notorious 2,810 level, but failed to break through on its third attempt. After this third test, the SPX reversed down before ultimately moving as low as 2,350 on Christmas Eve.

Relative strength offers a disciplined framework for allocating in those investments that have the strongest trends, wherever they might be found in the world. With that being said, there haven’t been too many changes in the Dorsey Wright indicators as we start the month of March. Are stocks getting overbought? According to Dorsey Wright risk indicators, ones we’ve mentioned many times before, the risk levels, including the Bullish Percent indicators for the New York Stock Exchange, are still at normal levels, or 56%. Risk levels don’t reach overbought levels until they reach well in excess of 70%. At this point, we remain invested in the two highest relative strength asset classes, Domestic and International Equities (stocks). Only time will tell, but we might see some changes in the sectors that rotate in or out of our models due to the relative strength of one sector versus another. We always want to be invested in the top five sectors of the leading asset class.

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Past performance is no guarantee of future results. All investing involves risk including the loss of principal.

Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Dorsey, Wright & Associates developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.

Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of Wells Fargo Advisors or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 3/4/19. Additional information is available on request.

Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolio across all major asset classes in an effort to emphasize strength wherever it exists. U.S. Equities, International Equities, Commodities, Global Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.

Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of Main Street Wealth Advisors and are not necessarily those of Dorsey, Wright & Associates, LLC, Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Main Street Wealth Advisors is a separate entity from WFAFN.

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