"It was the age of wisdom, it was the age of foolishness." - A Tale of Two Cities, Dickens (1859)
What a fun run we've had since the bottom of the "Tarriff Tantrum" this past spring. The benchmark S&P 500 Index has logged over two dozen all-time high (ATH) sessions, and every industry sector "boat" enjoyed some measure of the "rising tide". The A.I. cap-ex frenzy, easing rates, passage of accommodative tax policy, and announcements of foreign investment have contributed to an environment of animal spirits.
But as every runner must eventually take a breather after a sprint, so must risk markets pause after strong periods before beginning a new leg higher. I quote Dickens as an analogue to the dichotomy between recent market sentiment and current technical setups. Below are several charts that tell the story.
The synopsis is that the broad market sits at an important level, within a major support zone, and there are reasons to believe buyers may show interest here. The question is how strong that buying impulse will be.
SOURCE: TC2000
On Tuesday, November 18th, the S&P 500 closed for a second day below its 50-day moving average. This is the first such occurrence since April. However, the Relative Strength Indicator (RSI) triggered an "oversold" condition; a reading at or below 30. This may help explain the rally to start trading on 11/19.
Focusing on specific chart patterns, we have seen a multitude of bullish short- to intermediate-term bullish patterns form and hit their upside targets the past six months. However, we have been without any further bullish formations since mid-October, and we now see a new bearish pattern emerge with yesterday's close (below):
An inverse cup-and-handle (in blue) reveals a potential downside target of 6360. That would represent a normal and to be expected correction of ~8% from the October 29th high.
The follow-on pattern that would then develop is a head-and-shoulders set up (in purple) that yields a downside target of 6181 (just under -11% from the highs) which would bring the index back into the range from early July.
SOURCE: StockCharts
There is another scenario that could also play out, where rallies beget more buying and we claw our way back to the highs. For that to occur, buyers must start to outweigh sellers soon.
SOURCE: StockCharts
From a portfolio management perspective, the current technical setup married with a strengthening US Dollar and Federal Reserve reticent to cut rates further, forces us to sit up in our chairs.
To be sure, there are positive fundamentals in our favor: strong private sector balance sheets, substantial deregulation, tax reform that has yet to fully kick in, and an administration set on a path of fiscal, regulatory, and trade policy changes that represent a multi-year positive shock to growth that Wall Street consensus probably still underappreciates.
Personally, I am of the belief that the secular bull market continues, and the current corrective phase is just another "pause that refreshes". The last chart below is an important one against which to measure that belief.
My friend Frank Cappelleri of CappThesis writes of VTI, "All of the volatility we’ve seen the last few weeks has produced what could be a pretty substantial bearish head-and-shoulders pattern here. We’ve seen numerous attempts to break below this line; every time, buyers stepped up when needed. This would be another chance for that to occur—obviously, high risk if it doesn’t."
SOURCE: StockCharts
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DISCLOSURE: All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Any charts provided here are for informational purposes only and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Information in charts have been obtained from third-party sources and data, while taken from sources believed to be reliable, Advisory Services Network, LLC has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. Standard & Poor’s 500(S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.