This week’s update on the state of the market is going to be quick and concise, as I’m writing it on Saturday morning after wrapping up the annual CMT (Chartered Market Technician) Symposium in New York City. So let’s just get down to it as I want to share a few pictures and charts, along with what I like, and what I don’t like about each.
The first is the market (S&P500) going back to summer of ’18. We had a -19.8% drop from Sept 21st thru the bottom in late-December. Since then, the market has rallied and in the vast majority of cases (all but one, to be precise), whenever the market is above a rising long-term trend (as defined by the 200-day moving average) and falls more than -14%, for the first time since WWII, we haven’t seen a notable “re-test” of the initial lows. Not to say it can’t happen still (I’ll elaborate on that next week), but so far, here’s what I see:
- I like that the market cleared its 200-day moving average (red/rose color), pulled back, and headed higher.
- I like that it cleared the November highs (thin red, dashed line), pulled back, and headed higher this past six days.
- I still don’t like the weak momentum (bottom pane), however. In this kind of fast-paced rally, I’d expect to see “confirmation” of the trend reversal accompanied with momentum (via RSI) that rises above 70.
Then, we have this longer-term momentum chart that goes back 25+ years. It’s very slow moving and doesn’t throw up many signals, which is one of the reasons I like having it in my toolbox. Slow-moving, infrequent signals are typically ones we need to respect and pay attention to, and here’s what I see:
- I don’t like that we’re still on a sell signal since November 30th, but
- I do like that we’re seeing the indicator itself (lower pane) curl up.
Nerds Note: We never, ever want to anticipate what an indicator (or the market) is going to do. Rather, we wait for the signal and then react to it. Anticipating and acting prematurely only leads to frustration and failure.
The last chart today (I promised I’d be concise!) is the Russell 2000 index, which represents the small companies in the U.S. When markets crash, small-caps tend to crash first, then mid-sized companies, and finally, the large and mega-sized companies. Conversely, when markets bottom and reverse upward, small companies also lead the pack and tend to rise first, indicating “risk appetite” – or that investors in the market are willing to take risk and have confidence in the market heading to higher levels in the future. Here’s what I see:
- While small companies led the way up the hill in price in the 1st quarter, I don’t like that they’re having so much trouble getting above the long-term trendline as measured by the 200-day moving average (red/rose colored area).
- That being said, I do like that, unlike the S&P500 (or, “market” as a whole), small caps were able to head convincingly above 70 on the momentum measurement in the lower pane, which is definitely encouraging.
At the end of the day, we take a “weight of the evidence” approach to risk and investing. While we’re not “all-in” just yet we’ve been steadily getting back into stocks (as well as some commodities and bonds) over the course of the last couple months, as the market’s health has started to improve.
There is still a BIG hurdle to overcome yet, and it’s only about 1% away from where we stand today… the all-time-high, which printed on September 21st. If we can get above that level, pullback, hold, and head higher, I think we’re in for a treat through the rest of this year and at our office, we’ll turn up the volume the rest of the way.
However, if we head above the all-time-highs and the glass breaks below the market’s feet, I think we could see a trap door open with stocks heading back down as much as -10% or more. In that case, we’d be implementing our exit strategies quickly and heading to the sidelines to watch the show, rather than participate in it.
For now, the picture looks moderately positive, but we have a game plan and we’re sticking to it!
Till next time…