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S&P 500 In Foreign Territory?

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The graph above is a bit busy, but I wanted to show it to you as the indicators we follow are fairly consistently saying that we are due for a bit of a pullback in the index. I thought we could go through each of the indicators so you can have a feeling for what I see and the annotations I’ve made.

So, lets start with the panel at the top. This is a line graph of the S&P 500 with the 50 and 200 day moving average lines overlaid upon it. Additionally, I’ve drawn two green trend lines that form a descending triangle shape and an arrow. The descending triangle shape is fairly concerning because statistically the market breaks out of the triangle to the downside about 2/3 of the time. Also concerning about the graph in this panel is the fact that you can see the index has fallen below the 50 day moving average line – this is a reversal from a intermediate term bullish trend to intermediate term bearish trend.

The next two panels are just informational – they show the price performance of the S&P 500 over the past six months. The pink one is relative to the S&P 100 index, which you can see the S&P 500 is outperforming by 2.5% and the purple one is simply the S&P 500 performance, which is up a bit under 6% for the same period.

The panel below that is the Vortex indicator which tells you whether the market is behaving in a short-term bullish or bearish manner. When the green line is above the red line, you have bullish action and when the red line is above the green line you have bearish action. You can see in the red circle I’ve drawn that we’ve had a few days of bullish action, but that it looks like we are headed for a cross over into bearish territory.

The next panel is the Bolinger Bandwidth indicator. Bolinger Bands are not shown on this graphic, but one of their primary uses is to be an indicator of when the market might make a big move. Generally, the lower the reading on the indicator, the more anticipated volatility you will experience in coming trading days. At the current low level, we are due for a breakout in one direction or another. Given the other indicators we will discuss here, the likelihood is a breakout to the downside in the not-too-distant future.

The next panel is our primary price candlestick price graph. I’ve drawn two rectangles on this graph: the red one shows you how the 150 day moving average provided support to the market during the December/January time frame as the market basically traded sideways; the green one shows you how the 100 day moving average is acting as support currently. If we break to the downside and do not recover within three days or three percentage points (Mark’s Rule of Three for long-timer readers of the blog) then the most likely next move is to the same level the market traded in the December/January time frame, or roughly 2000 on the index.

The panel below that is the Relative Strength Indicator. What is important to note here is that the reading is below 50 and falling. This indicates that the market is losing strength and that prices could fall with it.

The panel below that has an orange box around part of the Money Flow area graph. This orange box shows that money flow has turned negative (meaning there is more selling pressure than buying demand for stocks).

Of the bottom five panels, I’ve added four pink arrows to show you that these indicators (which are all variation on price/volume indicators) are all in negative territory and even with the bullish action of the past few days shown by the vortex indicator discussed above, they could not break into positive territory.

After six years of the current bull market, investors appear to be tired and are experiencing that foreign concept of NOT seeing buyers materialize to “buy the dip.” With the prospect of the Federal Reserve raising interest rates this year, investors seem adopting a wait and see attitude, taking some money out of the market and booking some profits. We are part of that crowd, having added roughly 5% or so in cash equivalents to client portfolios as well as rebalanced holdings to book profits in holdings that have outperformed the broader market. In the rebalancing process, in anticipation of the Fed raising rates, we have increased our allocation to banks that should benefit from higher interest rates. We’ve also added to our holdings of companies that should be interest rate neutral given the low or no debt on their balance sheets.

Technical analysis is misunderstood by many investors as well as many people in the industry. Many believe it to be more science than it truly is – to me, it is just a representation of the investing public’s emotional attachment to the stock market. When the indicators are positive, you have investors adding money to the market because they believe it will continue to move higher and make them money. When the indicators are negative, it is just the opposite. Right now I think we are at or near the beginning of the time where that six year move higher may be running out of steam – it is unclear when or how large of a move down is possible, the indicators are not giving us any sort of reading on that – but the likelihood is that we are headed down more than we are headed for new highs.

The following video I made myself – so if you hate it, don’t tell me because I had fun at the concert and making the video of it.