Long-Term Stock Market Summary
Below is a monthly chart of the S&P 500 Index (middle panel) going back over 20 years. In the top panel is the momentum indicator RSI and in the lower panel is the Percentage Price Oscillator (PPO) which is another momentum indicator.
I have made several notations on the chart and here are the things that are of note:
• Currently the S&P 500 index is in an uptrend and has recently advanced to new all-time highs.
• The orange box highlights the consolidation that has occurred in the market over the past couple of years, before the recent advance to new highs. This sideways price action was the result of a global economic slowdown.
• Red lines on the RSI indicator note negative divergences. A negative divergence is a scenario where the index has advanced (noted with a green line) but RSI falls. This is a warning sign that momentum is not confirming the advance.
• The PPO in the bottom panel is also diverging negatively with the index, however, the indicator is above it’s moving average (red line).
All three of the past negative divergences that I have noted below have ultimately resulted in a major correction in the stock market. As with any negative divergence, it should always be viewed as a warning sign, not a signal. These divergences can last for a long time and also can get negated by a strong advance in the index that would negate the divergence. That being said, long-term momentum is suggesting an elevated level of risk.
Short-Term Chart of the S&P 500 Index
Below is a daily chart of the S&P 500 going back 9 months. Here are the things to notice about the chart:
• The index broke-out to a new all-time high and is currently in an uptrend.
• While not a well-defined trend line, we can use the noted trend line to define the current short-term advance. A violation below this line would be a signal that a counter-trend pullback could be at hand.
• The PPO is rolling over and is sitting right on it’s moving average. A decisive drop below it’s moving average would signal that short-term momentum has turned negative.
The bottom line is that the index is in an uptrend and at new all-time highs. This is bullish. However, multiple indicators are suggesting that the advance is susceptible to at least a short-term correction.
A decisive break by the index below the noted trend line and a move by the PPO below it’s moving average would signal a short-term pullback has possibly begun. This, however, would not suggest anything about the severity or duration of the pullback.
Below is a Sentiment Indicator that is updated weekly by CNN and is calculated using 7 indicators that they use to derive a fear/greed calculation.
According to CNN’s web page: Investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far.
The Index is at a very elevated level of 91 and this is suggesting that risk is high from the perspective of sentiment.
Commodities, The Dollar and Treasury Yields
Below is a chart of the S&P 500, Commodities, the Dollar, and the 10-Year Treasury Yield. Commodities and Treasury Yields have both advanced above a major downtrend line, while the Dollar has fallen below it’s trend line.
A falling Dollar provides a tailwind for Commodities and the Dollar looks to have broken down. Commodities look to have broken out of a down-trend and that has positive implications for the economy and stock market. Bond Yields advancing are a net positive for the equity markets as well.
Below is a chart of a Gold ETF (GLD). Gold has been putting in an 8 year rounding bottoming pattern. Highlighted in green text is two recent Falling Wedge patterns. This is a bullish pattern, that in up trends, normally resolves to the upside. The most recent wedge saw a breakout to the upside and suggests that Gold should continue to advance.
I like Gold for a number of reasons in the current market environment. The longer-term basing pattern, the shorter-term wedge breakouts, the breakdown in the Dollar which should provide a tailwind for Gold and the fact that Gold is not highly correlated to the stock market and thus could provide a good hedge against a potential stock market correction.
Over the past couple of years, the economy has weakened and the concern is that it would fall into recession. This is a huge concern for the stock market in that the economy drives stock market performance. We are getting some initial signals that the economy may have averted a recession, which would be a huge tailwind for the stock market going forward. We are not out of the woods yet, but recent market activity is encouraging.
From a technical perspective, the stock market is in an uptrend; however, long-term momentum divergences suggest that risk is still elevated. Short-term the stock market is due for at least a minor pullback based upon elevated sentiment, overbought conditions, and momentum indicators that seem to be rolling over.
The above-mentioned risks are just warning signs, not signals. Signals would be hit once trend lines get broken and support is violated to the downside.
Understanding risk is important because markets can fall a lot faster and quicker than they rise.
Client Account Update
Over the past month, we have strategically added equity positions. Client accounts have about 18% allocated to equities and 6% allocated to Gold, Gold Miners, and Silver. The remaining amount is allocated to Bonds and Cash.
I will continue to reallocate our client accounts strategically based upon our analysis of the markets.
Now is the time to reevaluate your retirement account allocations, not later after you have incurred substantial losses.
If you are worried about how your retirement accounts are allocated, shoot me an email and we can schedule a virtual meeting to review your holdings and investment strategy.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
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