This week: technical check, seasonality, corrections vs bears, buy the dip, uncertainty, hype, conditional volatility, analogs, margin debt flows, ultimate value indicator.
Learnings and conclusions from this week’s charts:
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The S&P 500 broke its 4-week losing streak with a +0.5% gain.
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Yet it remains below the 200-day moving average.
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Traders have been buying the short-term oversold dip.
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Even if it’s a bear market we might get a seasonal bounce.
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(but) There are multiple medium/longer-term downside risk signals.
Overall, I can sum it up best as saying: what I am seeing is that a lot of short-term tactical indicators are oversold/buys (partly sentiment, partly math), but all of the medium-longer term indicators are still bearish/in risk-alert mode and have not even close to reset anywhere near buys yet (for the longer-term minded or cyclically-aware investors).
1. Life Below 200: Last week the S&P 500 managed to eke out a +0.5% gain, nothing spectacular, and realistically; basically flat. But that did break a 4-week losing streak, and has the market sitting just above that ~5600/5650 support area.
That’s the upside. The downside is the 50-day average tells us the short-term trend is down (downward sloping 50dma line), and the index being below the 200-day average (and over 50% of constituents below their respective 200dma) is a foreboding fact —as Paul Tudor Jones has been attributed as saying: "Nothing good happens below the 200-day moving average."
Source: MarketCharts
2. Bear Market Seasonality: And that reminds me of a piece of analysis I did — looking at how seasonality works in bull markets vs bear markets. If you use price
On the upside, maybe we do get a seasonal bounce here (but only as a brief respite if we stay below that 200dma).
Source: Chart of the Week - Bear Market Seasonality
3. Recession Trading: Here’s another angle on it, and quite a useful way to think about how markets work — you have an initial correction as some kind of catalyst or trigger meets a market ready to correct. We could describe that as the market anticipating worse times ahead. If worse times (e.g. recession/crisis) precipitate then the market heads further lower with good reason, but if there is no good reason for the market to head lower (i.e. no recession, no other fundamental deterioration or shift in macro/monetary dynamics) then it probably finds its feet and gets back on track.
Source: The Daily Shot
4. Correcting Bears: Similarly, to keep things in perspective, Ryan Detrick highlights how “13 of the previous 39 corrections turned into bear markets. All bears start with a correction, but not all corrections turn into a bear market.”
I think you can look at this one bullish or bearish, but given the wider risk setup (read the bonus chart section where I make that part clear) — it does serve as a cautionary of what could yet be still to come on the downside [so let’s not panic and get depressed, but also let’s definitely not be complacent; let us only be pragmatic].
Source: @RyanDetrick
5. Buy The Dip: Short-term punters are out and at it again, and fair enough because a lot of the very short-term/tactical indicators do say oversold, and the market is up some ~3% off the 13th March low. But also, it just goes to show how the assertion that “everyone is bearish” is BS.
Source: @CheddarFlow
6. Overdone or Still Cooking? Another maybe constructive aspect is that some of the fears on the policy uncertainty front are maybe a little overplayed and overdone. I’d push back and say that this is *not* structurally/cyclically bullish (this chart maybe short-term/tactically bullish), because there is highly significant and real policy uncertainty, like — let’s not forget here how bold and unprecedented the policy push is from the White House… this is a very different presidency from the first term; we are in reform mode here, not stockmarket cheerleading mode (maybe later in the term?).
Source: Markets Report: start of a rally, or new lows ahead?
7. Hype Markets: And let’s also not forget that we are in the middle of a market hype cycle (and this chart doesn’t even fully capture the extent of speculation in single stock names or options etc). Bull markets grow on doubt and wither when hype takes hold.
Source: Topdown Charts
8. Downside Rising: Another thing is there is a growing body of evidence pointing to a change in the market tides. This one here shows the rolling count of major daily downside moves and you can see a clear tidal/cyclical rhythm to it, and the indicator is clearly turning up from a low point (danger zone).
Source: Topdown Charts Professional
9. Nvidia vs Nokia: Look I’m not a fan of analog charts as you can tell just about any story you want if you tinker enough with the charts but how they can be useful is in laying out a scenario and potential pathway because market cycles and bubble cycles reflect the only one true constant in markets; people.
The actions of individuals summed up to the crowd are what create these cycles and pathways, and so as long as there are still people, there will still be these types of cycles and market pathways.
Source: @MasterHedge
10. Remembering Telecoms: Alongside the dot.com bubble of the late-90’s was the even bigger bubble in telecoms (and unlike tech stocks — which ultimately did go on to much later become the “new economy”, telecoms never really recovered; though their impact helped change the world).
It’s an interesting episode in financial history that echoes the British rail stock bubble of the 1840’s (real building, real lasting impact, bad outcome for investors) and one that also brings tempting analogies to today’s AI gold rush.
Source: A telecoms bubble or a tech bubble? by Rupak Ghose
BONUS CHART
Longer-Term Reservations: here’s the latest update to that margin debt chart I flagged a few weeks ago — the risk signal has now intensified because following the move into the redzone it has now turned down off the high.
That’s the thing, even if you get a trading rally or some short-term oversold indicators, we still have facts like this looming in the background.
Similarly, the composite valuation indicator (combines: PE ratios, equity risk premia, price-based mean reversion factors) while down about 0.3 SD off the high — is still in the expensive zone, and points to higher than usual probability of a cyclical peak in the stock market.
As I have documented before, the most dangerous point in the market cycle is when indicators like these reach extreme highs and then turn down (the flipside being the best opportunities come when they collapse and turn up).
So while anything is possible, and maybe some series of positive surprises come along and offset these signals and the bull market resumes. In the meantime, we have a set of facts that tell us we need to stay alert to downside risks, keep open-minded to new information, but focused on risk management and to be prepared if things do deteriorate further into a classic cyclical downturn.