While we’re in the middle of a downtrend, it is nearly impossible to see that it is the middle. The middle can only be known when the end has arrived. It’s really much easier to wait till we’ve returned to a new all-time high and say ‘Yup, the downtrend is over’. But then that’s the challenge of what we do. It would be oh so much simpler if Wall Street held up a sign that said ‘the downtrend is over’, but that’s just not how things work. It’s always been true that a lot of the movement on the street is generated by people who think they know something that somebody else does not.
We must analyze charts, look much deeper, assess the risks, develop hypotheses and then determine our strategy. From an emotional standpoint, this can be grueling. We have to contend with the media saying ‘don’t buy till the prices pull back’ and then when prices pull back (like now) they don’t have any advice that says pull the trigger because they fear markets will go lower yet. Markets ARE difficult and volatile and anyone who puts their hard-earned funds to work at risk is having a sometimes difficult time. I get it.
But on to the real world and today’s chart of the S&P 500 Index* as represented by this chart showing the ETF of SPY. Let’s look at which signals would suggest that Wall Street has turned the corner and the current trend is again ‘up’. It should be obvious when you look at the chart from late August till today that the squiggly line showing the ending prices each day of the S&P are not ‘again up’. We are NOT currently trending higher.
First note the blue line: that is the 200 day moving average. By most definitions, as long as the price is above the 200MA, the long term movement of the market is up. And then note that the green line – the 20 day moving average is moving down. That indicates that the short term motion is down. In particular because the 20 MA has moved below the 50 MA shown in red, the shorter term is definitely down.
And finally look at the lower part of the chart indicating the Relative Strength or RSI. When the RSI measurement of the security is below 50, that’s not a healthy market. And when it gets below 40 (which it is this morning) it indicates the POTENTIAL for a longer-lasting downtrend, or even (GASP!) a cyclical bear market. I’ve said before and I’ll repeat myself, I don’t believe we’re headed toward one of those bear markets, but realistically one must consider the possibility when you sit in our chair – especially considering the chart of the RSI.
We will have technical confirmation that the current downtrend is over when the charts change. The minimum change we’re looking for is to see the 20MA pullback above the 50 MA. That will be the first of many indicators that will cause us to suspect that the uptrend has now begun again.
Spoiler alert: Today’s market (Thursday) closed with the S&P Index one cent above the 20 MA.
Are we there yet? Has it started back up?
The Bottom Line: I’m not sure. How’s that for taking a position? It’s about so much more than just one signal, and so we’ll keep watching the signals beneath the surface and make informed decisions based on them. In the very near term, it makes sense to be a bit cautious. I LOVE the longer term chart and still believe we’re in the early part of one of the longer secular bull markets of our lifetime. However short-term periods can be extremely volatile and we have one of those right now. And we’ll need to take it one day at a time. October will be leaving in a few weeks. Hopefully it will take a good chunk of volatility with it.
Ron’s Market Minute — Another Clue
While we’re on a technical journey, let’s have a look at Wednesday’s market. It FINALLY saw an inter-day reversal. Started the day moderately down but by the close had worked its way into the green. This is another clue that gives me a bit of confidence of a bottom. (Note: A bottom is not necessarily THE bottom.) Still we continue to position our clients for a rally based on our models.
But of course I may not get quite what I want: It’s always possible that the stars may not line up. For now, it is still too early to say the markets are surely on their way to a peak toward the end of the year.
So…the bulls appear to be gaining strength, but they need to keep their acct together for more than one day in a row. Friday is the monthly employment report and the odds seem to favor a re-acceleration of GDP in Q4. Markets are very fond of repeatability. They should be. How else could you develop a trend? And as jobs approach one million again (maybe 2-3 months?!) we may get to the market peak we’ve been looking for.
Of interest…Mike Wilson of Morgan Stanley has called for a 20% collapse and yet credit markets have stayed quite solid. It’s hard for me to imagine even a 10% pullback without some significant stress on the credit side. (and Yes I know the high yield bonds have pulled back but it’s a minor pullback — nothing that looks like a systemic issue. And we would likely need to see the yield curve flatten as investors run and hide in treasury bonds for a large pullback to manifest itself. The OPPOSITE is happening now with a mild steepening of the curve again.
The Sun continues to be peaking thru the clouds. I feel the day getting brighter.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
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