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®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners for use with advisory clients only and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email, please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

Please see Denk Strategic Wealth Partners’ Client Relationship Summary here https://denkinvest.com/?page_id=7099 for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.

LFS’ Regulation Best Interest Disclosure Document, which describes LFS’ broker-dealer services, and other client disclosure documents can be found here <https://www.lfg.com/public/lincolnfinancialsecurities/clientinformation/overview/disclosure>.

Past performance is not a guarantee of future returns.