Market Update
Trampoline anyone? That’s our internal image of the past few months with the S&P 500 falling 7.4% from September 18th to bottom-outOctober 15th and as of Friday’s close up over 10%. Both the Nasdaq and the Russell 2000 are up over 11.5% from their mid-October lows. The S&P 500 has now been closing above even its 5-day-moving-average for the past 23 days consecutively, something that has happened just three times before in the last twenty years. When this has happened before the market rally reversed within four weeks. In addition, the downward trend was accompanied by increasing volumes whereas the uptrend has been on declining volumes. When prices are falling, it means that supply exceeds demand. When prices are rising, demand must exceed supply. When we see more transactions occurring during falling prices than during rising prices, we pay close attention.
Warning Signs:
- The percentage of bears in all major market surveys is at multi-year bottoms, which is typically seen more near the top of a market.
- Fewer stocks are trading above their 200-day moving averages, compared to prior cycle highs, which is typically also a signal that we are near cycle highs.
- The ratios for put-calls and volume are also flashing warning signs.
Positive signs:
- Winter months are typically delivery strong equity markets.
- US economic data, while not exactly robust, is improving and does continue to look better than the rest of the world. With a strong economy, international investors are more likely to look to the US for investment, which would increase demand for US securities.
- Equities have shrugged off the elimination of the Fed’s Quantitative Easing program, and the earnings picture has provided cause for some optimism.
- The recent actions by the People’s Bank of China (PBOC), European Central Bank (ECB), and the Bank of Japan (BOJ) are viewed by the markets as positive for equities.
