There are Black Swan events and then there are BLACK SWAN events. The current decline, 12% in six days, ranks as one of the sharpest on record. Not counting 1929, the sharpest decline on record is the crash in October 1987, when the S&P 500 fell some 28% in 4 days.
As technical analysts and chartists, we study historical prices and patterns to get an idea of what to expect going forward. No two patterns are exactly the same, but they often rhyme with a few common characteristics.
There are plenty of cautionary tales to go around, and yet the new high parade continued this week. This is why process, price action and signals are so important. I can find plenty of reasons for caution and these were highlighted over the last few weeks.
The principle of confirmation stems from classic Dow Theory, which used the Dow Industrials and Dow Transports to confirm price movements. The bull market was in good shape as long as both recorded higher highs by exceeding their prior peaks.
The S&P 500 SPDR and Nasdaq 100 ETF led the market by surging to new highs. After a bashing at the end of January, these two came roaring out of the gates and answered with big moves in the first week of February. As the chart below shows, SPY held its early January low during the dip and showed relative strength in late January (less weakness).
The bears fired their first shot across the bow this week with sharp declines on Friday and Monday. The bulls were not in the mood to allow even a modest pullback and quickly stepped back into the market. Short-term, an oversold bounce after a 2.5% decline (Friday-Monday) is pretty normal stuff and does not change my overall thesis.
The S&P 500 SPDR is up 3% in three weeks (January) and trading near an all time high. Furthermore, the ETF is up 14.5% since August and 9.9% since October. These are big moves in relatively short timeframes, no matter how you slice it.
Stocks have been ripe for a rest or correction for weeks, and yet the current advance continues to broaden and buying pressure continues to outpace selling pressure. We already know that SPY and QQQ are hitting new highs and leading.
Stocks turned a bit mixed the last two weeks, but the bulk of the evidence remains bullish, both long-term and short-term. Looking at the five biggest equal-weight sectors, we saw new highs in the EW Technology ETF (RYT), EW Industrials ETF (RGI) and EW Healthcare ETF (RYH) this week. Technology led in 2019 and continues to lead in 2020.
It’s just the second trading day of 2020 and already the markets are setting up for a test. Stock futures are sharply lower as the S&P 500 looks set to open down around 1%. Gold, the Dollar and Treasury bonds are sharply higher as money looks for alternatives. A sharp decline in the S&P 500 could reverse the short-term uptrend and herald the much awaited correction.
There is not much change in the broad market picture. The S&P 500 SPDR hit a new high again this week and extended its uptrend. The long-term trend has been up since February and SPY has been on a tear since early October. Barring a 2.22 point decline today (Friday), the S&P 500 SPDR is set to close higher for 11 of the last 12 weeks. It is an extraordinary run (+9.71% since early October), and shows no signs of slowing.
Today’s report will focus on the S&P 500, the current advance and a future scenario. I am focused on the S&P 500, and SPY by extension, because this index is the driving force in the stock market. It accounts for some 80% of the US equity market and is the most widely followed benchmark for US stocks. Small-caps and mid-caps are more likely to follow the S&P 500, not the other way around.
The major index ETFs extended their breakouts as the bullish forces, which were highlighted last week, dominate heading into year end. Three of three technical forces remain bullish. Two of the three “other” forces turned from rumor to news this week.
Even though I mentioned these fundamental forces last week, the technical forces are what really drive my market stance.
Stocks took a hit early this week, but quickly rebounded as bigger bullish forces came into play. Today we will review these bullish forces by starting with the long-term picture for the S&P 500. I will then analyze the short-term uptrend, which survived its first test this week.
Uptrends and new highs are bullish. Sorry, but there is no other interpretation. We can debate the degree of bullishness, we can debate overbought conditions and we can debate non-confirming indicators.
The sky is falling as the S&P 500 fell a whopping .5% the last four days. Small-caps and mid-caps were hammered as the S&P SmallCap 600 SPDR fell 1% so far this week and the S&P MidCap 400 SPDR declined 1.3%. I am sure that there are probably some good reasons for these miniscule moves. Heck, there are always reasons.
The S&P 500 SPDR was never in trouble this year and the Russell 2000 ETF was never up less than 8% year-to-date. Small-caps surged out of the gate with IWM gaining around 17% the first two months of the year. This amalgamation of 2000 stocks then embarked on a long consolidation with a slight downward bias the next six months.
The recent breakouts and new highs in several key index, sector and industry group ETFs are bullish for the broader market. Now that we have the “all clear” for stocks, perhaps we should prepare for a pullback.
Something must be right in the global equity markets because we are seeing new highs in a number of key country indexes. The S&P 500 and Nasdaq 100
The S&P 500 SPDR (SPY) has gone nowhere since July, and that’s ok. Consolidations, corrections and pullbacks are all part of the process when it comes to uptrends. As the chart below shows, SPY is knocking on the prior highs and very close to a breakout.
Stocks have been mixed since summer with the major index ETFs trading in ranges the last three months. The S&P 500 SPDR and Nasdaq 100 ETF hit new highs before embarking on their trading ranges, while the S&P MidCap 400 SPDR and Russell 2000 ETF