SP 500 index
Let’s take a look at the trend lines and moving averages the S&P 500 index has been following since 2009. The 2013 trend line is clearly broken and the longer term trend line is now the one to watch. In the first chart, we see the current bull markets trend line established at the low in 2009 and only pierced once in the latest October correction. The last two corrections reversed at the 2009 trend line in mid-December and on 7 January. The 100-day simple moving average has also provided a good reference point since 2013 and it is now intersecting the 2009 trend line as seen in the chart below. The 7 January low found double support from both the trend line and 100-day simple moving average.
SP 500 Index Close Up
As we have written about before, the large cap US stocks have been the only stocks trending up this last year and the momentum appears to be slowing. We see indications of a bull market top forming – market tops are a process and not an event. If a top is forming, deeper corrections could take place early this year. They will be followed by bear market rallies giving opportunities to reduce exposure to equities as required. Our over-active central bankers will see to that, although they can not delay the bear market forever.
It is worth repeating the stock market is a leading indicator of the economy, not the other way around. Anyone using the positive economic reports to predict a rising stock market is not your friend. Of all the leading statistical economic indicators, the stock market is the first to react. Insiders know when business is slowing and can sell months prior to the numbers making it into economic reports. The news is most positive at market tops and most negative at market bottoms.
We need to watch the market internals and the momentum of the market and compare it to historical data to adjust our exposure to equities. We also know that 75% of the C-fund losses in the last two bear markets have occurred during the seasonally weak summer/fall season determined by our own timing models. While we see indications of a top, the process is not complete and the market could have another leg up. We do have some exposure to equities and will continue to do so as required by our models until a bear market is indicated.
Note: In the first chart, you see a blue line labeled “Shiller PE Mean Value Price Point”. I have been studying market valuation methods recently and developed this Mean Value line that represents where the market would be if it were trading at its mean value. I will write more about this in the future. This is not a pure valuation line since there are reasons why the market would trade above and below its mean PE at times. But it does provide a good historical reference point. The further above or below the line the market reaches, one can conclude that future long-term returns will be lower or higher than mean returns respectfully.
Categories: TSP Charts