The SP500 index (TSP C fund) contains 80% of the market value of the total public US stock market. Examining market internals and price action is one of many tools in gauging where we are in the stock market cycle (bull/bear markets).
It is my view we are in an extended and historically over-valued bull market thanks to over-generous global central bankers. Since the Federal Reserve is shifting policy we are closely watching for signs of when this bull will falter. First we have to break trend.
My reference lines in the following chart go back to 2010. The primary price channel for the bull market extension started in early 2016 but has underpinnings going back to 2011. We re-entered the primary channel after the unsustainable parabolic move in early 2018. The green line is the much talked about but over-rated 200-day moving average of the SP500 price.
The fact that the 200-day moving average and our lower price channel are lining up does make it a bit more interesting to watch. If the SP500 breaks below one it will probably break below both our price channel and the 200-day moving average. And then all the stock traders and computer algos that are looking at this technical picture breaking down will sell at the same time.
Yes I think much of technical analysis is simply a self-fulfilling prophecy. And in an over-valued market that has lost central bank support (at least at these levels) we need to worry about these types of catalyst.
We are not 100% invested in this market and I do not recommend getting to excited about today’s headlines. The 20% growth rate in corporate earnings the financial media are touting are not the savior of today’s overvaluations, but they should allow the smart money to unload stocks and junk bonds to the headline-followers for another few months.
I do find it ironic how companies jump through hoops to exclude significant “one-time losses” from their reported earnings on a re-occurring basis, yet never exclude significant one-time gains. The largest jump in earnings came the month after the tax bill was passed, so don’t get too excited about a business comeback just yet.
SP500 revenue growth is up a bit, but not by much. Much of this gain is from rising energy and material sector revenue thanks to higher commodity prices (can you say inflation). And the declining dollar boosted the third of the SP500 revenues that come from international markets. Tax cuts, dollar declines, and higher pump prices – good luck repeating those one-time occurrences.
What I do expect to repeat is the cause of the financial sectors revenue and earnings rise – higher interest rates. And higher interest rates should take care of the over-valuation issue in time. We are watching for indications that lead the larger stock market selloffs. They are not in place yet, but I am expecting to see them this Summer or Fall.
If you haven’t already you can read my view of the Best TSP Allocation for 2018 on our website. We get into more detail in our Current Situation Reports and Discussions if you become interested in becoming a smart investor.
Invest safe, invest smart.