Triple Top for Stocks? … Not Yet.

Looking at an interesting internal trend indicator of the S&P 500 you can see that although the overall market appears dangerously nearing a topping formation, the bear trend has a bit more development yet to go before reaching near certainty.

The rolling 30 day percent change of the 200 day moving average shows the short term (roughly monthly) trend change of the S&P 500’s 200 day moving average and easily highlights flattening, deceleration and decline of that measure.

It’s extremely unusual for the S&P 500’s 200 day moving average to decline for an extended period during Bull an expansion.

A declining trend that sees the 200 day moving average drop below its value set just 30 days prior is a nearly unequivocal indicator of a market top while dropping more than 0.30% holds past historical certainty.

How far are we from the point of near top certainty?

Currently, this internal trend indicator is 0.65 (i.e. the 200 day moving average is still .65% above its level of just 30 days ago) and at its current trend could take another couple of weeks to confirm or discount a top in the S&P 500.

Beware the Ides of a March Re-test!

As we flirt with a level of 1040 on the S&P 500, a point crossed one way or the other at least eight times in the last 12 years, it’s probably a good time to consider what the economic and social landscape would look like should a new bear market shape up as the leading trend.

Nothing puts a crimp in confidence more than declining stocks… not even home price deflation.

Back in 2006 home prices started to turn down across the United States and by mid-2007 it was fairly obvious to most astute observers that the decline in prices would be substantial.

Yet, stocks kept moving up and consumer confidence and retail spending remained, more or less, near the peak seen for the entirety of the aughts.

Even as stocks topped in late 2007 it could be argued that most Americans were unaware of the severity of the oncoming financial crisis and the impact that it would have on their future.

By the close of 2007 home prices had already come down nearly 10% yet the impact of the deflation of the largest asset that most households will ever control did not, oddly enough, appear to most to constitute a crisis or a cause for panic.

Though daily observers of housing and the macro-economy will likely consider the whole period of 2007 and 2008 to constitute one long brewing crisis, it took until stocks plummeted in late 2008 for Americans more broadly to wake up and panic cutting spending and bringing on a collapse of global trade.

The moral here is that declining stock prices apparently work to hit Americans in the “here and now” whereas home price deflation comes with a slower realization of loss of wealth.

So with stocks on the decline yet again, it’s important to consider the potential impact.

Yesterday the S&P 500 closed at the lowest level since November 2009 cutting the gain since March 2009 considerably.

Should we re-enter a bear market “sell into the rally” mode as was seen during the long slow slide of late 2007 to September 2008 it would likely work to depress sentiment and cause households to retrench.

If we are heading back for a re-test of the March 2009 lows… beware!

The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered or are just about to enter another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that recently the 50 day moving average broke through the 400 day moving average signaling a second “cross of death” that I will term the “cross of far more death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.



THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA.

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. TBD

Needless to say then next few weeks will be white-knuckle time…

The Almost Daily 2¢ - Twin Peaks?

Following up on a prior post, take a look at the trend and most recent state of the S&P 500 index and compare it to the last major bear market conditions that followed the dot-com bust.

There is a host of very interesting technical similarities (which are noted below) that may indicate that we have entered or are just about to enter another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice that I’ve updated the chart to reflect the fact that yesterday the 50 day moving average broke through the 400 day moving average signaling a second “cross of death” that I will term the “cross of far more death“ for all future posts.

Notice also, that I’ve added both the “effective” federal funds rate and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.25% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.


THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA.

NOW (Today’s Top?)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. TBD

Needless to say then next few weeks will be white-knuckle time…