Tuesday, March 7, 2017

S&P Hits 100 Trading Days Without a 1% Decline

S&P Hits 100 Trading Days Without a 1% Decline


Daily Support - 2,300-2,325 (watch the 50 day moving average)
Long-term weekly support - 1,990 (watch the 200 week moving average)
Short-term weekly support - 2,225-2,250
 (near the 200 day moving average)
First major support and possible bottom should a bear cycle occur - 1,550

100 Days

It was October when we last experienced a -1% close on the S&P. That was one rate hike ago, one president ago, and now, about 5 months ago. This is nearly breaking a 21 year-old record. When was the last time we saw a streak like this? It happened once just before the housing bubble burst, and before that, during the tech bubble. Looking at the chart below, we can see that we are likely due for the streak to end relatively soon. 

The March Rate Hike

The Federal Reserve will be having their meeting next week, and it is highly probable that they will go ahead with raising interest rates for the second time in 3 months. Value Walk did a great article recently in regards to rising rates. (The article also reiterates much of what our quarterly market outlook stated.)

"Do you remember Edson Gould?  He was a legendary technical analyst from the 1930s through the 1970s and developed a simple rule about Federal Reserve policy that has an excellent record of foretelling a stock market decline.
The rule states that “whenever the Federal Reserve raises either the federal funds target rate, margin requirements or reserve requirements three consecutive times without a decline, the stock market is likely to suffer a substantial, perhaps serious, setback” (Schade, 2004). This simple rule is still relevant. Although it tends to lead a market top, it is something that should not be disregarded.
In the mid-1980s the great Marty Zweig wrote a book titled Winning on Wall Street.  He is quoted, “Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”
Zweig’s Fed policy rule is simple, “three steps and a stumble.”  Basically, when the Fed raises interest rates three times, the stock market stumbles.  When they lower rates, it’s good for stocks." - ValueWalk 
Janet Yellen cooking up circuit breakers

Is a Sell Off Coming Soon?

Does this mean we are about to have a significant sell off? Highly doubtful. If we look at the history of any correction, there were telegraphed moves that displayed prominent weakness in the market. For example, back in August 2015, not only did we have a couple days of -1% and -2% losses while breaking the 200 day moving average, we also had failed to make a new high 3 different times over the course of May-August. 

This does not mean we should get complacent here. We believe the S&P will retrace back to a support level. The daily chart below shows a reasonable -1.5% retracement from the current level is likely. 

The weekly chart below helps us gain perspective on the larger picture. Should the red trend line break (indicated on the daily chart above), we feel a significant support level will be around the 200 day moving average/50 week moving average. The weekly support levels are much more significant.

History Tells Us - Valuations Matter

Lastly, we need to be realistic about our investments. Investing in the equity market while it is at valuations similar to the current level has never produced a significant gain over 10 years. In fact, the average gain per year is only about 2% when valuations have be close to this high in the past. (illustration below) Another issue to note, this is the highest Shiller CAPE we have seen outside of the tech bubble and just before black Tuesday. Let's look at the monthly chart below. We have a clear support level should we enter a bear market. We believe the current risk/reward ratio does not justify any long term investments in the equity market currently. Please read our post on TLT here to see where someone may park their money until we are at a fair valuation. 


Clearly, right now is a high risk time to begin long term investments. We encourage investors to stay prepared. We have a rate hike next week. The market is in a frenzy of panic buying. This will eventually wear off. When it does, maybe the grim reality of the steep premiums investors have been paying will stop them cold in their tracks. Until that day, pay attention to any short term support levels for short term entries, get defensive with your long term accounts, and don't fall into the trap of the fear of missing out.

Disclosure: We are long TLT.

Disclosure: The information provided in this article is not to be construed as investment advice. Any securities you buy are ultimately your decision. Investing carries risk. Always do your due diligence before buying/selling any security. We are not being compensated for writing this article.

No comments:

Post a Comment