The S&P May Break This Important Trendline — But Don’t Panic Just Yet…
The SPDR S&P 500 ETF (NYSE: SPY) closed lower again last week. The ETF is now about 2.8% below its all-time high. Yet, despite the fact that major stock market averages are near all-time highs, there is a sense of panic in the market.
To understand this feeling of panic, I took a look at Barron’s. This website almost always has a gloomy outlook and reflects the bearish outlook in a succinct manner. This weekend, Barron’s noted…
Wall Street has found something scarier than tapering, taxes, and China Evergrande Group combined. It’s called the 50-day moving average.
The predictions of impending doom from Wall Street’s talking heads continued this past week. The reasons for a pullback are many: The stock market has rallied for too long and has gone up too smoothly, the Federal Reserve is about to remove the bond buying that has helped prop markets up, taxes are ready to rise, economic data are slowing. None of it really left a mark.
But the 50-day moving average has been important in the market’s recent advance.
As of Monday’s close, SPY has now gone 219 days without two closes below its 50-day moving average. That’s the second longest streak since 1990.
As we are going to press on Tuesday afternoon, we may see that streak broken by the time markets close.
The longest streak took place back in 1995. It ended in January 1996 after a 31% run, a gain that mirrors the current one. In the next chart, I’ve zoomed in on that specific period.
After that streak, there was some volatility, but the market continued its strong rally until 2000. The strength seen in 1995 was a setup for years of additional gains.
The current situation could be exactly the same. There are reasons to expect additional gains in the stock market that could drive prices higher for years. The primary factor is the Federal Reserve’s low interest rate and easy money policies. In addition to that, earnings growth should remain strong as the economy continues to recover from the pandemic-induced recession.
But investors seem to be caught up in the short-term headlines. Sentiment declined sharply last week, according to the American Association of Individual Investors survey.
A large number of individuals turned bearish after a 3% drop in the S&P 500. This isn’t unprecedented. We often see sharp shifts in sentiment. But the investors making those changes are often wrong.
It’s interesting that we see an even larger decline in sentiment in 1996, after the S&P 500’s 250-day streak above its 200-day moving average. Bears at that time were on the wrong side of the major trend. It’s possible that history is repeating itself now.
That said, after looking at my indicators, I am cautious in the short run.
This week, my ITV indicator turned bearish for SPY. While I’ll be keeping an eye on this, it could just be normal volatility similar to what we saw back in 1995.
ITV is similar to VIX in that it rises as prices fall. Its current position, with the indicator (red line) breaking above its moving average (blue line), it is possible we could see additional weakness in SPY.
But, according to my Profit Amplifier Momentum (PAM), there is reason for optimism.
PAM is designed as a short-term indicator. It’s at the same level of oversold extreme seen in July, which was followed by a sharper rally.
For the short term, based on my indicators, it’s best to watch the market action in the first part of the week. It’s possible a rally will ensue from this oversold extreme. It’s enough of a possibility that I remain slightly bullish on the S&P 500 in the short term.
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