SHORT TAKES
CORRECTION: Since details matter in the stock market, it is important to speak to the proper charts. The charts on the right side of the screen at the 6:20 mark should have been shown as they appear below. Thankfully, the message does not change with the corrected charts.
It is very difficult to look at the weekly chart of the S&P 500 ETF (SPY) below and draw long-term bearish conclusions. SPY corrected earlier in 2018, went sideways for a few months, and then broke above a multiple-month base.
The NASDAQ 100 ETF (QQQ) experienced a somewhat volatile period of consolidation between January and mid-June, and then went on to print a series of higher highs.
The Dow ETF (DIA) recently cleared the weekly high printed in January and simultaneously made a new all-time weekly closing high.
The weekly chart of growth-oriented SPY relative to defensive-oriented TLT recently printed a new all-time weekly closing high. Compare and contrast the 2018 chart below to the rollover look before and after the major stock market peak that was made on October 9, 2007. In October 2018, the SPY/TLT ratio is above an upward-sloping 22-week moving average. In October 2007, the SPY/TLT ratio was below a downward-sloping 22-week moving average. Unlike the 2007 chart, the 2018 chart shows little in the way of a migration to defensive assets.
It is difficult to see signs of risk aversion or concerns about future economic outcomes in the present-day version of QQQ/TLT. The QQQ/TLT ratio recently cleared the February 2018 peak and remains firmly above an upward-sloping 22-week moving average. Is it possible the 2018 chart below morphs into something more like the concerning look in 2007? Yes, but it has not happened yet.
Given what we know today, the period of consolidation/indecisiveness that occurred for several months in the DIA/TLT ratio appears to have resolved itself in a bullish manner. In 2007, the DIA/TLT ratio peaked several months before the S&P 500; in 2018 it is still making new all-time highs.
This week’s video takes a fact-based look at the NASDAQ dating back to 1984. 2018 is compared to both bullish and bearish periods. After reviewing the facts, you can draw your own conclusions.
Below is a headline warning about valuations in 2011. Needless to say, a lot of good things have happened in the stock market since 2011.
As shown in previous weekly videos, if you walk through history step-by-step it is difficult to see how valuations are helpful in making investment decisions; in fact, it is possible to make the case that they can be harmful:
CAPE: How Helpful Is The Shiller PE
VALUATIONS: Is It Really Different This Time?
STANDARD PEs: Useful Timing Tools For Stocks?
Valuations became in issue in both 2000 and 2007, an issue that was reflected in all the charts as the markets peaked. If/when valuations become a problem in the coming days/weeks/months/years, deterioration will begin to show up in the hard data, charts, and in asset class behavior; that may happen, but it has not happened yet. We will continue to take it day by day with an open mind.
The weekly and quarterly charts covered in this post and video are not significantly impacted by day-to-day volatility, which is another way of saying one day does not make a trend.
The facts we have in hand on Monday, September 24, tell us the market’s long-term trend remains constructive. The charts below show the 100, 200, and 300-day moving averages in 2018 and 2008.
Since one of the hardest things to do is sit tight during normal volatility that regularly occurs within the context of a long-term bullish trend, it can be helpful to understand areas of possible support below the market. Price action has identified the 2848-2873 range as one area of possible support should the market decide to backtrack (see top of orange box below). If that range is violated, the top of the yellow box comes into play between 2790 and 2805.
Markets often have “give back” periods within the context of an existing uptrend. For example, based on the intermediate-term bullish move off the February 2018 YTD low, it would not be unusual for the S&P 500 to retrace 38.2%, 50.0%. or 61.8% of the A to B move before going on to make a higher high above point B. If price stays below the 61.8% retracement, the odds of a bearish reversal would increase. For us, the moral of the story is there are numerous reasons to be patient during 100% normal and to be expected volatility within the context of an existing and ongoing uptrend (until the hard data says otherwise).
Our purpose here is not to predict any movement in price (up or down), but rather to understand the range of possible outcomes within the context of a constructive trend.
This week’s stock market video covers numerous “we need to be careful about this” topics that were covered in 2017, allowing us to review them in the context of what has transpired in 2018.
The average stock remains above areas of previous resistance that came into play in 1998, 2007, and 2015.
The average stock just printed a new all-time monthly closing high last month. It is difficult to wedge this factual piece of data into a bearish argument for stocks.
If the data on multiple timeframes begins to shift in a meaningful way, we must be flexible enough to reassess the long-term probabilities. We will continue to take it day by day.
