Harder Markets Are Typically Followed By Easier Markets
S&P 500'S BREAKOUT ATTEMPT
The S&P 500 closed above 2532 on October 3, 2017, and eventually rallied to 2872 on January 26, 2018. The S&P revisited 2532 on February 9, 2018. Last Friday, the S&P 500 closed above 2872. Therefore, price stayed inside the orange box for 325 calendar days.
The S&P 500 broke above the March 2018 highs in July. The same "it is important not to overthink singular outcomes" concepts apply to the present breakout attempt:
We all want a clean breakout and then a push higher. Unfortunately, that is not how it always plays out in the real world. A successful retest of a breakout attempt can (1) drop back and stay above the orange boxes, (2) drop back to the orange boxes, or (3) drop back into the orange boxes before pushing higher. On a successful retest, the important common factors are (a) breaking out, (b) dropping back toward the box in some fashion, and (c) making a higher high above the most recent previous high. In the real world, there is no neat textbook definition about what a successful breakout looks like.
Since, in the short run, it will have little impact on the bigger (and much more important) picture, experience says overthinking breakouts tends to be a distraction. No single event makes up the weight of the evidence, including the outcome of a breakout attempt.
TRENDS AND CONSOLIDATION
When the S&P 500 was trending strongly in late January 2018, the expression "the market needs to consolidate its gains" applied. It is not unusual for markets to alternate between periods marked by strong trends and periods marked by consolidation. The concepts are based on price, and have nothing to do with how the orange boxes are drawn. We could remove the orange boxes below and the concepts would still apply.
TIME FOR AN EASIER MARKET?
The answer to the question above falls in the TBD category. The longer the S&P 500 can stay above 2872, the more meaningful the breakout becomes.
THE BIGGER, AND MORE IMPORTANT, PICTURE
Under our approach, when the long-term trends are strong and favorable, we prefer to remain invested during bouts of normal volatility. Given most major U.S. indexes have posted new all-time closing highs, a fair question may be are things starting to look like the period leading up to a 1987 or 2000-like peak? This week's video reviews present-day facts in the context of stock market history to address logical topping concerns. After reviewing the facts, you can draw your own conclusions.
DAY BY DAY
Even if the S&P 500's breakout holds and stocks march higher (TBD), the expression uses "easier" and never hints that anything related to the stock market will be easy. As always, if the facts change in a meaningful way, then our assessment of the probabilities will need to be adjusted.
Stocks: More Like 1987 Crash Or 1982 Bash?
ANALYSIS: S&P 500 1930-2018
Momentum Paints A Clear Picture For Stocks
BULL MARKETS BEND BUT DON'T BREAK
Bull markets are ultimately about the ability to sustain long-term momentum during inevitable corrections and pullbacks. Stockcharts.com describes MACD as "one of the simplest and most effective momentum indicators available". Monthly MACD helps us monitor long-term bullish momentum. In the 2007-2008 case, after the market's bullish momentum had been bending for some time, it eventually broke after the S&P 500 peaked in October 2007. Notice how price made a series of lower monthly lows and MACD experienced a bearish cross (red arrow below). The chart below is what the early stages of a bear market looks like; the S&P 500 did not find a bottom until March 2009.
1995-1996 CASE
The bend but don't break concept applied to the pullback and consolidation that occurred in 1996 following a strong rally in 1995. The monthly chart stayed inside the orange box for seven months (consolidation) and eventually made a new monthly closing high. Notice how monthly MACD stumbled a bit, but never experienced a bearish cross (green arrow below). The 1996 case was cited in March of this year in an effort to make the try to be patient case.
2017-2018 CASE
Sometimes in football, defenses can give up a lot of yards, but when push comes to shove, they limit their opponent's ability to score. Bull markets experience scary breakdowns from time to time, but when push comes to shove, the market rights itself and eventually goes on to print new highs. Given the look of the 2017-2018 chart below, it is fair to say the present day looks a lot more like the 1995-1996 case relative to the 2007-2008 case. If the market can finish August in a respectable manner (TBD), the S&P 500 would print a new all-time monthly closing high; something that does not align with the major top theory of markets.
IS IT REALLY DIFFERENT THIS TIME?
You may have reviewed the charts above and thought that's great, but 2018 looks more like the major stock market peak that was made in the year 2000. The 2018 vs. 2000 case is covered extensively in this week's video. When viewed in the context of history (1935-2018), there is a valuable message hidden in present-day valuations, technicals, demographics, and asset class behavior. The video reviews facts; you can draw your own conclusions.
MACD IS NOT MAGICAL
MACD is used in this post as a proxy for the weight of the evidence, meaning we would have chosen numerous indicators or methods to illustrate the same concepts. The weight of the evidence, which includes monthly MACD, continues to favor a resumption of the current bull market over the start of a new bear market. Time will tell.