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.
Stocks: It Is Really Different This Time?
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.
2000/2007/2018: 199 Days After The Peak
TRENDS AND TOLERANCE FOR RISK
If we knew with 100% certainty the stock market was on the verge of falling 50%, as it did after the peaks in 2000 and 2007, would we rather own 100% stocks or 100% bonds? The answer is simple - bonds. Thus, we can learn something about the present day market's tolerance for risk by reviewing some stock/bond ratio charts.
199 DAYS AFTER THE 2000 PEAK
The S&P 500 peaked on March 24, 2000. October 9, 2000 was 199 calendar days after the stock market's major bull market top. The charts that follow show long-term trends in the stock/bond ratio. Notice how 199 days after the stock market peaked, the 30-week moving average had moved from the top of the cluster to the bottom of the cluster, which indicates waning conviction to own stocks relative to more defensive-oriented bonds.
199 DAYS AFTER THE 2007 PEAK
A similar "the bullish trend is rolling over" look was clearly present on the same stock/bond ratio chart 199 calendar days after the S&P 500 peaked in the 2007-2008 period.
199 DAYS AFTER THE 2018 PEAK
The S&P 500's highest close in 2018 came on January 26, or 199 calendar days ago. How does the same ratio look today? The answer is much better, telling us to maintain an open mind about better than expected outcomes for stocks relative to bonds in the weeks, months, and years ahead.
RED SCREENS AND SCARY HEADLINES
The S&P 500's year-to-date low was made on February 9 at a level of 2,532. Relative to last Friday's close, the market had gained 300 points since printing the intraday YTD low.
This week's video walks through the 2018 correction and subsequent move off the low, allowing us to make a logical comparison of trying to make decisions based on short-term trends/scary headlines relative to leveraging factual data based on long-term trends.
CHARTS HELP WITH ASSESSING ODDS
Charts and hard data cannot predict the future; they simply help us objectively assess the odds of good things happening relative to the the odds of bad things happening. Just as the charts said "try to be patient" in early February, they continue to favor good things happening between now and year-end. We will continue to take it day by day and remain open to all outcomes. If the data shifts in a meaningful way, we will adjust the odds. That may happen, but it hasn't happened yet.