When Will It End?
In my previous February 7th article for Forbes.com, I said that the US stock market was historically overextended and suggested that investors keep a closer-than-normal eye on the market — and their holdings — and to have an exit plan in place just in case this investor apprehension turned into a corrective decline.
That decline materialized with a vengeance last week as the benchmark S&P 500 (SPX), after just setting a fresh all-time high on February 19th, collapsed by 538 points or 16% into the February 28th low before attempting to recover this week.
Meanwhile, one of Asbury Research’s tactical models, the Asbury 6 as shown in Table 1 below, shifted to a Negative status on February 24th.
When all Asbury 6 are positive, market internals are the most conducive to adding risk to portfolios. Each negative reading adds an additional element of risk to participating in current or new investment ideas.
Not shown in the table is that, despite this week’s rally, none of these metrics are currently close to turning back to a Positive status. This indicates the internal, “under the hood” condition of the market still remains weak, and warns that the market remains vulnerable to a deeper decline.
The chart below plots the S&P 500 daily since July 2018, showing that the US broad market index collapsed through its December 2018 uptrend line three days later, on February 27th, while also moving below its 200-day moving average (a widely-watched major trend proxy). This simply means that the major trend has turned negative or bearish.
S&P 500 daily since July 2019
Copyright 2020 Asbury Research LLC
A quick word about the value of price charts, for those unfamiliar with technical / quantitative analysis. The information contained in these charts represents the collective wisdom of all investors, big and small, with actual skin in the game. They indicate many different things including trend, potential turning points in price, and a day-to-day measure of investor urgency and conviction.
Financials asset prices have a memory. The chart also shows that SPX has at least temporarily stopped declining at 2856, which is the previous October 2019 low that was tested and held on February 28th. More recently, the rally from this low stopped on a dime and reversed lower from 3133, which represents the underside of the December 2018 trend line SPX collapsed below on February 27th. This level is being tested again now, as of the close today
So what does this all mean? In my view, the S&P 500 could be in the midst of an emerging major bearish trend change, based on its recent decline below major support at the 200-day moving average and the December 2018 trend line. However, the validity of that breakdown is currently being tested, as shown by the rally back to the 3133 area. Now the market has big a decision to make.
If the recent breakdown in the S&P 500 is the real deal, it should remain below the 3133 area while our Asbury 6 model retains its current Negative status. Conversely, a sustained rise back above SPX 3133, corroborated by a Positive shift in the Asbury 6, would suggest that the recent market collapse was just a temporary panic attack and that the previous 2019 US broad market advance is resuming.
Know your levels, and stay tuned.
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