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Corrective Bounce or Market Bottom?

The benchmark S&P 500 (SPX) made a very impressive 6% rally on Thursday and Friday of last week (Feb 24th and 25th).  Does this mean the recent market correction over, or is this just a minor bounce within a larger, uncompleted decline? 

Yesterday, February 26th,  we published a 40-page chartbook. (Our latest Monthly Investment Compass, access requires subscription) that specifically addressed this question.  The following are one table and one chart from that report.

Market Internals Remain Weak

Table 1 below shows that, despite the huge market rally at the end of last week, four of our Asbury 6 risk management model‘s constituent metrics are still negative (red).   The model itself has been on a Negative status since January 14th and the S&P 500 has declined by as much as 12% since then.

Table 1

Editor’s Note: The Asbury 6 is our own quantitative risk management tool which is updated daily in our Research Center.   The “A6” is a combination of six diverse market metrics that we grouped together to look beyond the day-to-day, up-and-down noise of the stock market to determine its actual health — in much the same way that a doctor first checks the patient’s vital signs during an office visit.   Four or more metrics in one direction, either Positive (green) or Negative (red), indicate a Tactical market bias. The dates in each cell indicate when each individual constituent of the A6 turned either positive (green) or negative (red). 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.

It would take a positive (bullish) shift in the Asbury 6 to help confirm that the current market decline is over and a new advance is beginning.

Quarterly Momentum Remains Negative

Chart 1 below plots the S&P 500 weekly in the upper panel with a corresponding chart of the US broad market index’s 13-week (quarterly) rate of change in the lower panel.  Rate of change measures price momentum.  

Chart 1

The rightmost red highlights show that the 13-week ROC has been negative (below its zero line) since January 21st, which indicates a quarterly bearish trend.  The other red highlights identify the previous two similar bearish trends, between February and May 2020 and between October 2018 and February 2019.

As things stand right now, the market’s recent bearish bias is still intact.  However, many of our indicators not shown here concur that this is a very important intermediate-term decision for the stock market, from which its next multi-month to multi-quarter directional move — up or down — is likely to begin.  Stay tuned.

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