Stock Market Heads Off A Correction – For Now

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In our January 22nd Stock Market Update we pointed out that the S&P 500 (SPX) had just moved 11% above its 200-day moving average and said this indicated an historically over-extended extreme.  It warned the 2019 US broad market advance was vulnerable to a corrective decline.  The index actually peaked that day and proceeded to collapse by 123 points or 4% over the next seven trading sessions. 

Chart 1 below shows that sharp decline pushed the index right into underlying support at 3212 to 3205 on January 31st.  This level had to hold for SPX’s current tactical uptrend  — which has been in effect since October 2019 — to remain intact.  And hold it did, as the US broad market index has subsequently taken that 4% loss right back and, as of February 6th, has edged into new all-time highs.

Chart 1

Meanwhile, however, our Cross Asset Relative Performance (CARP) Model, as shown in Table 1 below, suggests that investors remain cautious.

Table 1

Our CARP Model identifies relative trends across 9 different investment categories for the purpose of determining which parts of the market are performing best, and also measures investors’ risk appetite.  Investment managers and investors often consider these various relationships when constructing a comprehensive, diversified portfolio.

CARP currently shows a trend of relative outperformance by stocks versus bonds, and by growth stocks over value stocks, both which indicate an appetite for risk.  However, the table also shows that low volatility stocks are outperforming high beta stocks, large cap stocks are outperforming small cap, and long term bonds are outperforming short term bonds — all which suggestion caution — if not a defensive bias.

So, while the stock market appears to have just avoided a downside correction, it’s historically overextended condition remains intact and our CARP Model still indicates some investor apprehension.  We see this as an environment to remain invested, but to keep a close eye on your holdings and have to an exit plan already in place — just in case this investor apprehension turns into another sharp market decline.

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