The S&P 500 has seen a seven-day string of losses, which picked up steam this week. News headlines cite uncertainties over falling oil prices, a tightening Presidential race, rising global bond yields, and increasing chances for a December rate hike.
For those of you who didn't have the chance to attend our Investment Strategy Conference last Saturday, our belief is that we are approaching a peak in the US economy and stock market with a possible recession next year. Consequently, given our current outlook, we argued for a more defensive stance toward equities.
Since we spent most of our time looking at macroeconomic data (with well over a hundred slides!), here are some technical charts we are watching, which, as you'll see, also help to inform our cautious outlook.
Looking at a daily (short-term) chart of the S&P 500, we see the MACD is on a "sell signal" (red line above black line) and has not tipped decisively into an area consistent with major bottoms seen over the past 2-3 years. In terms of Bollinger bands, we are in oversold territory but not to an extreme; same is true for the Stochastics.
When looking at the S&P 500 on a weekly (intermediate-term) basis, the MACD is currently giving a "sell signal" and trending downwards. We are moving from neutral into oversold territory on the Bollinger bands but not yet at extremely oversold levels consistent with prior intermediate market bottoms going back 6-7 years. The Stochastics are currently correcting from highly overbought levels.
When looking at a monthly (long-term) chart of the S&P 500, the MACD has pulled back from its extreme readings seen in 2014-2015 but is currently giving a "sell signal." The Bollinger bands show we are correcting from overbought readings but not yet at levels consistent with multi-year market bottoms. This is true whether you look at the price action in 1990, 1994, 2002-2003, 2009, or the double-digit correction in early 2016.
In terms of market breadth, here is a weekly chart of the S&P 500 with the percent of its members trading above their 50-day moving average shown below. When a greater number of individual stocks comprising the index are above their 50-day moving average, breadth is considered strong as more stocks are showing upward trends and vice versa. Due to the volatility of this data, we've applied a 52-week (1-year) moving average and, as you can see, it has started to turn back down. On a longer-term basis, that means breadth is showing a weakening trend and may be a cause for concern if the trend continues.
The last technical chart we'll show is for the NYSE Composite, which, according to Investopedia, contains over 1,900 stocks. In the second panel is the NYSE Breadth Index. As you can see, breadth tends to deteriorate at or near major market tops and is showing signs of rolling over again. This bears monitoring for continued signs of weakness.
Then, of course, there's this chart. The NYSE in 2000 vs. today:
Analogs like the above don't always play out but, so far, there's a decent match between the two. IF (and that's a pretty big "IF") the NYSE follows the 2000 pattern, we could be looking at a major selloff heading into the election followed by a final bottom in 2017. We don't consider such analogs as tradable but it's interesting to consider nonetheless.
Bottom line: Momentum is on the downside, breadth is weakening, stocks are still overbought on an intermediate and long-term basis, and economic data appears to be slowing in the context of a possible Fed rate hike this December. Given all of the above, the technical outlook is, in our view, "dicey".
Charts courtesy of StockCharts.com and Bloomberg
Subscribe to our weekday premium podcast with various guest experts, strategists, and book authors by clicking here.
