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The Market’s Long-Term Momentum Just Went Negative

Wed, Nov 21, 2018 - 7:33am

The October correction, now followed by a double-dip into late-November, has pulled the market’s monthly momentum into negative territory.

Though seasonality favors a year-end rally, with the long-term MACD (a monthly trend/momentum indicator) for the S&P 500 now making a bearish crossover, this lowers the probability of a quick rebound to higher highs above the October 3rd peak. More than likely, we are setting up for volatile sideways trading or further downside should fundamentals deteriorate.

MACD stands for moving average convergence divergence and is used by many stock market technicians to track shifts in trend and momentum using two moving averages that, when crossing over, produce bullish (buy) or bearish (sell) signals.

A bearish crossover (sell signal) occurred at the 2000 tech bubble peak, the 2007 market peak, and the intermediate market peak in 2015. As of this writing (Nov. 20th), we now see a bearish sell signal on the S&P 500.

long-term momentum
Source: Stockcharts.com, Financial Sense® Wealth Management. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly

With the recent crossover, this could either signal a major market peak the likes of what we saw in 2000 and 2007 OR a more temporary one similar to 2015.

Notice that we did not see a monthly crossover at the January 2018 peak, which suggested momentum was still positive and that higher highs would be achieved, as was the case.

At this point, odds favor a temporary top similar to what we saw in 2015—which led to a year-long sideways pattern—or the beginning of a broadening top formation. We will be watching leading economic indicators and financial stress measures for signs of widespread deterioration consistent with the 2000 and 2007 market peaks, which we do not see currently (see below).

leading economic indicators
Source: Bloomberg.com, Financial Sense® Wealth Management. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly

Stay tuned as we discuss what moved the markets every week on Financial Sense Newshour podcast or online via our Market’s Weekly Bill of Health. As Brent pointed out in his last update, “Only three out of the 10 sectors have at least 50 percent of members with long-term bullish trends. This data highlights how poor the market’s long-term trend is looking at the moment.”

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