Monday, February 3, 2014

We're Still Not There Yet

Last Tuesday, I asked "are we there yet?" with regards to a market bottom. My answer then was no, not yet, and it remains my answer. 

What will it take to change my view? For starters, I want to see two things happen.

First, I'd like to see the S&P 500 put together three consecutive up days off this low or one significant up day with a bar/candle range spanning 15-20+ points. Obviously both conditions occurring would be even better. The orange boxes in the daily chart above identify past instances when either of the two conditions have occurred. With the market able to string together at least three straight days of gains and/or experience a big positive spike for the day, it goes a long way towards indicating that sentiment is shifting from fear and caution to more assured, risk-seeking behavior by investors. And as shown in the chart above, we're not there yet. That said it's encouraging to see the S&P 500 holding above the 100-day moving average (red line), which has served as sturdy support in the recent past.

The second thing I'd like to see occur is for the MACD to trigger a buy signal, i.e. for a bullish crossover to occur in the 12- and 26-day EMAs, also shown with a positive histogram. I always prefer to see a meaningful signal with the histogram getting beyond just barely turning positive, but again as shown in the chart above, such a bullish signal is quite a ways off from happening anytime soon.

Having commented on the near-term outlook for the market, I thought it would be appropriate to briefly review a much longer-term perspective.

The monthly chart above displays the S&P 500 going back to 1997. In short, the longer-term backdrop for the market remains solidly bullish. I would become very concerned about a secular decline if 1) the 6-month moving average (blue line) were to cross down through the 12-month moving average (red line), 2) the stochastic were to breach 50 to the downside (note blue boxes), and 3) the rate of unemployment (orange line) were to begin to trend higher (see previous blog post). All three of these conditions occurred in late 2000 and in late 2007 or at the start of 2008. None of the three conditions are in place currently. The 6-month MA remains 75 points above the 12-month MA, the stochastic is extended at 95 (!) and the unemployment rate continues to trend down at 6.7%.

Of course, these conditions could change in the near future, and understand that I track (much) more than three indicators or conditions. But the larger point remains: it would take months for these conditions to change and until that occurs, the long-term market outlook continues to look bullish.

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