Still no signs of a turnaround in U.S. equity markets
A lot of investors were hoping that once the presidential election was over, the stock market would instantly start to show signs of recovery. We saw evidence of those optimists the day prior to the elections when major indices posted hefty gains. Since then, it appears everyone has realized that a change of presidents does nothing to change market fundamentals.
Although there undoubtedly remain some optimists who believe the market bottomed in October, it appears to be mostly wishful thinking because there is no technical nor fundamental support for such an opinion. Below is a chart of the daily price movement of the S&P 500 over the past two years.
The gold line is a 50-day simple moving average. I have included it because it is one of the simplest and basic tools of technical analysis. When an investment is trending strongly above its 50-day MA, that is a good indication that risk is fairly low. In general, most investors should never consider purchasing an investment that is trending below its 50-day MA. On this chart we see that the S&P was trending above that mark until October 2007, which we now know was the peak for this index. Since then, the only time the index has stayed above its 50-day MA is during a two-week period highlighted by the pink oval. Currently, the S&P 500 is moving away from its 50-day MA after a sharp climb last week.
The middle portion of the chart is a moving average convergence divergence (MACD). During periods of market strength, the MACD will trend above the zero level. Like the 50-day MA, the only time that occurred in the past year was a brief span in April and May. Recently the MACD began rising, but now it is curling over and appears to be poised to head down again. Half cycles where the MACD turns back down before approaching the zero line are viewed by many technical analysts as very negative for the market.
The bottom portion of the chart is a volatility indicator. Going back to 1970, it has never been at this level before. In the October 1987 crash, it reached slightly above the 0.03 level. In the fall of 2002 near the end of the last bear market, it peaked at slightly above 0.02. As I have indicated in the past, volatility can be misunderstood. We like volatility when the bias is upward, but that is certainly not the situation now. In a steep downward trend, volatility is a good indicator of market risk. So this indicator is currently showing that risk is probably significantly higher than at any period in the past four decades.
There is a chance that those who believe the market has bottomed are correct, but based in the weakness of economic fundamentals and a wide range of technical indicators, I think there is a good chance that the real bottom is probably still ahead and perhaps significantly lower.
F.S.
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