4 reasons for more chop on the markets!

Stock markets look like they may have a bit more room to correct before resuming the bullish trend. As a JP Morgan strategist recently suggested: “This will be a choppy environment the rest of the year as markets deal with growth that isn’t as strong and turn to the potential of withdrawal of policy support”. Today, I have 4 technical factors for you to consider in the potential of an extension of the recent market correction that appeared last week to have dissipated.

My thoughts  – whether the market acts “choppy” for the balance of the year or not as JP Morgan strategists suggest – I am wondering if the market may indeed be choppy for the remainder of the summer.

Lets start off by looking at the chart of the S&P 500. I’ve noted potential pullback targets (4100, 3940) – should my ascertains for a pullback be correct. Although the market is not overbought from my go-to metric of measuring the height of price over its 200 day (40 week) SMA, there are still some signs suggesting a minor pullback from current levels.

  1. One sign of overbought markets comes from the momentum indicators. Not only are they retreating from an overbought level – they are negatively diverging against the trend of the S&P 500. Note in particular the divergence by MACD vs the index. I have rarely observed divergences of this type that could carry higher market prices for any length of time.

 

2. The next argument for a bit more market weakness comes from historic tendencies for markets to be weak in August. Market seasonality tends to be weak in August, as shown by this EquityClock graph.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Equity inflows – illustrated here courtesy of BearTraps, suggests that August is one of only two months that has typically seen retail money (ETF & mutual fund) outflow. Outflow, when it happens, does not lead into rising markets :

 

 

 

 

 

 

 

 

 

 

 

 

4. Finally: Seasonality for the Jackson hole meeting at the end of August – data from Goldman Sachs since 1950 suggests that markets pull back into the Fed meeting. Market participants become wary of potentially damaging Fed policy – real or imagined – coming into the meeting.

 

 

 

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2 Comments

  • Hi Keith- China stocks have dropped a lot this week. Is it time to slowly get in?

    Reply
    • Randy–this is a great question – I think its going to be opportunistic– I am very interested in buying this market–BUT….you know the rules–technical trend is down = dont buy. When it bases, you can take one small step into the market. If the base breaks to the upside, you can start buying aggressively. So far, no base yet. Read my book Sideways for more on that structure. Or my new book, which reviews that strategy in the last chapter.

      Reply

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