How low can it go?

The current market malaise just goes to show me that I shouldn’t take a vacation. Perhaps its my fault, in some strange way, that the market would stage a mini-implosion while I was enjoying a quiet northern Ontario week at the cottage. All hell broke loose while I was thinking less about markets, and more about which type of meat to put in the smoker. That, and planning my daily bike ride. Yes, my hip (which I broke on June 1st), is progressing nicely, for those who were aware of my accident. I’m back on the bike, and easing back into some more serious training – the cottage kick-started that routine.

Anyhow, on with the show. When I look at markets, I evaluate their strength by looking at two things:

1. Trend: Is the weekly chart making higher highs and higher lows, or are things moving sideways? Where is the market vs. its 200 day (40 week) simple moving average (SMA)? Is volume supporting the trend or sideways move – or is it petering out?

2. Risk: What do the “internals” of the market look like? Is the market rising on broad based participation (breadth), or is this a concentrated market? How does market sentiment look – that is, the relative confidence of market participants (smart money, dumb money), and the relative risk premiums being paid by options players? Is the market looking overbought, oversold, or “just right”? These factors are addressed through my Bear-o-meter.

Later in the week I will post a blog on my Bear-o-meter reading. I try to do a Bear-o-meter reading in the first week of every month. Last month, we had a bearish reading (very high risk) – but that high risk reading conflicted with the trend, illustrated by a bullish breakout thought the old resistance point on the S&P 500 (SPX).

The SPX had been trapped below 2950-ish for 18 months until it broke out in July. So, we had a conflict between a bullish trend – in an environment of higher risk. For that reason, we kept a 15-20% cash weighting in our ValueTrend Equity Platform. We couldn’t be bearish for the trend, but we couldn’t be “all-in” given the risk. One of those “damned if you do/ damned if you don’t” situations.

Today, I will address the first part of our analysis: Trend. The chart below illustrates my notes to follow.

The good news is that, despite the fact that the SPX just broke below that ever-frustrating stopping point of 2950  – we can at least say that the SPX is nowhere near putting in a lower low. Remember, a bear trend needs a lower high AND a lower low. A break below June’s low would be a major problem. A break below the 200 day SMA, which happens to land right around the June low of 2750-ish, would add to the problem. We are nowhere near that situation.

The bad news is that the failure to remain above the 2950 resistance point puts us right back into the never ending sideways market from hell. The SPX and the TSX have both been in a trend-free environment since January 2018. That’s a long friggin’ time to be treading water!

So, let’s see what the Bear-o-meter says to check the risk of the current situation. I’ll post the results of that compilation in 1-2 days. Between the trend – which appears to be roughly intact, and the current risk/reward tradeoff, which will be illustrated via the Bear-o-meter, we can draw some reasonable conclusions for our forward view of the markets. Stay tuned.