Below is a chart that I’ve maintained, and posted on this blog in the past. Its updated with my current notes.
It has been my strong conviction that markets find a reason to rally when oversold, and find a reason to decline when overbought. The actual reason is immaterial. You will note that a rising market shrugs off bad news, and a falling market ignores the good news.
Korea’s missile test and a hawkish Fed tone is the excuse that gave markets the reason to decline from the current overbought period. Not coincidentally – these events motivating a selloff are occurring in the seasonal period most likely to correct. N. Korea’s prior missile testing antics caused barely a ripple when they occurred in the favorable seasonal period in periods within an environment of neutral sentiment and momentum. and the Fed has been back and forth on hawkish and dovish comments. Yet neither of these events caused a sharp selloff.
The chart below shows us that all 3 of my favorite momentum studies have been diverging against the rising wave of the S&P500. Meanwhile, volume has not been inspiring – albeit typical for the summer – it’s been declining since January.
Friday saw a minor breach of the first level of support noted on the chart. Next level of support, should 2130-ish not hold, will be around 2040.
September is the month for this type of correction. I’ve been 30% cash / equivalent for a while now. And now I’m looking for the window to re-enter. I’ve got a shopping list of potential stock purchases to execute in the coming weeks. I hope you have a list too. Its Christmas for stock pickers – if you have the cash!