Make sure the light at the end of the tunnel isn’t an oncoming train

Today, I’d like to discuss my methodology of determining when the bear market is “officially” over. ValueTrend avoided getting caught in the false rallies of the summer, then fall, in 2022’s bear market. This, along with some solid stock selections, resulted in a positive return in our Equity Platform (gross & net). This, while the majority of investors and managers experienced losses. We are still holding near 30% cash – despite the temptations of the current rally. Lets discuss WHY we are not taking the bait, and HOW we will try and determine when a rally is “real”. To do so, I will discuss some of my basic rules surrounding trends, and then apply those rules to the major NA indices.

If you follow my work, you know that I define the basics of the dominant market trend by two main factors:  Peaks and troughs, and the 200 day (40 week) Simple Moving Average (SMA). Let’s take a look at where the North American broad indices are with regard to those factors. We’ll look at the S&P 500, and the S&P TSX 300 for guidance.

As an aside, if you just want to know the bottom line – read the “conclusion” remarks under the SPX, the TSX, and then the final wrap-up conclusion.

Rules of Engagement

Lets start off by defining my rules & tools.

• I  use a weekly chart when looking at trend. You could argue that the monthly chart is a better viewpoint for major trend analysis. True to a point, but my view is that the monthly chart is so long that you can miss some of the near-termed movements. A once-a-month reading of the market could cause delay in spotting the trend change. That can cost you money. For that reason, I stick with weekly charts.
• I employ a systematic approach – per my Online Technical Analysis Course, to identify trend, consolidation, breakouts, and support/resistance rotations:

• Finally, I use a filter of a minimum of 3 days, with no more than 3 weeks, to react to a breakout from a consolidation or a breakout through the last high (assuming a recent higher low). This helps avoid false breakouts, or determine if a trend reversal potential is likely legitimate.

Hopefully this makes sense to you. Now, lets apply my rules to the SPX & TSX!

S&P 500

Below is the weekly chart of the SPX with a 10 week (blue line, roughly 50 day) and 40 week (red line, roughly 200 day) simple moving average (SMA) overlay. I’ve marked the peaks and troughs in red. I will not address the 10-week SMA as it is not an essential part of my rules. Lets go through the essential rules:

• We have a recent (November 2022) lower high near 4100. That’s bad.
• We have a higher low (December 2022) near 3800 vs October 2022 low of near 3500. That’s good.
• Price vs. the 40 week SMA (red line) broke to the upside this week. But the market retreated right back to that line yesterday. We need an absolute minimum of 3 days, preferably 2-3 weeks, for price to hold over this SMA – currently near 3828. I’ll call this “neutral” unless price breaks below (bad) or stays above the 40 week SMA for another week or more (good).
• Conclusion: We need 4100 (last peak) to break, and price needs to stay above the 40 week SMA – which is a given if price breaks 4100. Because I don’t yet trust this rally, I will not jump until 4100 holds for 1 week or longer.

S&P TSX 300

Below is the TSX 300 chart with the same moving averages and peak/trough indications per the SPX chart. Lets apply the rules:

• We have a recent (November 2022) higher high near 20,500. That’s good.
• We have a recent (December 2022) higher low near 19,000. That too, is good.
• The market is testing 20,500 again without a break yet (that’s questionable). We may be setting up for a sideways consolidation. TBD!
• Price is ahead of its 40 weeks SMA, which sits near 19,780. That’s good.
• Conclusion: There is an early case for a bullish trend reversal on the TSX. However, given that price is struggling near that last high near 20,500 – I am inclined to wait for a confirmed break of 20,500. There is a potential for the current actions to be that of a consolidation – which is better than a bearish downtrend. But I’d rather not be caught buying at the top of a consolidation pattern. So…Like with the SPX noted above, I’d like to see a break of 20,500 that lasts at least a week, or longer, before we deploy cash. Having said that, the TSX certainly has had a stronger profile than the SPX. This is exactly what I’ve suggested on this blog since January 2021.

Wrap-up Conclusion

So there you have it. You can see why, based on my technical rules, ValueTrend remains cautious despite the current rally. Rules are rules. If the conditions noted above change – I will change. I’m watching 4100 on the SPX, and 20,500 on the TSX. ValueTrend will react upon a confirmed break (1+ week) of those levels. We will start to leg in at that point, also paying attention to my Bear-o-meter to determine how aggressively we leg in. We will remain in cash until my rules dictate a change. Opinions, whether bullish or bearish, are a dime a dozen. Emotions, too, are counter-productive. You can learn more about my technical system by taking my Online Course. If you’d like ValueTrend to manage your portfolio (33 years in the business, with fully qualified CMT and CFA’s working on your behalf) – contact us here to discuss your options. Remember:

A system will save you from yourself.