One of the reasons I publish this blog is to provide a record of my market and sector calls. You can see for yourself if I am accurate or not by looking back at the history of my calls. For example, in my recent guidance on my longer termed allocation to maintain inflation-benefiting securities, I recommended readers consult my blogs from late 2020 and early 2021 to confirm that my allocation views were correct at that time (which I was). I believe that by being able to refer to my older market and sector views on the blog, you will have confidence in my current insights.
While I cannot possibly be correct 100% of the time, I hope to maintain a track record worthy of your attention – and that’s a goal best illustrated here on this blog, and through the performance of the ValueTrend Equity Platform here. And I do hope that you will consider taking advantage of those insights through my Online Technical Analysis Course or my books. And, of course, if you want the best possible reflection of my insights, contact ValueTrend to discuss how we can manage your money directly.
My most recent neartermed call was a very strong call, indeed. I noted on April 7th that my Bear-o-meter signaled a “High Risk Alert”. Here is the blog, for the record. In that blog, I noted that ValueTrend was legging out of higher beta stocks and raising cash. I suggested you might want to begin legging out yourself. I do hope you listened. The market has turned decidedly bearish, suggesting that my high-alert Bear-o-meter reading on the 7th was accurate. That’s what I’m here to discuss today.
The chart below illustrates the following points – note that I have listed points such as seasonality and sector rotation that don’t appear on the chart:
- SPX roughly hit its last peak near 4600–and failed.
- The SPX is below its 200 day SMA
- Lower highs and lows prevail.
- Moneyflow momentum (top pane) has fallen off the cliff
- MACD has just crossed the zero line. This typically results in further downside momentum.
- Positive Seasonality is about to end
- Market leaders FAANGS are largely in trouble
- Economic leaders – the US banks – have broken support
- Market alpha is coming from defensive positions like utilities and staples
- As the Fed struggles with the reality of fighting inflation while simultaneously fighting off recession, there is a good chance of the worst of both worlds: Stagflation.
The above factors do not paint a picture of a growth stock market environment right now (although, this too shall end). At best, my view is for a sideways consolidation with a floor near 4200 and a ceiling near 4600. A break of either of those levels implies a change from consolidation to a bull (if 4600 is broken to the upside) or bear (if 4200 is broken to the downside).
I believe there is a reasonable chance that the market will fall this summer, meaning that 4200 could be broken. Remember though, you cant predict, you can only prepare. In some ways, the SPX chart and overall market conditions look a bit like what I saw in 2008. That is, a former speculative environment, a lower low and a break of the 200 day SMA, and a breakdown of the market leaders (banks, oils at that time), and a housing peak & crash. This time, we have the bull market leaders of the FAANG’s rolling over in many cases, and variations of the same background conditions for the market.
This means that, beyond possible neartermed rallies (the market is neartermed oversold a bit) – the market has the makings of a potential correction and/or bear market. This implies a possibility of more downside before oversold conditions arrive – hopefully by or before the end of the summer. The Bear-o-meter blog (noted above) noted other conditions leading me to become more and more cautious at this time.
All in, this is a time for smart investors to profit by rotating into favored sectors, and holding some cash while awaiting opportunities. Markets move faster than they used to. Any bear market conditions can come and go in a few months. So – be nimble, be quick, and be smart. There are opportunities to be had in a bear market (assuming we get one), but you need to play it right to be one of the victors, rather than the victims.