Bear Market Risk and S&P 500 vs. the World
Bear market territory is pretty far away. Our judge for bear or no bear is the momentum of the S&P 500, MSCI All World (ex-USA), and 1-3 Month Treasury Bills. So basically, we need the green and/or orange line to be below the red dotted line before either market is in bear market territory which means risk off. The S&P 500 and MSCI All World (ex-USA) index are pretty close in performance over the past 12 months. We are focusing more on international markets as the actual vehicles we buy/sell show the S&P 500 at a slight disadvantage since the end of May 2017.
Correction Risk of the S&P 500
The risk of a correction this week is higher than normal according to breadth. We saw a nice jump in the S&P 500 index last week, but we did not see the same jump in breadth which shows us a few stocks led the advance rather than the many. Another thing, the oscillator measuring breadth of the NYSE (also called the big board) is overbought. A correction doesn’t have to be down, a correction can simply be a sideways move in price. If price does jump higher again this week, the bulls will want to see breadth increase along with it.
S&P 500 Market Stage
The S&P 500 is in a broad bull channel (outlined by the green lines below) and may be forming what could be considered a wedge pattern. A wedge at the top or bottom of a trend can lead to a reversal of trend. A reversal doesn’t necessarily mean straight down, it just means probably at least two legs down. The wedge below is outlined by the numbers 1, 2, and 3. The S&P 500 did break out to new highs last week and so the question now becomes, “will it last or will the wedge pattern play out?”
The big economic news this week are the Housing Starts numbers which are expected to rebound. Those numbers are in the schedule for Wednesday morning at 8:30 CST. Should be an interesting week! The big thing in the S&P 500 is whether or not last week’s breakout will continue. The S&P 500 is on highs and the long and short-term trend are still up.
by Adam Straseske, CMT