It was an absolutely fierce battle between the bulls and bears this past week. Alas, the bulls posted a victory for the week as the S&P 500 finished up 1.86%. It was exciting to say the least, but even after the past two weeks of bullish price action, the longer term structure of the S&P 500 remains bearish.
There are two fundamental reasons why the S&P 500 structure is bearish. The first is that on a monthly chart, the S&P 500 has made a lower low. A down trend is defined as a series of lower lows and lower highs. We now have our first lower low.
The second is that 12-month momentum has in fact turned negative for the S&P 500. It has been negative for the MSCI All World (ex-USA) index for some time now. This was the primary reason we switched our focus away from international indices long ago.
Before I jump too far in conclusions, I like to remember one time is an event, twice is a coincidence, and thrice is a pattern. Metaphorically, we are in the ‘event’ stage of this possible pattern. The problem with waiting for the complete pattern in the stock market is that a lot of loss has already been played out. The probability becomes higher, but the risk becomes larger as well. So, the question has now become, will there be follow through in the market?
We are taking precautions as I prefer to be safe rather than sorry. We are focusing away from US equities and looking for more fixed income vehicles or vehicles that don’t necessarily correlate with the equities markets. With the current equities positions, we are certainly in a sell the rallies mindset. Have a great week!
Adam Straseske, CMT
PS – If you don’t have a copy of my book, “Home Run Financial Planning,” I want you to have a copy! Of course, I’m a little bias, but it is a darn good book…and my nephew said it was the best book he ever read (just kidding…he didn’t really say that, but he probably thought it)! Just email me if you want a FREE copy, I’ll be happy to mail it out to you.