Long if We Surpass Records, Short if We Cant
The S&P 500 is flirting with record highs again after a major correction last December which only missed becoming a bear market by a marginal amount ending just shy of down 20 percent. Going on to the 11th year in the bull market, investors should then take a look at where we could be and a few signals to determine where we are headed which can be found on Daily FX’s Discovery to Deflation chart.
If you follow the S&P 500 then you will notice that recent price action interestingly resembles areas around the the blow-off and transition phase. However, the problem with this road map is that we simply do not know where we are in the cycle. As of right now, either we are in between the bear-trap and renewed optimism, or we are between a bull-trap and THE lower-high or the final lower-high before a massive downturn (hence emphasizing ‘the’). If we look at the S&P 500 and the above chart, we can see where these levels could be.
Since this is the case, we are forced to look at some other signals. First, volume on average has been a noticeable step lower ever since December 2018 on either of the bull or bear side. Second, while the consecutive candle count shows a recent uptick in consecutive up days, the down days are much more volatile. In other words, it only took a few down days to correct almost 20 percent and three months to gain it back. In spite of this, while the downward volatility is extreme so too is the upward momentum. A near 20 percent gain in three months is incredible for any asset. Most mutual and hedge funds would be happy with 20 percent returns over 3 years let alone over 3 months. In other words, price action is incredibly choppy. Where are markets this choppy? Usually at the end of a bull cycle during what’s referred to as the distribution phase.
Yes, choppiness occurs during public participation phase as well, but the public participation phase occurs mid-cycle and not after ten years. There could potentially be what has been referred to as an elongated cycle. This is possible, but lacks precedent in the United States as the current bull market is now the oldest bull market in history coming in at 10 years.
Overall, a bearish view is not just predicated on these cyclical theories. We know global growth is already slowing. Germany just barely avoided recession this year while Italy is already in one. China may be in recession as well, but we wouldn’t know because they manipulate their data to such an extreme. Capital inflows into markets are significantly lower since the bull run began in 2009. Interest rates across the world are at 0 while the only hawkish central bank, the Fed, has reversed course on fears of the global growth slowdown. A common truism in trading is “Don’t short support, don’t buy resistance.” Maybe we can reach more record highs, but let’s not go all in until we can pass the current ones. If we don’t and pass below December’s levels, then markets will start to panic and you should too if you’re still in stocks by then.
If you follow the S&P 500 then you will notice that recent price action interestingly resembles areas around the the blow-off and transition phase. However, the problem with this road map is that we simply do not know where we are in the cycle. As of right now, either we are in between the bear-trap and renewed optimism, or we are between a bull-trap and THE lower-high or the final lower-high before a massive downturn (hence emphasizing ‘the’). If we look at the S&P 500 and the above chart, we can see where these levels could be.
Since this is the case, we are forced to look at some other signals. First, volume on average has been a noticeable step lower ever since December 2018 on either of the bull or bear side. Second, while the consecutive candle count shows a recent uptick in consecutive up days, the down days are much more volatile. In other words, it only took a few down days to correct almost 20 percent and three months to gain it back. In spite of this, while the downward volatility is extreme so too is the upward momentum. A near 20 percent gain in three months is incredible for any asset. Most mutual and hedge funds would be happy with 20 percent returns over 3 years let alone over 3 months. In other words, price action is incredibly choppy. Where are markets this choppy? Usually at the end of a bull cycle during what’s referred to as the distribution phase.
Yes, choppiness occurs during public participation phase as well, but the public participation phase occurs mid-cycle and not after ten years. There could potentially be what has been referred to as an elongated cycle. This is possible, but lacks precedent in the United States as the current bull market is now the oldest bull market in history coming in at 10 years.
Overall, a bearish view is not just predicated on these cyclical theories. We know global growth is already slowing. Germany just barely avoided recession this year while Italy is already in one. China may be in recession as well, but we wouldn’t know because they manipulate their data to such an extreme. Capital inflows into markets are significantly lower since the bull run began in 2009. Interest rates across the world are at 0 while the only hawkish central bank, the Fed, has reversed course on fears of the global growth slowdown. A common truism in trading is “Don’t short support, don’t buy resistance.” Maybe we can reach more record highs, but let’s not go all in until we can pass the current ones. If we don’t and pass below December’s levels, then markets will start to panic and you should too if you’re still in stocks by then.
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