Several market indicators have been warning for the past few weeks of a possible short-term top and pullback for the S&P 500 in what could be part of the overall trading range the markets have been dealing with for the past two years. The indexes have stalled and have been trading below-average volume, which is a change from the more bullish pattern of recent weeks.
The number of stocks that are advancing and the number of new stock highs that are decreasing is an indication of a narrower list of stocks that are supporting the higher index prices, in our opinion. While we expect a pullback to develop soon, we see it as part of the overall range of the past two years and the longer-term bull market of the last 10 years, and we view it as a good general opportunity to add to positions once it has completed.
We view the recent new highs in the Dow Jones Industrial Average as being closer to the end of a rally than the start of a new uptrend as the indicators of advancing stocks, new stock highs, volume, and the non-confirmation of diverse indexes have not yet given us the signal for a sustained advance.
The short-term sentiment indicators like the put/call ratio are also indicating too much complacency on the part of traders, which often occurs at short-term peaks. We do not believe it is a good time to get overly bullish as the opinions in the media have been expressing recently and expect that a market pullback could develop shortly that could bring the indexes back into more neutral territory.
While the Short-term market may be overvalued based on a variety of information, the overall market has been in a bullish trend for the past 10 years, and the recent move to new highs by the Dow Industrials and the S&P are confirming the trend is still intact. There have been intermediate- and short-term pullbacks along the way, and we think there will be more of the same ahead, but these have turned out to be good entry zones within the long-term bullish trend. The worries over tariffs, interest rates, impeachment hearings, and slow growth will likely continue for some time, but so far, the predictions of the markets’ doom have been greatly exaggerated.
The relative performance of value stocks is continuing to make gains against the previously leading growth stock sector in a trend that could be the beginning of a more meaningful shift in the market. It has only been a month that the value stocks have started to outperform, but more recent stalling and correcting in the tech and other growth sectors could be an indication that this shift into the perceived safety of the lower P/E stocks may be a trend that could last for many months. Historically, value stocks tend to do better when the market as a whole is not bullish, and the range of the past two years certainly qualifies as a frustrating period.
The trend on gold is pulling back from a recent peak in the 1550 area that followed a strong run-up in price of over 30% in the previous 12 months. We see this as a normal correction within a possibly longer-term uptrend with the strongest support zone now being in the 1350–1400 area. It is a normal chart pattern for a security to pull back to test an earlier breakout level and that is what gold appears to be doing. But the fact that gold broke out from a five-year bottoming trading range is still the overall condition that suggests to us that a longer-term trend is still developing and the current correction is all part of the process. At this time, gold is about halfway back from the recent peak to the support area below.
SHORT TERM (days to weeks) – Neutral. The major indexes have moved into some relatively tight ranges of about 4% for the past month despite the many trading days where the indexes have moved in excess of 1%. This type of a neutral trend is normal and constructive as long as the support at the lower end of the ranges hold, which are at levels of 25,400 on the Dow Industrials and 2820 for the S&P 500. The current technical measures suggest a slightly higher risk of breaking to the downside, rather than higher, but we think the relatively high amount of bearish sentiment is an indication that any market weakness from here could be limited. These ranges could last another month or two before the long-term bullish trend begins again, with the higher daily volatility remaining an ongoing pattern.
INTERMEDIATE TERM (weeks to months) – Neutral. The indexes are also in trading ranges for the intermediate term, and these ranges have been nearly 20% wide for the DJIA and the S&P over the past two years. This is also normal for a bull market that has more than quadrupled from the low of 10 years ago, but the wide range also allows for much movement in both directions over the shorter term as the market reacts to the news and events that may or may not carry significance to the stock market. This larger range could continue until earnings estimates for the broad market start to show some improvement from their currently flattish expectations.
LONG TERM (months to years) – Bullish. The bull market of the past 10 years remains intact although the short-term, more volatile movement can be a distraction from the general improvement of the economy and business conditions over the past several years. Long-term secular bull markets tend to move higher until stock valuation measures along with consumer and investor sentiment reach higher levels of bullishness. As these long-term bull markets develop, there is generally much volatility along the way with market pullbacks and economic slowdowns being possible within the longer-term trend. These intermediate disruptions to the long-term trend are common and to be expected, while the more serious declines of the past tend to occur after much-longer periods of bullish enthusiasm have carried the markets to much higher levels. Eventually, we believe that the current secular bull market will get to a much more optimistic place, but has years to go before we see it.
TRADING UPDATE: We remain committed to a diversified portfolio and we will make adjustments as market conditions change.
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