S&P 500 Direction

In The Highstreet Group by John Bartoletta

S&P 500 Direction Reminiscent of 2012

The S&P 500 Index is looking a lot like it did during the 2011 correction, which was followed by a multiyear bull market. In 2011 the 50 day simple moving average fell below the 200-day line in August, a bearish signal known as a death cross. The index did a nosedive before making several futile recovery attempts that were resisted by the 200 day simple moving average.

Finally, early in 2012, the 50 day crossed above the 200 day, a so-called golden cross, and the index began a rally that lasted for years. Note that each time the benchmark fell below 200-day average (twice in 2012 and once in 2014) it bounced right back up again. And look at the dozen or so other times it rebounded just before hitting that line. That means the longer-term trend line provided significant support, which helps explain why the 200 day moving average is the most-watched technical indicator.

Fast-forward to what has happened this year since this past August’s plunge. The pattern from 2011 is being repeated. A death cross has been followed by multiple sharp dips and failed rebounds. Even the latest robust rally, when the index managed to top the 200 day line in October before falling again, mirrored what happened in the same month in 2011. The images above puts the two periods side-by-side. The resemblance is uncanny. With the index now testing the 200 day, the market is right about where it was almost exactly four years ago. If history repeats itself, there will be a bullish golden cross early next year. If not, a deeper correction may be at hand.

There is good data and plenty of indicators to support an opinion for either direction, in our view, which is why market forecasting occurs in such a grey area – it’s never just black or white. The long-term market trend continues to be bullish from the 2009 lows, and the recent 12% pullback by the S&P has not changed this trend. The intermediate trend is neutral, as the level of the S&P is still the same as it was a year ago, and in the middle of the range for that period. The short-term trend is in a recovery after a correction, with stocks engaging in mostly mixed but overall improving trends.

TRADING UPDATE: We have been putting a limited amount of cash to work into stocks as conditions warrant. At this time we are not seeing clear indications of what areas of the market may lead in a recovery, so a more general approach is best at this time.

We continue to hold cash levels of 20 – 25% that are limiting the portfolios to about 65% of the market volatility. The cash can be put to work quickly should we see opportunities present themselves and the hedge positions will remain a trading tool to improve risk exposure in the portfolios.