S&P 500 Flag Confirmed New Highs Reached
The second graph above represents a short-term S&P 500 (6 month) Daily chart. A few weeks ago we sent out an update indicating that the markets were at an inflection point. The S&P (first graph) was either setting up a head-and-shoulders (bearish) pattern that could take us down to lows and possibly a -10% correction or the S&P was developing a “flag” (bullish) pattern and could test the 50 day moving average (1809) and then rally to new highs. The markets confirmed the upside flag pattern and they have just reached new highs resulting in a short-term overbought condition. At the time of the previous update, we were preparing our accounts for either outcome as we had forecasted. If the market headed down, we would have increased our short position (protective hedge) and maintained a high cash level. If the markets headed up, confirming the flag pattern, we would take the hedge off and put cash to work increasing our equity allocation attempting to capture return. We did just that. At the breakout, we removed the short position and reduced cash from 25% to 12% capturing the recent upside move. We remain cautious while expecting the market to test 1900 and then 1950.
In the short-term, payroll growth estimates missed the mark by almost two-hundred thousand jobs over December and January, the focus will be firmly on this Friday’s announcement of the February’s jobs report. Another significant miss, especially with no upward revision in the prior months, could put a huge dampening effect on the pace of the Fed’s taper plans in coming months. With the bull market’s five-year anniversary less than a week away, the big question confronting investors is how much longer the bull market will continue. For clues, we can look at a variety of measures, including fund-flow data and valuations. Inflows picked up last year, but they still have a long way to make up for all of the cash that poured out of the market from 2008 through 2012. This alone suggests the S&P 500 could keep rallying in the years ahead although this is likely to come with volatility, including a possible recession and bear market along the way. Remember, geopolitical tensions may override generally bullish fundamentals. This may contribute to increased headline volatility that is difficult (if not impossible) to anticipate as to when it may occur with either fundamental or technical analysis. In the interim, until things settle in the Ukraine, we are keeping our trading to intraday strategies and not open any new positions, long or short.
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