September 28, 2023
Good morning,
The market in S&P 500 Index (SPX) terms has fallen -5.35% in 9 trading days. The market feels like it is taking the elevator shaft down after months of taking escalators upward. We talked about this – it does not feel good. However, feelings need to be isolated from market prognostication. The message of the market (the bloodless verdict of the market as Jeffrey Gundlach describes it) is conveyed by observing changes in price – the price changes of stocks, bonds, commodities, currencies, and their indices. Technical Analysis is defined as the study of price change and is part of the four-way Technical/Quantitative market analysis methodology we follow. Of the four, Fundamental, Macroeconomic, Behavioral and Technical, the last one is the best tool for interpreting the message of the market.
The correction that started August 1st and resumed 9 trading days ago has done some damage. Many lines of support have been violated, although not what we believe is the “line-in-the-sand” support line – the SPX-4200 level. See the Bloomberg chart below and note the convergence of many trend lines in the 4200 region – that’s why our dividing line is there.
On the one hand, the pullback is coming during a seasonally weak time of the year, suggesting that the stage is being set for a historically common year-end rally. On the other hand, the breakdown coincided with a breakout in bond yields across the Treasury curve. Investors may be belatedly taking the Fed’s higher-for-longer rhetoric seriously just as economic data slows, arguing for more than a seasonal pause.
You can draw three conclusions from the current technical picture. First, technical damage has triggered negative signals from some trend and breadth indicators. Second, sentiment is approaching extremely pessimistic levels, suggesting a year-end rally is not off the table. Third, macro conditions and long-term technicals leave open the possibility that the market is going through a topping process (scribing the end of the cyclical bull market) that could carry into 2024. Note #2 and #3 are not mutually exclusive. We could see a decent year end rally within a multi-month topping process. Tops do take longer to form than bottoms.
Alan Shaw, a founding member of technical analysis, used to teach his students to look at the question, not the possible answers. I think the question investors are asking today is will the recession ahead have a hard or soft landing. The recession ahead … with that kind of prevailing question in the air, it doesn’t seem like a good time to put money to work. We stay defensive. Thank you, Alan.
Be well,
Mike
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