by Taki T., Secular Investor:
The markets were ‘shockingly’ interesting last week. But what investing opportunities have been created by the recent ‘shock’?
The seriousness of last week’s shocking action in the market is shown by the volatility index, which posted its second highest reading since its inception in 1990. This is comparable to the great crash of 2008/9.
There has been much discussion regarding technicals and charts. Instead, we prefer to focus on the trend, particularly the uptrend since 2012, without analysing the myriad of technical indicators. The weekly chart of the S&P 500 shows the uptrend is still intact (green dotted line below), although the S&P 500 arrived at a critical ‘make-or-break’ point. The weekly close on the trendline, only a couple of points above the 100 week moving average, suggests that all scenarios are still open.
However, the bad news for stock investors is that the 2009 uptrend is violated on the monthly chart, the most relevant chart type for secular trends. August is setting up for the first monthly close below the 2009 trendline. The odds now favor a continued decline, unless proven otherwise. Structural support comes in at the 2007 top, at 1600 points for the S&P 500, which is 19% below today’s levels.
Our preferred indicator for the stock market is its correlation with the Federal Reserve balance sheet. Since 2009 it has been a very reliable indicator, as shown by the chart below. Uncoincidentally, the Fed’s balance sheet stabilized in late 2014, when the process of ‘Tapering’ was completed. Since then, the stock market has traded sideways following the Fed’s balance sheet.
That correlation suggests a weak future for stocks, unless the Fed intervenes with monetary stimulus, which was not what the Fed hinted during their recent announcements. Based on the Fed’s balance sheet and monetary decisions, one can assess whether U.S. stocks will offer opportunities or whether a cautious stance is preferable.
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