We follow "major" trends in several main asset categories. Most of those readings first turned over (flashed warning signs) in early May. One of our most reliable indicators is a ratio of the S&P500 vs. the 30-Year US Treasury Bond price, denoting the relative favor of stocks vs. bonds. Using this indicator. our trend-following system would have gotten the investor out of equities and into bonds in the first week of May. Note the chart below and the green (buy) and red (sell) signal lines.
There are no glaring warning signs that this correction is nothing more than a normal setback. However, we all know that a trend change can continue as a trend change and then become the new trend! In market conditions whereby selling feels relentless, there comes a time when bears cover shorts and value-seekers place bids on the market. A few of our indicators suggest that such a bounce may be on the near horizon.
Put/Call ratio at 1.18 is at bullish (contrary) levels, and its 13-day moving average sits at the highest point of the year at 1.06. This typically precedes some sort of bounce in equities. VIX, our fear factor reading, has risen but clearly not as much as with other pullbacks. In fact, VIX tends to remain in the 25 and below area during bull market pullbacks, only to sprout into the 40's and higher when we are at the cusp of bear-market conditions. Stocks trading over their 50-day moving averages are sitting at low levels last seen in the 2010 summer setback following the "flash crash." While these various indicators sit at extremes, we would look for signs of capitulation (aggressive selling) with an intraday recovery to mark the start of a bounce.
One test we anticipate this week is whether the Nasdaq and the S&P500 can hold support at their 200-day moving averages, only 15 points lower than Friday's close for the Nasdaq, and 18 points for the S&P500. Given Friday's swoon of 41 points and 18 points for the Nasdaq and S&P500, respectively, one would expect the market forces to potentially test these nearby levels sometime on Monday. Clarity around price performance at this important bull/bear dividing line will aid in our overall assessment of the market trend going forward.
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