Equity Mid Year Macro Update
In January I reviewed the long-term technical and fundamental positions of the big four: Bonds, Equities, Commodities, and the Dollar. Those pieces are extensive in terms of both fundamental and technical outlooks and are linked for your review below. I made two particularly important fundamental observations:
1. Both policy vectors (Fiscal and Monetary) are turning negative and are unlikely to provide support. This may change if rising rates break the weakest financial link forcing the Fed to pivot to address a systemic issue or if Congress decides that another money drop is appropriate.
2. Of the 19 bear markets since 1929, 15 have been accompanied by rising inflation. Rising inflation is by far the most consistent/reliable of the bear market factors.
The SPX piece concluded: "The technical trend to higher prices is intact, but, from this trend position, the market is extremely vulnerable. While not yet discontinuing bullish strategies, I would be extremely wary, reducing commitments and deciding on risk management levels. Shorter term time frame weakness can easily morph into something greater."
Where are the markets now?
Since those January posts, equities are sharply lower and both technical and fundamental factors have deteriorated markedly. I suspect that by the end of the fourth quarter the balance of the techncial data will have, at the very least, confirmed that the 14-year uptrend is over. While price behaviors in the SPX and NYSE Composite have yet to confirm a primary bear market, I think it likely that at the least, an extended bear is unfolding.
Since January, the monetary vector has turned decidedly negative (rapidly increasing Fed Funds rate and quantitative tightening), and while the recent declines in commodities are creating optimism, the inflation rate continues to worsen. Even should inflation moderate it remains far in excess of the rough 3% threshold above which most companies struggle. Most importantly the Fed has clearly pivoted from the economy and toward inflation. Because they waited so long to pivot, the battle will be a prolonged one and will likely require a recession, perhaps a serious one, to win. In short, the liquidity that propelled the bull market has reversed and the prospects for it returning soon are limited.
Currently I see no immediate systemic issues that could require a response from the Fed but I am growing more concerned around emerging markets. I also continue to monitor credit conditions (see the post linked below for how to monitor credit on the platform) but so far, the widening in credit spreads isn't compelling.
SPX Monthly: Log Scale:
The market has spent nearly 15 years confined to an upward sloping channel. Prior to the pandemic selloff the market uptrend was best described by the channel defined by trendlines A-B and A1-B1. Despite the channel being violated by the pandemic decline (G), I continue to view A1-B1 as the primary trend support. As long as this trend line remains intact, the price trend in the monthly perspective remains higher. Two observations. 1) Over the 15 years price spent a tremendous amount of time pressed against the top of the channel suggesting strong underlying demand. 2) At the January 2022 high, price overthrew the top of the channel. This "overthrow" behavior often occurs near the end of extended trends. In my view, a violation of the A1-B2 uptrend will move the long-term trend from up to neutral. To then define a downtrend the market will need to begin building a pattern of lower highs and lower lows.
Monthly momentum oscillators have rolled over. I have included a basic MACD oscillator on the chart. I don't use oscillator crosses as buy or sell signals, but I do utilize them as trend filters.
NYSE Composite Monthly (NYA): Log Scale: I prefer to define broad equity via the behaviors in the NYSE Comp. Many of the same observations for the SPX (trendlines and momentum) hold true for NYA. Notably there is an extremely large wedge pattern that will be activated with a drop below roughly 11k (roughly 20% further).
The roughly 20% year to date decline from the all-time seems modest by historical standards. Granted, since the great financial crisis declines have been generally in the -20% zone. But that was against the backdrop of nearly constant quantitative easing. Absent QE, and against a backdrop of rapidly deteriorating economic fundamentals, the current environment is far different.
I have also marked the chart with recession bands. Many commentators are making the case that equites often bottom near the beginning of a recession. I don't see the evidence. In fact, if the US/World is just entering a recession, I wouldn't expect an equity bottom anytime soon. Again, the reaction function of the Fed may come into play. While I think the Greenspan Put is dead, or at least the strike is much lower than in the past, if credit markets freeze or a major systemic issue develops they may feel forced to pivot.
Triple Screen: Monthly momentum has clearly turned lower, and could easily support significant additional losses. Weekly oscillators are moving into configurations that could support some recovery, but it’s likely that strength will be corrective. The mostly lateral movement that has developed in the daily perspective is consistent with a market relieving an oversold condition.
Conclusions:
3. The technical uptrend that has defined the markets path since 2008 remains intact but will likely fail later this year.
4. The weight of evidence, both fundamental and technical, suggests that the current decline is early to mid-stage, and that the uptrend will fail. The moving the long-term trend from up to neutral.
5. The important difference between this decline and the more run of the mill declines that have occurred since the GFC is monetary policy. The Fed has fully pivoted to fighting inflation. Having already erred by assuming transitory inflation, they will be very slow to pivot back to the economy and asset prices.
6. While it would not be surprising to see a decent tactical rally develop in coming weeks, it isn't likely to evolve into a new bull. I will be a much better seller of strength in daily and weekly perspectives.
7. While the market at the index level is vulnerable, many component names are much more advanced in their bear markets. There are opportunities beginning to show up.
The caveat (as always) is the Fed. If systemic issues develop and they pivot from inflation, all bets are off.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
1. Both policy vectors (Fiscal and Monetary) are turning negative and are unlikely to provide support. This may change if rising rates break the weakest financial link forcing the Fed to pivot to address a systemic issue or if Congress decides that another money drop is appropriate.
2. Of the 19 bear markets since 1929, 15 have been accompanied by rising inflation. Rising inflation is by far the most consistent/reliable of the bear market factors.
The SPX piece concluded: "The technical trend to higher prices is intact, but, from this trend position, the market is extremely vulnerable. While not yet discontinuing bullish strategies, I would be extremely wary, reducing commitments and deciding on risk management levels. Shorter term time frame weakness can easily morph into something greater."
Where are the markets now?
Since those January posts, equities are sharply lower and both technical and fundamental factors have deteriorated markedly. I suspect that by the end of the fourth quarter the balance of the techncial data will have, at the very least, confirmed that the 14-year uptrend is over. While price behaviors in the SPX and NYSE Composite have yet to confirm a primary bear market, I think it likely that at the least, an extended bear is unfolding.
Since January, the monetary vector has turned decidedly negative (rapidly increasing Fed Funds rate and quantitative tightening), and while the recent declines in commodities are creating optimism, the inflation rate continues to worsen. Even should inflation moderate it remains far in excess of the rough 3% threshold above which most companies struggle. Most importantly the Fed has clearly pivoted from the economy and toward inflation. Because they waited so long to pivot, the battle will be a prolonged one and will likely require a recession, perhaps a serious one, to win. In short, the liquidity that propelled the bull market has reversed and the prospects for it returning soon are limited.
Currently I see no immediate systemic issues that could require a response from the Fed but I am growing more concerned around emerging markets. I also continue to monitor credit conditions (see the post linked below for how to monitor credit on the platform) but so far, the widening in credit spreads isn't compelling.
SPX Monthly: Log Scale:
The market has spent nearly 15 years confined to an upward sloping channel. Prior to the pandemic selloff the market uptrend was best described by the channel defined by trendlines A-B and A1-B1. Despite the channel being violated by the pandemic decline (G), I continue to view A1-B1 as the primary trend support. As long as this trend line remains intact, the price trend in the monthly perspective remains higher. Two observations. 1) Over the 15 years price spent a tremendous amount of time pressed against the top of the channel suggesting strong underlying demand. 2) At the January 2022 high, price overthrew the top of the channel. This "overthrow" behavior often occurs near the end of extended trends. In my view, a violation of the A1-B2 uptrend will move the long-term trend from up to neutral. To then define a downtrend the market will need to begin building a pattern of lower highs and lower lows.
Monthly momentum oscillators have rolled over. I have included a basic MACD oscillator on the chart. I don't use oscillator crosses as buy or sell signals, but I do utilize them as trend filters.
NYSE Composite Monthly (NYA): Log Scale: I prefer to define broad equity via the behaviors in the NYSE Comp. Many of the same observations for the SPX (trendlines and momentum) hold true for NYA. Notably there is an extremely large wedge pattern that will be activated with a drop below roughly 11k (roughly 20% further).
The roughly 20% year to date decline from the all-time seems modest by historical standards. Granted, since the great financial crisis declines have been generally in the -20% zone. But that was against the backdrop of nearly constant quantitative easing. Absent QE, and against a backdrop of rapidly deteriorating economic fundamentals, the current environment is far different.
I have also marked the chart with recession bands. Many commentators are making the case that equites often bottom near the beginning of a recession. I don't see the evidence. In fact, if the US/World is just entering a recession, I wouldn't expect an equity bottom anytime soon. Again, the reaction function of the Fed may come into play. While I think the Greenspan Put is dead, or at least the strike is much lower than in the past, if credit markets freeze or a major systemic issue develops they may feel forced to pivot.
Triple Screen: Monthly momentum has clearly turned lower, and could easily support significant additional losses. Weekly oscillators are moving into configurations that could support some recovery, but it’s likely that strength will be corrective. The mostly lateral movement that has developed in the daily perspective is consistent with a market relieving an oversold condition.
Conclusions:
3. The technical uptrend that has defined the markets path since 2008 remains intact but will likely fail later this year.
4. The weight of evidence, both fundamental and technical, suggests that the current decline is early to mid-stage, and that the uptrend will fail. The moving the long-term trend from up to neutral.
5. The important difference between this decline and the more run of the mill declines that have occurred since the GFC is monetary policy. The Fed has fully pivoted to fighting inflation. Having already erred by assuming transitory inflation, they will be very slow to pivot back to the economy and asset prices.
6. While it would not be surprising to see a decent tactical rally develop in coming weeks, it isn't likely to evolve into a new bull. I will be a much better seller of strength in daily and weekly perspectives.
7. While the market at the index level is vulnerable, many component names are much more advanced in their bear markets. There are opportunities beginning to show up.
The caveat (as always) is the Fed. If systemic issues develop and they pivot from inflation, all bets are off.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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