SUPPORT, RESISTANCE & STRESS
With markets being well into the ‘meat’ of earnings season, let’s talk technical numbers. For the S&P 500, the big question is: will we or won’t we break 2500?
Of course we will… the question is when?
The S&P 500 is less than 1% from the key 2500 level. At the same time, we’re going into the August/September typical slump of the markets. Typical, in this case, meaning a statistical measure — these two months are ‘typically’ not great months for investors. That does not mean they’re always bad months either. That’s the beauty of statistics – they’re mostly right-ish.
The technical pattern is not setting up a ‘definite’ signal at all. Last Friday was another narrow trading range indicating the possibility for a reversal of pricing trend. The trend, of course, has been fairly flat. So which trend are we reversing? The slow grind higher? The low volatility? Or is there such a lack of trend this signal means very little right now?
Rather than count how many angels can dance on the head of a pin, let’s just look at the numbers. For the S&P 500, resistance is at 2500. It’s a big round number. And breaking it would surpass a lot of analysts’ expectations for 2017. Support is the trickier one given the tight trading ranges. Short-term, there is support at 2460. Should this fail, there is another level of support at 2450. Then the market would slide down to 2423/2400.
Keep in mind, a pull-back to 2400 is only a 3% pull-back. While this could feel like a significant move given the extended periods of low volatility we’ve enjoyed, this is ‘nothing’ in the grand scheme of things.
I'd also like to address the myriad of doomsday prophets who are calling for an imminent crash in the markets. First, the economic numbers that have been coming out lately are still good. Could they change? Absolutely. However, that doesn't mean they will change tomorrow. Second, corporate earnings have been good for the most part. The market certainly isn't cheap from a price/earnings (P/E) perspective but it also isn't insanely expensive yet. Finally, the credit markets are functioning very orderly at the moment, which was not the case back in 2008. The chart below will give you a little perspective.
One of the many indicators I follow is the financial stress index published by the Federal Reserve Banks of Kansas City and St. Louis. The chart below is a combination of the two Federal Reserve Bank stress indicators (green and red bars) with the S&P 500 (orange line) overlaid on top. You'll notice financial stress in the credit markets shot up dramatically in mid to late 2007 as evidenced in the green bars shooting up and turning red. At the same time, the market began a decline that ultimately led to the wash out in October of 2008. Fast forward to today and you see no such evidence of that kind of stress in the credit markets. This doesn't mean we won't see a correction. However, it does mean a 50% crash at the moment is unlikely. Barring some catastrophic geopolitical event the market doesn't appear to ready to fall off the face of a cliff based on the data.
So the question today remains: will we see 2500 or 2400 again first? I don’t have the answer either, so it’s best to stick to the process and see how it plays out. Stay tuned...
Quote of the week:
"It takes as much courage to have tried and failed
as it does to have tried and succeeded."
– Anne Morrow Lindbergh