Saturday, August 10, 2013

Market Update: S+P 500 short term trend, market internals and a 1987 style market crash?

With the bulk of the earnings reports already completed and very little market moving economic data this week, the markets lacked a catalyst for short term direction. The result became a relatively range bound, uneventful trading week.

In our short term market update post this week, we did a decent job highlighting what became the short term bottom. The chart of the S+P 500 above (60 minute) highlights that support zone as well as the resistance zone above, which is defined by the 61% retracement level and previous swing high. We remained inside this trading range the entire week.

Next week I am expecting a resolution to this trading range. A break out above 1700 would signal to me that the rally to 1740 and 1770 is underway. A break below would mean a retest of the 1676 low, and likely a drop into the 1655-1660 support area before our rally to 1770 commences.

I continue to monitor the cumulative advance - decline line, as we pointed out the double top and divergence some time ago. The sooner I see this double top taken out to the upside, the better I will feel about the long side. However continued weakness below the last major swing low, as highlighted on the chart above, would have very bearish implications for the longer term trend.

Sector performance year to date remains relatively unchanged from the previous week. Financials dropped one notch and basic materials moves a little closer to entering positive territory for the year.

The economic calendar this week looks relatively light as well. We have some retail sales data coming in on Tuesday which could potential be a catalyst for a breakout of our short term trading range. Ending the week on Friday with the University of Michigan Consumer Sentiment report.

In conclusion: we are hearing increased chatter about the similarities that lead up to the 1987 stock market crash and what we currently have going on today. While I am not hear to debate whether a similar style crash could happen (anything is possible when it comes to the stock market). I thought I would offer some food for thought regarding the differences between the two time periods as well.
This chart above is a quarterly chart of the Dow Jones Industrial Average off the generational low in 1974 an into the 1987 crash and beyond. It shows a 380% gain from low to high which would equate to around 3000 on the S+P 500 today. Also it included a 155% gain over a 3 year time span without a correction greater than 11%. That would also equate to roughly 3000 on the S+P 500 off the 2009 lows.
The truth is no one knows exactly how it will all play out with 100% certainty. The only thing we as individual investors can control is how we react and interpret to current market data. The truth is the markets do not care about anyone's opinion, no matter how good that opinion might be.