Market Update….Dual Diagnosis

Last week we received the psychiatric report that indicated Mr. Market was suffering from Market Nervosa.

However, after this week’s session, the diagnosis has been updated, and it now indicates that Mr. Market is also suffering from a bi-polar disorder. Each condition is creating a feedback loop to the other.

One reason for the new diagnosis is that the S&P 500 jumped 2.5 percent last week, staging its biggest 10-day rally in a decade and up 5 days in a row. This is just after Mr. Market had its worst December since the Great Depression culminating in 8 consecutive down days.

Unlike most economists, Robert Schiller (Nobel Prize winner & inventor of the CAPE or the cyclically-adjusted price-to-earnings ratio) believes that both fundamentals and human behavior drive the markets. He has also said that human behavior can even cause recessions.

We at Marketgauge believe in the same and hence our focus on charts and technical analysis which best reflects human behavior.

Currently, many traders are looking at 50-day Moving Average as overhead supply, but it will most likely will be taken out and create a head fake as real resistance is on weekly charts. The 50-week and 200-day moving averages are where the rubber meets the road, which means that the SPY could rally another 5% or more before real resistance shows up.

Volume has dried up this week’s rally and we are very overbought short term with 92% of stocks in the S&P 500 above 10-day DMA, so a sell-off could show up at current levels as well.

Another interesting factoid is that Brazil has been the strongest performing equities market since a Populist leader assumed leadership late last year. Brazil’s stock market has outperformed the US by almost 35% over the past six months and by 20% versus emerging markets in the final three months of 2018.

Historically, Populism usually results in higher stock prices short-term and lower prices long term after slower global growth and an unstable geopolitical environment kick in, but it takes time (3-5 years) for Mr. Market to realize it. Watch out when it does.

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