By most accounts, the financial markets have had a very interesting start to 2019.  After a tumultuous annual closing last December, the S&P 500 quickly posted YTD gains which approached 20%.  Recent pullbacks based on continued trade war concerns have become apparent in the last few weeks. But the S&P 500 displayed gains of 26.59% when the prior rally is measured from the late-December lows to the highs before the end of April.  Students of history understand that this is well above the historical averages for the index. Since the S&P 500 began as a composite of 90 stocks in 1926, average annual returns have numbered only 9.8%.  

It can be argued that corporate earnings this season were supportive, as roughly three-fourths of the company's in the S&P beat earnings expectations for the first quarter.  But all of the positive headlines in the financial news media show a clear misunderstanding of the fact that corporate earnings expectations were revised lower before these reports were released.  For the first quarter, market analysts reduced earnings estimates for S&P 500 companies by the widest margins since Q1-2016.  

Those cuts did nothing to deter the exuberance of investors, however, as the changes in expectations were immediately followed by new record highs in both the S&P 500 and the NASDAQ.  The divergences between expectation and reality have become quite striking at this stage.  As a result, many investors must be wondering whether the recent short-term pullback in equities is really based on trade war concerns or if it is simply a more dominant expression of the underlying trend in the market returning toward more sustainable averages.

In actuality, editorializing about the relative positions of different asset classes within the broader context of the financial markets is an exercise which has limited value.  Even in cases where those opinions are correct, there is little reason to believe that those behavioral trends will actually hold up over time. What actually matters in the financial market is valuation (both current and historical).  In order to assess those valuations, market practitioners must look at the price charts themselves.

After reaching its record highs before the end of April, the dominant trend trajectory in the S&P 500 has unfolded in a clearly developed impulse pattern. Elliott Wave practitioners may argue that the bearish moves outlined in the above chart may have reached a point of completion, given the 5-wave series of declines that defines the most recent price move.  But, from a fundamental perspective, sentiment changes appear to be more deeply rooted as alternative safe havens have emerged in the process.

During the same time period, Bitcoin - U.S. Dollar (BTC/USD) has essentially gone parabolic.  In the isolated context of market price movements in 2019, Bitcoin and other cryptocurrencies have exhibited a striking lack of correlative trajectory performances relative to the S&P 500.  This is even more significant because the moves span asset classes (with clear visibility in both equities and foreign exchange). Bitcoin valuations have roughly doubled in value this year, and the majority of that move came as U.S. / China trade tensions began attracting a majority of the market’s attention in the financial news media.  

Speculation on probable catalysts aside, what is undeniable in these events is the momentum reversal that has become visible with respect to equities valuations and cryptocurrencies.  There are well-documented rules of momentum trading in stock markets which highlight Average Directional Range (ADR) metrics defining volatility boundaries in conjunction with support/resistance levels, Rate of Change (ROC), and specific events.  Those metrics indicate significant changes in the ways investors are using cryptocurrencies, as sentiment now appears to be firmly rooted in safe haven mechanisms. Given the limited price history that is available for the cryptocurrencies, outlining terms like “overbought” and “oversold” have limited validity.  Going forward, students of the market will likely continue to watch for new developments in these instruments as investors might currently be in the process of defining a new category of safe haven assets.