Amidst Signs Of Excesses, 50-Day Once Again Defended On S&P 500; Fed Readies To Taper/Tighten

The 50-day on the S&P 500 was once again defended. Households’ equity exposure is on course for yet another high in 3Q, even as margin debt jumped to yet another record in August. Amidst these signs of excesses, the Fed wants to both taper and tighten, no matter how small a window it may be playing with.

Yet again, equity bulls used the 50-day as an opportunity to buy the S&P 500. The average was meaningfully breached last Monday but was reclaimed on Thursday. After coming under pressure in the first two sessions, the large-cap index rallied in the next three. At Monday’s low, the index (4455) was down 2.9 percent but recovered enough to end the week up 0.5 percent. In the end, a bullish hammer showed up on the weekly.

This was the 11th time from May last year the 50-day attracted bids (Chart 1). This time around, from the September 2 record high of 4546 through last Monday’s low, the S&P 500 dropped 5.3 percent. It has not had a double-digit decline since last September when it dropped north of 10 percent from high to low.

Near term, there is decent resistance at 4480s, and after that of course the September 2 high.

September has four sessions left. The S&P 500 is so far up 3.7 percent in 3Q. If these gains hold, this will have further raised US households’ equity allocation. It is already looking too lop-sided.

In 2Q, their equity ownership in financial assets was 37.8 percent – a new high (Chart 2). The metric has just about gone parabolic since 1Q last year when it dropped to 28.4 percent.

Interestingly, households’ equity exposure is comfortably above prior highs from 2000 and 2007, with 1Q00 at 32.5 percent and 2Q07 at 28 percent. Back then, a bear market soon followed and sustained for a while. This time is proving to be different.

Leverage is acting as a big tailwind. But margin debt cuts both ways – helps on the uptrend and hurts on the downtrend. So far in the current cycle, it has been nothing but a tailwind.

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Disclaimer: This article is not intended to be, nor shall it be construed as investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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