E Looking For A Correction In Equities?

Even if trading equities on shorter time frames, or on an intraday basis, now is the time to zoom out to a monthly outlook to assess exactly what the markets are doing. On a monthly chart of SPY, the index is in a breakout which started about six years ago after it broke above $1550. There have really only been two times where the index lost a bit of momentum. 

The first was a correction that began in the summer of 2015 and ended in early 2016. The second was a sharp fall in December last year. To be fair, the correction began in October, but the December price action is what I consider to be significant. I say this because the index was the most oversold during that period when looking back at the last four years.

S&P 500 Monthly
SPY Monthly Momentum


Why the Emphasis on Technicals

Although I do focus a lot on technical analysis, I certainly don't ignore the fundamentals. But, having said that, I think there is a time to respect price action and what the technical picture is telling us. When an instrument is in a multi-year breakout, it is definitely time to respect the price action.

Keep in mind also, an investor might have a sound fundamental reason to be bearish equities but it could take months or even years before the markets react. As John Mayard once said - "The markets can remain irrational longer than you can remain solvent."

For these reasons, this article is focused on the technical outlook and what price action is saying rather than relying on fundamental analysis.

I'd also like to add, that the fundamental picture can change rather quickly. After all, it was only six weeks ago when headlines were filled with talks of a recession and the implications of an inverted yield curve.

Correlations in Global Equity Indices

What's made me bullish equities a bit early on in the current rally is how strong equities are around the world, generally speaking. There have been a few times over the past four years where several indices entered into a correlated bear market while US equities showed very little signs of weakness. When many of the equity indices around the world are showing strength, I believe it gives that much more of a reason to be bullish US equities. After all, the US markets have long been outperforming their global counterparts.

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