Odds Growing Sharp Reflex Rally In S&P 500 Sooner Than Later

From early October, the S&P 500 is down 18 percent. Important support lies at 2400, or just underneath. Several indicators are at/near panic levels. Risk-reward odds favor unwinding of these conditions sooner than later.


There is blood on the Street. Bulls have been gored.

From its all-time high of 2940.91 on September 21 through last Friday’s intraday low, the S&P 500 index is down 18.1 percent. The Nasdaq 100, which peaked on October 1 at 7700.56, lost 21.9 percent through last Friday’s low. The Russell 2000 small cap index peaked earlier, on August 31 at 1742.09, and is down 26 percent through last Friday’s low.

At one point, through the aforementioned September high, the S&P 500 (2416.62) was up 10 percent for the year. Now, it is down 9.6 percent. Even if Santa shows up in the remaining four and a half sessions this year, it is hard to imagine the losses getting wiped out.

Momentum increasingly is going bears’ way. Monthly indicators are still not done completely unwinding the overbought conditions they were in. This is a risk facing longs medium- to long-term. Near term, daily and weekly charts are oversold, and can start unwinding in the right circumstances. In this scenario, selling hits the pause button.


It is too soon to definitively say if the ongoing selloff has exhausted itself.

Investors Intelligence data show bulls still hanging in there. Last week, they registered 39.3 percent, which is the lowest since May 2016 and is down from 61.8 percent early October. Earlier in February 2016, when US stocks in general reached a major low, bulls’ count fell as low as 24.7 percent, with bears rising to 39.8 percent. The bull-bear spread back then was in the minus column (Chart 2). Not this time around. Bears last week were feeling smug at 21.4 percent. The spread has narrowed to 17.9 percentage points, but this is no panic territory.


The irony is that, even after this selloff, forward multiples are in the 13-14 percent range. Chart 3 plots the operating P/E for the S&P 500 (large cap), 400 (mid cap) and 600 (small cap). The trailing P/E for 2017 was elevated. Thanks to corporate tax cuts of December last year, this year’s earnings jumped.

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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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