Markets and Logic Need Not Mix

posted Oct 8, 2014, 9:21 AM by Katie Shook

Despite the generally favorable economic tailwinds for the US, the market momentum has gone negative.  At this point most every technical signal I track is indicating trouble.  Moving averages have become resistance rather than support;  directional trends are negative;  prior price support has failed;  and sellers seem to outnumber buyers.

What’s interesting is that the basic 2/10-month crossover chart — the big-picture-macro-direction-example-graphic that we talk about — is on the verge of going negative as well.  The 10-month moving average (of the SPX) is just over 1912.75 while the 2-month is around 1955.

Perhaps it’s really as simple as saying QE is over and valuations need to be re-examined in the face of rising interest rates.  We could rationalize that improving economic conditions should justify higher stock prices (which would likely be the case).  But that does not mean the SPX, having not had a 10% pull-back since 2011, isn’t ‘due’ for a move.  This could finally be the excuse.

Calling a bear or a pull-back has embarrassed a lot of people over the past few years.  The markets have been remarkably resilient.  The data has been generally improving.  Still, reversion to the mean happens.  Regardless of what your gut may tell you, the data is saying we should see a short-term pull-back.  How deep is tough to call — if 1900 fails though, the 1800 level (or 1730′s for a more serious move) is not out of the question.

We’ll see how the market feels about the FOMC minutes today.  I see little reason to expect a reversal given the kind of market internals we’re seeing right now.

Daily Digits

Daily Digits 10/8/14

Weekly Estimated Range

Weeklies 10/8/14

2/10 Crossover

2-mo 10-mo Xover

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