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

IMPORTANT DISCLOSURE INFORMATION Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Littlejohn Financial Services), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Littlejohn Financial Services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing. Littlejohn Financial Services is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Littlejohn Financial Services' current written disclosure statement discussing our advisory services and fees is available for review upon request.