Technically Speaking: Short-Term Bull Or Bearish Top

Over the last couple of weeks, I have discussed the entrance of the markets into the seasonally strong period of the year and the potential to increase equity exposure in portfolios on a “short-term” basis. To wit:

“With the markets EXTREMELY overbought short-term, the setup for putting money into the market currently is not ideal.

However, as shown in the chart below, the markets have registered a short-term BUY signal that suggests that we remain alert for a pullback that generates a short-term oversold condition without violating any important supports.“

The chart below updates that analysis through Monday’s close.

“As shown, the recent surge in the markets has driven asset prices back resistance near the old highs. Simultaneously, the markets are pushing into very overbought conditions with a rather extreme deviation from the longer-term moving average. Such deviations tend not to last for an extended period. 

In plain English it essentially means the markets have likely completed its current advance and need a short-term correction to provide a better ‘risk/reward’ entry for investors to increase equity exposure.” 

As shown in the chart above, the expected correction began in earnest this week.Currently, a correction back to previous support levels (2040-2060) will likely find“buyers” betting on the traditional year-end rally. 

Long-Term Concerns Remain

However, it is the longer-term picture that I remain worried about. As noted by my friend Joe Calhoun at Alhambra Partners:

“Stocks also belie this belief that the Fed finally has it right, that growth is finally accelerating and the real recovery is finally underway. Yes, stocks have rallied nicely the last few weeks and have nearly recovered from their August swoon. But all that has done so far is to bring stocks back to where they were in mid-August just before the sell off.While it is certainly possible that we will yet make new highs, I think it is important that momentum is not confirming the move higher except, again, in the very short term. Long term momentum indicators still show a market in the process of topping.”