Valuations Have Little Bearing On Short Term Returns

Written by Top Down Charts 

Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I’ll pick a couple of themes and hammer them home with the charts, but sometimes it’s just a selection of charts that will add to your perspective and help inform your own view – whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It’s worth noting that the aim of the #ChartStorm isn’t necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here’s the another S&P 500 #ChartStorm write-up

1. 50-day Moving Average Breadth: The previous line in the sand for 50dma breadth was the downtrend line which got decisively broken to the upside following the US election.  But now there is another line, and another test for the market.  Should breadth break through that line it will open the door for even more new highs and mark a transition to a more frothy and euphoric market.  But if it fails the test it will likely be the start of a correction.

Bottom line: 50 day moving average breadth is coming up against another line in the sand.

2. The 1994-95 Analog: Analogs are always a dubious, yet often interesting and amusing, analysis method.  Basically an analog is where you overlay one market on to its history (or even some times the history of another market), with the understanding that it could follow the same pattern as the past.  As they say, history doesn’t repeat but it often rhymes. So then we look at the interesting analog below by Gerring Capital, pointed out by Joseph Fahmy of Zor Capital. The implication is that today’s market could follow what happened in 1994-95. You can’t rule anything out, but you’d best look for a fundamental story to back up such an analog…

Bottom line: The 1994-95 analog suggests much more upside for the S&P500.

3. Prolonged Periods of Consolidation: The below chart from Will Geisdorf of Ned Davis Research shows that a prolonged period of consolidation can act as a bear market. This makes sense from a number of angles, a sideways market can sometimes reflect wide variation of returns between sectors e.g. biotech vs commodities. It can also have a cleansing effect on sentiment and keep money out of the market and on the sidelines.  And the other point is that stability or low volatility is a rare and fleeting thing in markets – any period of low volatility and range-trading will often be shortly proceeded by a trend change and period of greater volatility.Of course, the implication for today’s market is that it’s good news because we’ve just been through a prolonged period of consolidation.