Recently I have been on ‘high alert’ for the prospect of a reversal of the short-term uptrend in equity markets that has been in effect since mid-December. While circumstances such as short-term sentiment at or near overbought extremes (Exhibit 1), extended and fatigued momentum (Exhibit 2) and numerous negative divergences (Exhibit 3) and/or non-confirmations coalesced to suggest that a reversal was due, I had been reticent to call a top as my preferred short-term Elliott Wave Count suggested that one more thrust to new highs would give the structure more of the ‘right look’ and my smoothed version of TRIN had not yet called for a reversal.
Last Thursday however, both of the final conditions on which my short-term optimism hinged were resolved bearishly. The S&P 500 did manage a print above Tuesday’s high—a whopping 36 pips higher in fact (probably indiscernible on the charts). Also, the 10-day moving average for TRIN finally reached levels commonly associated with equity tops (see the middle pane of the Exhibit 4).
Moreover, since its climax on Tuesday, daily momentum has been worsening (shown in the middle pane of Exhibit 2). This condition appears likely to persist for the next two or three weeks.
Thus, price patterns, TRIN, momentum and sentiment all argue—rather convincingly—that, as of last Thursday, a short-term top is in. The odds appear particularly high that the coming pause will take the shape of a pronounced intermediate-term decline rather than a well-contained short-term pullback within the context of an ongoing uptrend. However, the longer-term picture is more difficult to interpret, and while am inclined to give a bearish intermediate-term outcome the benefit of the doubt right now, there is a viable case to be made for another multi-month advance before the next serious equity market undoing.
To illustrate this point, several long-lead sentiment surveys (i.e. the University of Michigan Consumer Confidence Survey, the Conference Board Consumer Confidence Survey and the ABC Consumer Comfort Index) are currently emitting bullish signals. Also, quarterly S&P 500 momentum is still on the upswing.
Conversely though, other long-term sentiment data is flashing warning signs. For example, the percentage of cash held in mutual funds, which measures how portfolios are actually positioned rather than relying on investors’ articulation about how they feel, is currently bearish. Additionally, weekly and monthly action in credit spreads imply worsening conditions for corporate credit into the back half of this year.
Also of note, the monthly Coppock Guide is deteriorating (thus momentum is degenerating across daily, weekly and monthly degrees). However, I hesitate to read too much into the set-up of weekly and monthly momentum, as the downward slope of these curves does not appear adequate to seriously pressure markets lower. To wit, notice in Exhibit 2 that after the peak in weekly momentum in the winter of 2010, equity prices held up for more than six months even as the weekly Coppock Guide declined fairly consistently. The sharp decline that did ultimately eventuate last summer occurred only as the weakening of intermediate-term momentum accelerated materially.
In summary, over the short-term, the risk/reward trade-off appears unfavorable to long investors. Further, there is a strong possibility that equity markets troubles will endure over the intermediate-term. However, the jury is still out on this latter contention. More to come as the markets provide more insight.
In the meanwhile, stay safe and stay nimble.