It’s been a difficult market to gauge for traders so far this year, after a stellar start to the year which saw the S&P 500 rise by 164 points or 13% to peak at 1422 on 2nd April. Technical reversal patterns then set the next stage to a low of 1266 on 4th June, which equated to a fall of 156 points or an 11% decline from peak to trough.
The recent market action has exhibited bear like behaviour during this decline – reflected by volatility up-ticks and increased levels of angst, however it is still wide-off the generally accepted measure of an actual bear market which needs to be down 20% from the highs for at least two consecutive months. Bulls naturally are holding onto the hope that this phase is merely another healthy correction within the overall bullish trend from the 2009 lows.
The last two significant corrective phases in the S&P since the 2009 lows have measured as follows:
April-July 2010, high 1219, low 1010 – 17% correction
May-October 2011, high 1370, low 1074 – 21% correction
The 2011 correction did fall by more than 20% but the lows never held long enough to confirm a bear market. Both corrections occurred during the sell-in-May season and were followed by a rally which escalated to leave no bears standing.
We don’t know what is around the corner but to try and work out if the current decline is imminently ending and about offer up a resumption of the bull trend, it’s worth viewing the shorter-term daily chart for a clearer perception of the short-term trend. Technically there are still causes for concern here.
The S&P tested the uptrend from the 4th June low and the 50-day moving average yesterday, the fact that the trend line broke increases the likelihood of a further decline ahead. The 200-day moving is getting closer and closing the gap between the 50-dma, if they meet and crossover to the downside selling pressure may increase – although the crossing of the SMA’s as a signal doesn’t always work as a trade, it lags the price action, so if the market is in a corrective phase it can often be too late to trade.
The last time a daily downside crossover of these SMA’s occurred that set a precedent for a bear market was in December 2007; cue the banking crisis and a subsequent 57% decline in the S&P 500. The food-for-thought being that if the 50 and 200-day SMA’s do meet and crossover to the downside as a precursor to a new bear market, as it did in 2007 – then the worst may still be ahead.