Trend Check with Tushar Chande

Detour Ahead for the SPX? (Or, Is it 2015 All Over Again?)

The S&P 500 chart this year is starting to resemble the market's evolution in 2015. Then, as now, the market had lost all its up-side momentum, and it was listlessly moving sideways into the summer.  Then, in 2015, we had a mini-crash in response to a currency move in China, and it led eventually to the lows in January, 2016.  We look at the similarities in the market’s price action in 2014-15 and 2016-17 for clues to what might happen next.

Chart 1: Is there a detour ahead for the market? Perhaps there are clues to be found in 2015.


 

The SPX in 2014-15

The S&P 500 Index rallied hard in October, 2014, and had a choppy climb up to new highs in March and May, both of which occurred with momentum divergences versus the 14-day RSI (much like this year).  The market eventually crashed in August, and made a lower low in January, 2016.

Chart 2: The SPX rallied hard off a low in October, 2014, only to see the rally lose momentum in May. Observe the divergence at new highs between the SPX and RSI just like I discussed earlier.  The market retested the highs in May a couple of times before crashing in August in response to currency devaluation in China.

 

The SPX in 2016-17

As you can see in Chart 3, the SPX bottomed in November, 2016 (instead of October in 2014) and rallied hard, with virtually no choppiness to a high in March (just like March, 2015), and then consolidated before rising to new highs in May (just like May, 2015) with a momentum divergence versus the 14-day RSI (just like May, 2015).  It possible it will continue to evolve just as in 2015?

Chart 3: The SPX in 2016-17 shows many similarities to its evolution in 2014-15. Note the key low in November (vs. October), the high in March, and then the high in May with negative divergence. (An updated chart is here).

 

Correlation is Moderately High at 0.76.

I plotted the change in value of a $1,000 investment in the SPX from the end of September through the middle of next May both in 2014-15 and 2016-17 and the price evolution had a moderately high correlation of 0.76, meaning that it was not just my imagination.

Chart 4: The correlation between the price evolution of the SPX between the end of September and mid-May in 2014-15 and 2016-17 is moderately high correlation of 0.76.

 

Market Internals are also similar

I then applied my intermediate-term trend-following model (see details here) which uses a 100-day Bollinger Band with 0.5 standard deviation width together with a 20-day simple moving average.  The trend is up if the average is outside the upper band, and down if it is below the lower band.  I used the current stocks in the S&P 500 to go back and calculate the percentage of stocks trending up and down in 2014-15 and compared them to 2016-17. Now there will be some errors here, since I have not corrected for the actual index construction in 2014-15, but the answers should be close enough for our purpose.

Chart 5: The estimated percentage of stocks trending up (or down) for 2014-15 using the intermediate-term model. Note how the up-trending stocks peaked in early December and then trundled lower until a cross-over in June, well before the August crash.

Chart 6: The percentage of stocks in the SPX trending up (and down) looks similar to 2014-15, except that the peak in the selling occurred a few days later than 2014, and the peak in up-trending stocks occurred later this year (in March rather than December as in 2014-15).

 

I can correct for the difference in the timing of the peak in down-trending stocks (the orange line in Charts 5 and 6) by shifting the line in Chart 6 back a few days to simplify the comparison. The shifted breadth comparison (see Chart 7) shows that the down-trending stocks are following the 2014-15 line quite closely, and the percentage of up-trending stocks (gold line)  has now also come down to the 2014-15 blue line.

Chart 7: I deliberately shifted the 2016-17 data back a few days to match the peaks in the selling (or down-trending stocks) in the fall (see orange and crimson lines). Now you can see that the market-breadth lines for 2016-17 have roughly converged with their 2014-15 counterparts.  This chart suggests a period of upcoming weakness in the market this year.

 

Summary

The 2016-17 market reminds me of the 2014-15 market more strongly each day.  More than even the price action, the percentage of stocks trending up (or down) also looks quite similar.  Of course, this is a post-election year, and no two years evolve in exactly the same way, but it worth keeping the similarities in mind as the market trades deeper into the summer.

The details of the trend-following models are in an earlier post for those who might be interested.

I hope you liked this detour down memory lane, and will subscribe below for automatic reminders of future updates.

I am absolutely delighted to wish you all a very Happy Mother's Day!  Enjoy!

 

Tushar

 

 

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