ChartWatchers

S&P 500 Warning Signs Emerging for Summer - Again

 | 

In the very near-term, it's difficult to predict which way the S&P 500 is heading.  Recently, we saw the Volatility Index ($VIX) spike to nearly 22 and the multi-month uptrend line on the S&P 500 was violated.  Take a quick look:

VIX 7.6.13

The biggest technical issue wasn't necessarily the VIX rising to 22 as we saw it move above that level in late December 2012.  Instead, breaking that 5-6 month trendline that already had four successful tests was the bigger story.  In my view, it changed the "cloudy" outlook for equities from a short-term concern to a more intermediate-term issue.  It also happened just as we approach the worst 2-3 consecutive months of the year historically.

Here are the historical numbers - you decide if they'll impact trading in the next few months:

S&P 500 annualized return since 1950:

July 1st through July 17th:  +21.48%
July 17th through September 28th:  -2.04%

Since 1950, that July 17-September 28 period has covered 3140 trading days, or roughly 12.4 years worth of data.  That's a lot of data and certainly should be considered a "representative sample" by statisticians.  And it trails the AVERAGE annual return of the S&P 500 by more than 10 percentage points.  Based on these FACTS, there is no doubt that the market has an historical "tendency" (not a guarantee) to struggle throughout this period, some years much worse than others.

Why else should we be concerned?  Well, let's take a look at the weekly chart of the S&P 500:

SPX 7.6.13

Check out the black circles on the chart above.  It shows that over the past decade, we've seen a handful of times where the weekly PPO (percentage price oscillator - similar to the MACD, but expressed in percentages rather than dollars) is stretched to the 3-4 level and the weekly RSI hits 70 (overbought) simultaneously.  In every case, we've seen selling take us AT LEAST to rising 50 week SMAs over the next 2-3 months.  To be honest, it makes perfect sense.  A stretched PPO tells us that the market has been running HOT for an extended period of time and the overbought RSI confirms it.  A pullback really is to be expected.

But before you go running for the hills, you should also realize that key sectors/industries are performing exceptionally well on a relative basis, suggesting the longer-term bull market remains intact.

So what does all this mean?  Well, it tells me that short- to intermediate-term risks are rising if you're on the long side.  I combat that by trading less often and fewer shares.  You can further reduce risk by selling calls or buying put insurance on the S&P 500.

Please don't misunderstand my overall view, however.  I remain BULLISH over the longer-term (6-9 months) but realize the market is likely to continue its recent choppy pattern, perhaps turning more bearish later this summer.  I believe we'll see 1530 on the S&P 500 at some point over the summer, possibly even the 1465-1485 area.  I do not plan to short, however, as these levels are not guarantees and as I said before, I remain bullish in the longer-term.

My Chart of the Day for Monday highlights a few of the reasons for my bullishness later in 2013.  You can CLICK HERE for details.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus