IS MAR­KET WIN­TER COM­ING?

Two pre­vi­ous bull mar­kets ended in a sim­i­lar fash­ion

Financial Mail - Investors Monthly - - Front Page - GARTH MACKEN­ZIE www.trader­scorner.co.za

In last month’s tech­ni­cal col­umn of In­vestors Monthly I high­lighted the fact that the bull mar­ket in SA and global eq­ui­ties was get­ting very ma­ture and that a po­ten­tial end to the bull mar­ket was in sight.

A month can be a long time in fi­nan­cial mar­kets and the month from mid-Au­gust to mid-Septem­ber has seen a dra­matic shift in the state of global eq­uity mar­kets. A global eq­uity sell-off en­sued fol­low­ing a move by the Peo­ple’s Bank of China to de­value the Chi­nese cur­rency. This was a dras­tic move which was un­ex­pected and has cast doubt over the health of the Chi­nese econ­omy. Given the sig­nif­i­cance of the Chi­nese econ­omy to the rest of the world, it is no sur­prise that mar­kets have been rat­tled by this sud­den re­al­i­sa­tion that China may not be the saviour of global eco­nomic growth af­ter all.

The weekly chart of the S&P500 that is pre­sented here shows three bull mar­kets and two bear mar­kets that have oc­curred since the mid-1990s. The world’s largest and most closely watched stock in­dex has made a sig­nif­i­cant break be­low the up­trend that joins all the lows since the start of the bull mar­ket in 2009.

This looks very omi­nous when com­pared to how the prior two bull mar­kets ended. Both the bull mar­ket that led up to the dot-com bub­ble burst­ing in 2000 and the bull mar­ket that led up to the fi­nan­cial cri­sis in 2008 ended with sud­den sharp breaks be­low the bull trends that had char­ac­terised those two bull mar­kets. These trend line breaks were also com­bined with mean­ing­ful breaks be­low the 50-week mov­ing av­er­ages. Fol­low­ing the breaks be­low the up­trends and the breaks be­low the 50-week mov­ing av­er­ages, the mar­ket gave a sud­den sharp throw-back to the un­der­side of the 50-week mov­ing av­er­age.

How­ever, those throw-backs were in­suf­fi­cient to sur­pass the 50-week mov­ing av­er­age and the mar­ket suc­cumbed to more selling pres­sure. This fail­ure to chal­lenge the prior bull mar­ket higher is caused by sellers who failed to sell at the mar­ket top, view­ing the throw-back as an op­por­tu­nity to lighten or exit their hold­ings at a rea­son­able level. It also comes at a time when the rhetoric in the mar­ket has be­come de­cid­edly more cau­tious.

In both prior cases, the S&P500 suf­fered sharp bear mar­kets af­ter the bull trend had been bro­ken. Cur­rently the chart setup on the S&P500 is of con­cern and if the past is any guide, it is quite pos­si­ble that the prior bull mar­ket has ended.

We’ve seen the mar­ket break be­low the up­trend that be­gan in 2009 on the move be­low 2 050. If the mar­ket fol­lows the same pat­tern as the prior two top­ping out phases, then it’s likely that we will see a sharp throw-back up to­wards the 50-week mov­ing av­er­age at 2 050 be­fore fur­ther selling per­sists. What hap­pens next is crit­i­cal and will be an im­por­tant in­di­ca­tion of whether the bull mar­ket is in fact over.

A fail­ure to break con­vinc­ingly above 2 050 on the S&P500 will likely be the sig­nal to in­di­cate that fur­ther down­side is likely and that a new bear mar­ket may be start­ing. If this is the case, then the big sup­port on the long-term chart comes in at 1 550. That’s some 30% be­low the re­cent mar­ket peak of 2 130. A 30% pull­back would be a rel­a­tively shal­low bear mar­ket when com­pared to the bear mar­kets of 2000-2003 and 2007-2009.

Typ­i­cally, bear mar­kets are a lot sharper and more dra­matic than bull mar­kets. The mar­ket falls much faster than it rises, which is why bear mar­kets gen­er­ally don’t last as long as bull mar­kets. The warn­ing signs are clear and there is no doubt­ing that the tone on eq­uity mar­kets has shifted re­cently. “Buy the dips” seems to be a for­got­ten strat­egy now and there is gen­er­ally a lot of ner­vous­ness in the air. This, com­bined with the tech­ni­cal dam­age that has hap­pened re­cently, sug­gests that the win­ter sea­son may have ar­rived for the world’s big­gest stock in­dex.

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