While it is entirely possible that the S&P 500 has indeed peaked, Chris Ciovacco, at Ciovacco Capital Management, points out that those analysts who are already saying the bull market is over are forgetting about one key factor and might be jumping the gun.
Ding Dong, the Wicked Bull Is Dead
If you follow the markets, you may have noticed a recent increase in "the bull is over" articles. While it is entirely possible the S&P 500 has already peaked, the evidence says it may be a bit early to declare the dawn of a new S&P 500 bear market.
What Do the Facts Tell Us Now?
Regular readers know we are not fans of forecasting (bullish or bearish). Therefore, our purpose here is not to counter bearish arguments with bullish arguments, but rather to stop and look at some facts in place as of May 28, 2015.
Cannot Have a Bear Without This
Corrections and bear markets have one thing in common, they both feature the S&P 500 making a series of lower highs and lower lows.
Lower Low Came in October 2007
The chart below shows the S&P 500's topping process as the bull market ended in October 2007. With the S&P 500 still trading at 1550, a lower high was made in October 2007. To have a bearish trend, we have to have a lower low as well…one was made in November 2007.
Click to Enlarge
Lower Lows Come During Corrections
Just as day follows night, lower lows follow lower highs during multi-month stock market corrections. A lower high was made in early July 2011, stocks did not find a bottom until several weeks later (see chart below).
Click to Enlarge
NEXT PAGE: What About on a Global Scale?
|pagebreak|Most Recent Event: Higher Highs
Has the S&P 500 recently made a lower high followed by a lower low? No, in fact the last significant event was a higher high.
Click to Enlarge
NASDAQ Made a New High Wednesday
Markets make new highs when the net aggregate opinion of all market participants is bullish. If the net aggregate opinion was bearish, bullish conviction would be too low to push stocks to a new high. How long has it been since a new high was made by the Nasdaq? Answer: One day.
Click to Enlarge
The ACWI All-World ETF (ACWI) has exposure to stocks around the globe. ACWI made a new high two weeks ago, meaning the global stock bears have some work to do.
Click to Enlarge
Talking About a Minimum Threshold for Bears
If we see a lower high and lower low, does it spell doom for stocks? No, lower highs and lower lows are made all the time. The point is a lower high and lower low is one of the easiest bearish thresholds to cross, and yet, it has not happened as of May 28, 2015. Until one of the easier to check off bearish boxes is checked, some patience remains in order before participating in the nearly impossible game of picking stock market tops.
If They Have Trouble with Football...
If the best football handicappers cannot predict the outcome of NFL football games with accuracy much better than a flip of a coin, how reliable can we expect market forecasters to be when trying to call a much more complex system known as the global economy and global stock markets?
Bears May Get a Boost Friday...They May Not
Friday brings the latest reading on the US economy. Rather than attempt to predict (a) the GDP number and (b) the market's reaction to the number, our approach calls for taking it day by day. If the evidence, including a discernible lower high and lower low, calls for a reduction in equity exposure, we are happy to do it. Are we perma-bulls? No, the charts say what they say and are not impacted by our personal views or human biases.
By Chris Ciovacco at Ciovacco Capital Management
