….and they aren’t in a down trend either. You know what? That’s okay. But anyone whose arguing that they are trending – in either direction – is ignoring price and applying second (or third or fourth) derivative analysis to this market. From the purest sense, a trend is defined as higher highs and higher lows, can we agree at least to that? If so, then I don’t see how we could say that the S&P 500 or other major indices are in positive trends. We’ve now seen two lower highs in 2018 with the performance in the red four months into the year. The lows have yet to materially break below themselves, providing the last saving grace that this has yet to turn into a defined down trend.
Historical Lower Highs
Jason Goepfert of SentimenTrader noted that when the market has seen two lower highs of at least 2% within 30 days of each other since 1930, equities were up just 43% of the time 3 months later with a median return of -2.8%. That’s not a quality of a roaring up trending market. Jason looked deeper into the historical data and found that of the eight prior signals where the market was coming off a loss of less than 5% (meaning it wasn’t currently in a protracted bear market like 2008), lower highs were followed by positive S&P performance just two times six months later.
Volume
From a volume perspective, as I’ve been pounding the table on for several months, trading appears to be more distributive than accumulative. What I mean by that is the heaviest volume trading days have been on down days, meaning more traders are entering the market when price is weak than when price is strong. This isn’t a characteristic of a strongly bullish market environment. While it still fits in to the characteristics of a market in consolidation, which at this point is the only way to describe what U.S. equities are doing right now – consolidating.
Momentum
What about momentum? That’s gone through a change as well. During the back half of 2017 the Relative Strength Index (RSI) (as shown in the top panel of the chart above) stayed above 50 during dips in price. But in 2018, momentum has struggled to even temporarily break above 50 – creating a new lower range. While it’s positive that RSI isn’t spending much time under 30 on weakness, the new range isn’t a characteristic of an up trend.
Plenty of Opportunities
While the major indices may not be in a well-defined trend, there are still plenty of stocks that are. There continue to be pockets of strong trends that are taking place, giving traders plenty of opportunity to profit. While the S&P 500 is negative so far this year, there are nearly 900 stocks with a market cap greater than $2 billion that are up for the year and over 230 stocks up over 20%.
Earnings Catalyst
What’s unfortunate is that we’ve now come out of such a strong earnings season, with many U.S. companies reporting massive profits and forecasting bright prospects for the future, and traders have nearly completely ignored it. While not a fundamental-based analyst, its hard to ignore the fact that the market has given no importance to Q1 earnings. Companies have been waiving the green flag in front of trader’s faces, practically screaming “look how much money we made!” and traders turned right around and continuing selling stocks. We saw this early on with bank earnings and it continued throughout the reporting season. When a catalyst to send prices higher is ignored like that, we must take note. Seasonality now enters the much discussed historically bearish six months of the year. Maybe traders will ignore this bearish note as it ignored the bullish earnings…who knows.
Conclusion
What I do know, is that price must be respected and the current price action has not been bullish but has yet to turn fully bearish either. It’s okay that we’re in a period of consolidation. It’s important to recognize what’s happening and respect it rather than try to twist it into something it’s not. Until we get a break out above around 2800 or under 2575 patience can be a great virtue to have.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.
