Overview
The Personal Consumption Expenditures (PCE) Index report delivered a double whammy. First, the data were revised upward as part of an annual adjustment. Second, the core PCE bounced higher this month, led by food and rent. The Volckerization of the FOMC policies will continue until further notice.
The Bank of England intervened in their bond market to protect retirement plans faced with margin calls. As a result, US 2-year and 10-year yields also dropped sharply in sympathy. Perhaps this will help stabilize our markets as well.
The Conference Board Index of Leading Economic Indicators dropped below its recession signal in August. The Board now projects a recession in coming quarters, which argues for a more cautious investment approach, contradicting my oversold indicators.
Key Question
Can a market breadth-based entry be too early? Of course, investment decisions always carry risk, and sometimes the best entry points are the ones with the most negative news environment. Hence, we look at a long-term market breadth analysis to explore this question.
Performance Summary
A horrible month in the market, with double-digit declines. Even though I expected weak performance this month due to seasonal tendencies, this was a bit over the top.
The net bull/bear balance has been below -60 for almost the entire month, except for a brief two-day bounce. Thus, it continues to identify the market’s path of least resistance correctly.
The S&P-500 has now reached the top of its consolidation from nearly two years ago and is entering a rather broad region of potential support extending down to 3200.
The 2-year yield found temporary relief after the Bank of England’s intervention. The chart points to a peak of around 4.5%, which roughly matches the FOMC terminal-rate projection of 4.6%. The stock market will not improve until we see this rate retreat.
Despite all the selling, the VIX index remains well contained, as it approached prior highs and pulled back a bit. We could get a short-term bounce if the VIX index retreats.
We need encouraging data on inflation or unemployment to turn the market's psychology. So we look forward to next Friday’s unemployment data for help.
Breadth-Based Entry Points
We begin with the usual warning that any investment decision carries risks. I measured market breadth as the difference between the percentage of S&P-500 stocks in uptrends minus the percentage in downtrends. For convenience, I assumed the trend was up if the 50-day simple moving average (SMA) was above the 200-day SMA (and vice versa for downtrends). This indicator varies from +100% to -100% since when every stock has its 50-day SMA above its 200-day SMA, the reading would be +100%-0%=+100% and vice versa for downtrends. Here is what the data show using the current configuration of the S&P-500 stocks.
The data suggest that important lows occur when this indicator falls below -50% and then turns up. Let us explore the 2008-2009 market decline, which provided a “generational” entry point for stock market returns. The market bottomed in late February/ early March 2009. Naturally, the situation was bleak at the actual low, with pervasive negativity.
Since this model uses two very slow-moving averages and a large number of stocks to measure trend changes, it is slow to respond. Hence, the location of the entry point can significantly affect your percentage returns.
For example, you could have bought when the index rose above -50 after dipping below it, and you would have been “too early” by about a year, in April 2008. Then, the second such upturn occurred in late May 2009, but some 38% above the lows. Finally, the indicator turned positive in mid-April, at approximately the same level above the lows as when it ticked above -50%. In other words, the entry point can shift significantly and affect your percentage returns. So, the risk/reward for an aggressive entry can be worthwhile, but it is not without risk. Naturally, only you can decide what makes sense for your individual risk preferences.
Wrap-up
My posts should give you a good starting point, with context and suggestions if you like to research. Then, you can visit my website, chandeindicators.com, for more information and ideas. I hope you stay tuned and help by subscribing and recommending it to your friends and colleagues.
Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, and entertainment, not for investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.