Seven Models to Analyze the June-22 Low
Was June the bear-market low? The answer depends on the model's look-back period.
Overview
The FOMC meeting minutes were released mid-week and helped the bears by drawing the market’s attention to further rate hikes.
The S&P-500 rose to the mid-April resistance we identified last week and pulled back, but not before we got several lows above 4250 and a high near 4325 (~200-day moving average). This week’s price action affirmed a new bull market.
Key Question
Has the market made a bear market low? Well, the answer depends on who you ask. Or, more correctly, the answer depends on which models are used to identify the low. Or, more appropriately, the length of the look-back period used to construct the model. I will compare seven models to show you that the level of smoothing implied by the length of the look-back period largely determines the answer.
Performance Summary
We wrote last week:
However, the market may be getting a bit overbought as it approaches the highs of the late April bounce (shown by the dashed red line on the $SPX chart above.)
The market barely peeked above the April highs before pulling back (see chart above). The net bull/bear balance was a bit weaker at +57.
Even though interest rates rose a bit this week, the utilities broke out to new highs, so one must watch for a false breakout.
We show a MetaStock scan using the Chande Trend Meter (CTM) over the major US equity market sectors. The strongest sectors include utilities, consumer staples and financials (broker-dealers and insurers.)
Seven Models
If you have followed the market commentary recently, there seems to be little confidence in the June market lows. Opinions are widely dispersed, with skeptics pointing to the FOMC's focus on inflation, deteriorating macro data, and earnings disappointments, among many factors.
I will focus on seven breakout and moving average crossover models of lengths varying from 12 to 200 days to examine the percentage of stocks in the SP-500 in uptrends. We should expect that very few stocks are in measurable uptrends near a market low.
The figure above plots the proportion of S&P-500 index stocks in uptrends using 25-day and 50-day breakout models. The model's exact definition matters little since the look-back length (25 vs. 50 days) makes the real difference. The data show that the shorter the look-back length, the quicker the model’s response. Observe that the percentage of stocks in uptrends approached zero at both the major lows. The recovery off the June-20 low has been quicker than off the March-20 lows.
The figure above focuses on 100-day and 200-day breakouts, with the 50-day breakout data added to provide continuity to the previous figure. Note that the models with the longer look-back length (100 and 200 days) are slower to respond at the bottom when compared to the shorter (50-day) model. At either low, the slower models (100 and 200 days) had fewer than 10% of S&P-500 stocks in uptrends.
In the figure above, I have zoomed in on just the 2022 calendar year and added two moving average crossover models, one using 7-day and 50-day crossover and the other using the 50-day and 200-day crossover. Focusing on the June lows, we can see that the 12-day, 25-day, and 50-day breakout models quickly rose from zero. However, the 200-day models (50/200 crossover and 200-day breakout) were the slowest to respond.
The overall response of the models was similar, i.e., the percentage of stocks in uptrends approached zero and then rose, which is the very definition of a market low. The speed with which the model responded varied with the length of the underlying look-back length, with shorter look-back models responding more quickly than the models with a longer look-back period.
Thus, the length of the look-back period will largely determine your assessment of the June market lows.
Wrap-up
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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.