To fulfill a dream on my bucket list, I attended the NCAA Men’s Final Four Basketball Championship in San Antonio, Texas. Besides the games, I enjoyed the company of a childhood friend—someone I have known for over 52 years—with whom I stayed while I was there. He is an extremely bright individual and has spent his career on the legal side of a number of large and small financial institutions. After I explained “secular bull markets” (equity markets that go up for a period of at least ten years, interspersed with cyclical bear markets) and my belief that we are still in one, he asked me a few direct questions.

1)  If you are wrong about the current bottoming process, where do you see risk to (support) for the S&P 500?

Following the strong rally between November 2016 and January 2018, I continue to believe a multi-month consolidation period would not be unusual. However, a 50% retracement of the move by the S&P 500 (2614.45) between these two time periods is approximately 2477, or only about 5% below yesterday’s closing price.

2)  What do you need to see going forward to make you feel that the current downside probing is behind us and some upside probing (short-term rally) is at hand?

The key to the sustainability of any future rally attempts will be for “pessimism” to grow (it has, which has bullish implications given that this is a contrary indicator) and for strong buying demand to show up. This would be evidenced by a string of days during which NYSE Advancing Volume leads NYSE Declining Volume by at least a 9 to 1 ratio, or some type of Breadth Thrust occurring—neither of which has yet happened. I would also say, from a price perspective, the NYSE Composite Index (12,367.07—using this index because it is broader than the S&P 500 and provides a different perspective) needs to rise and stay above a wide range of resistance (selling pressure) between 12,500 and 12,800.    

3)  My first home mortgage was around 13% in the early ‘80s. Interest rates have steadily declined ever since. What now?

I think the long-term trend is “slow but steady to the upside” with 3.00% to 3.04% being the next important area of resistance.

4)  I’m a long-term investor. What markets might I look at if I’m willing to take some risk and manage it along the way?

If you will truly manage risk (“Bulls make money, Bears make money, but the Pigs go broke”), Emerging Markets look to be in a period of outperformance versus the U.S. markets, defined by the S&P 500.

Retracement levels (potential support) based on the rally off the November 2016 Election low and the January 2018 high. 
NYSE Composite Index. A wide range of resistance exists between 12,500 and 12,800 (red falling 50-DMA)
10-Year U.S. Treasury Yield Index. Next area of important resistance is in the vicinty between 3.00% and 3.04% - not shown. 
MSCI Emerging Markets Index vs. U.S. Markets (S&P 500) - Weekly. Rising Line: emerging Markets Outperform. Falling Line: U.S. Markets Outperform. 

Given all the algorithmic trading occurring, the equity market is very dynamic right now. We will continue to share our insights. In the meantime, please know that Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.  

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written on 04.03.2018. Chart sources:

Print Copy of Article: Day Hagan Tech Talk: April 4, 2018 (PDF)

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