Chart Talk {04.25.19}

Today's chart shows last fall's decline and this year's "V" shaped recovery.  Note the compounding math.  It takes a 25% gain to erase a better than 20% decline.   Also note that we've used a great deal of market buying power to just get us back to where we were seven months ago.  If I stepped this chart back even further then I could also point out that we're only marginally higher than we were back at the end of January of 2018.  In terms of market movement we have gone roughly 15 months now with little to show in the way of gains.  

This fits into my thesis which is that we've been in a consolidating pattern these past 15 months.   Are we on the verge of ending that pattern and rocketing higher or are we seeing another topping pattern that could lead to some kind of decline?  Unfortunately nobody knows, however, this is what we do know at this point.  First some reasons to be a bit more cautious at this time:

Stocks are not cheap at something like 17 times this year's earnings estimates on the S&P 500. 

Stocks are overbought by our work in all the time frames we follow.

The most recent IPOs that have come forward indicate a certain amount of speculative froth may be trickling into stocks.  Investors also seem complacent.

We are about to enter a seasonal period of time where stocks have historically struggled to make gains.

We have not seen a pullback during this recent move higher in excess of 4%.  All pullbacks have been short in duration and have been met with buyers.

Balancing out these more negative points are a few on the positive side:

Earnings have been better than analysts estimated a few months ago.  Earnings estimates on a going forward basis have been moving higher.

The economy is strong, as is job growth.

The end of the Mueller Report likely removes the risk of a constitutional crisis with the President as political crises are not good for stocks.

When I look at all these tea leaves I think the higher probability for markets between now in the fall is more of the same churning action we've seen since early 2018.  I think there's also a higher probability that stocks could at some point between now and when the leaves fall off the trees see something larger than a 4% decline. Remember that historical volatility resides somewhere in the 10-14% range.   I also think stocks have the potential to be higher than where they are now by the end of the year and also carry the potential to be higher by the end of 2020.  In that scenario and based on what we know today, I think pullbacks in stocks would be met by buyers.

Of course that is just a guess.  It may be based on probabilities but we all know the future is hard to predict.  Pretty much anything can happen and will.  In terms of what to do I will say that investors should monitor their risk/reward requirements and see if anything has changed.  Only based on that should investors contemplate any changes in their investment profiles.  Investors that see the need for certain amounts of cash in the next 4-6 months may want to become more defensive in their portfolio orientation.  In terms of an upfront need for cash I would note that advice is prudent at any time whether in good or bad markets.

I will be back early next week.  The chart above of the S&P 500 ETF SPY is from Tradingview.com although the annotations are mine.  You can double-click on the chart at the top of the page to make it larger.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.