Published June 14, 2019
Timeframe matters when we are analyzing markets. While we might hear that stocks are in the midst of a strong rally, a look at the broader stock market over a wider timeframe says that most stocks are treading water.
The chart below shows how the S&P 500, since 2009, alternates between strong moves upward with flat periods, pausing and consolidating those gains. The consolidation periods have been lasting around 12-18 months. We appear to be in the latter stages of one of these consolidation periods now.
The hallmark of the uptrending market is the continuous support provided for stocks, where buyers come into the market at key pricepoints (shown with the blue arrows below). Eventually, this support gives way as buyers fail to step in. This looked to be happening back in December as stocks fell through the 2600 level. However, buyers quickly reemerged and the market ship righted itself.
Looking away from large-cap stocks and toward the thousands of smaller companies in the market, we see the consolidations take a longer time (boxed areas). The chart below shows how the stock market of smaller companies breaks out of the blue pullback periods to rocket higher. These periods of consolidation are longer, with the prior one lasting almost three years! It remains to be seen whether we are merely in the middle of one of these long holding patterns, or not.
Backing away to almost 20 years of data, we see that stocks do break downward out of these boxed flat periods.
The bottom line message here is that the stock market is in the midst of a consolidation period. Stocks have resolved these consolidation periods in favor of the bulls twice during this long market run since 2009. Will there be a third upward run? Or, have we seen the high for this market cycle? Risk factors appear to be building while the world’s central banks find their toolkit somewhat diminished. How these factors get resolved will determine which way stocks break.
Market Update
A flurry of positive news kicked off the week pushing stock indexes +0.5% higher. An agreement to skirt tariffs on goods from Mexico combined with two mergers to give stocks a positive push – United Technologies and Raytheon in the aerospace/defense sector; Salesforce.com and Tableau in the software arena. Resistance at 2900 turned the S&P 500 back downward later in the day. Flat sessions Tuesday and Wednesday as investors await the Federal Reserve interest rate decision next week. A tame inflation report Wednesday further supported investor’s hopes for a rate cut. A -4% tumble in oil prices Wednesday reminded investors of the softness in global economic growth, though it failed to rattle stock and bond markets. A rebound in oil prices due to strikes against a couple of oil tranport tanker ships pushed stocks +0.4% higher Thursday. The rebound in oil merely offset the prior day’s decline however. An overnight earnings warning from semiconductor maker Broadcom pressured the Nasdaq early Friday. The company sited the U.S. sanctions on Chinese smartphone maker Huawei as a reason for the softness in their outlook. Stocks dipped -0.2% in Friday’s trade.
For the week the S&P 500 added +0.56% while the Nasdaq 100 (QQQ) rose +0.88%. Smallcap stocks lifted +0.58% on the week.
Warm wishes and until next week.