Written by Lance Roberts, Clarity Financial
The market has continued to remain within its bullish trend channel from the 2015 lows which is why we only mildly reduced our overall equity exposure in February of this year.
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The good news is the strong, rising bullish trendline from the 2016 lows, which coincides with both the short and long-term moving averages, remains intact for now. This provides fairly strong support for the market on an intermediate-term basis which keeps portfolios allocated toward equities currently.
However, over the last couple of weeks, I have discussed the weekly sell signal looking to reverse as shown in the lower panel. The market’s weakness kept the “buy” signal on hold which confirms our lower levels of equity exposure in portfolios.
Most importantly, any confirmed break below 2710 on a weekly basis, which is a break that fails to recover, will most likely signal the onset of a protracted bear market. With no real support, until you reach the long-term bullish trendline from 2009, there is roughly 500-points of downside risk. As I stated previously:
“I certainly don’t plan to ‘hold’ equities ‘long’ during such an event.”
Longer-Term
There is absolutely nothing good going on a longer-term basis. Valuations, extensions and deviations from long-term trends all suggest rather negative forward outcomes.
The key to watch for here is a reversal of the market that triggers a quarterly MACD “sell signal.” The current spread between the long-term moving averages suggests that such a signal is likely 2-to-3 quarters out if the “bulls” don’t get their act together soon and start rallying the market higher. The current action is more than likely part of a topping pattern rather than a consolidation.
As Bob Farrell’s Rule #4 states:
“Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways”
With the MACD at such an elevated level historically speaking, the signal is inevitable. It is simply a function of time.
Yes, we are still long equity exposure in portfolios for now, but let me repeat from last week:
“…we do so with a risk-management process in place. We encourage you to do the same. If you don’t have one, it might be time to develop one. Or find someone to do it for you.”
