Charts That Validate Stocks Are In The Process Of Topping

The S&P 200-day rolling return is an interesting chart but not much in the way signals with the exception to illustrate the S&P500 does not fall out of the sky and enter bear markets after a strong 200-day run.

Bear Markets

Bear markets usually begin with a topping process, after all, markets are cold-blooded beasts and adapt and rationalize their bullish biases to negative news and deteriorating conditions.   Until they don’t.

Inertia is innate in the stock market, in part due to Wall Street’s myopic focus on the year-end bonus, but if equities can’t break out after making several local tops (see the second chart),  caveat emptor and be warned something is rotten in the state of Denmark.  

We remain medium-term bearish on U.S. stocks based mainly on macro valuations (see charts) though surely, the S&P500 will rally tomorrow on the announcement of the restart of China trade talks.   Is it sustainable?

In our June 26th post, we stated,

Our best guess, however, is given President Trump’s low approval ratings moving into an election year, he is highly motivated to kraft some sort of truce or Potemkin China trade, which will be sold as the “greatest deal ever,” to give the market one last boost.

An S&P top of around 3025-3060 would repeat the topping zip codes of past history.  — GMM, June 26th

Key Levels

Given the topping behavior of the 2000 and 2007 bears (the Sep’18 bear market was short and barely cleared the bar, down 20.2 percent peak to trough),  an S&P top in the range of 3000-3100 would be consistent with recent history and the nominal highs made in 2000 and 2007.   These levels are in the range of around 1-5 percent above the May 1st and June 26th high.

Until the S&P clears 3115, we will maintain our medium-term view that investors should be reducing risk by selling into strength.

In the short-term, we have relatively high conviction traders will remain lathered up on the prospects — emphasis on prospects —of a China trade deal and Fed easing.  We don’t and won’t fight that.  No strategic shorts put out until the mid-3000 level unless the markets show clear signs of breaking.

Scalping the market with short-term buying and selling is a different story.  That’s getting harder and harder with the rise of Auto & Algos (AA).

In the long-run,  we shorts are all dead.

As always, we reserve the right to be wrong.

Topping Process

Initial Tops & Pops

Stocks Expensive Based On Macro Metrics