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August 24, 2020


Market Comment

Phases & Cycles



Aug. 18: In just under five months the S&P 500 index has gained an extraordinary 54.6%. For over a month we have called for a correction to refresh and replenish the bull market to enable further gains down the road. The bull’s response so far is to ignore any signs of internal deterioration and quickly meet any selling pressure with renewed buying. But the S&P 500’s seemingly inexorable advance to test the high at 3,393 opens up several possible scenarios for the next two months. The S&P 500 could 1) cut easily through its high and continue its current upward trajectory, much as the Nasdaq did in June; 2) consolidate in a trading range near current levels before pushing higher into the 3,400s; 3) move quickly above 3,400 but then fall back (a “false breakout”); or 4) stay flat until the August option expiry date (21st) and then collapse.

Scenario No. 3 or No. 4 is the most likely, considering: 1) New York is about to enter the historically volatile September/October period; 2) presidential election years tend to offer particularly weak returns during the autumn; 3) the S&P 500’s negative internal momentum divergences, while improving, still persist; 4) volume is tailing off; 5) the S&P 500 remains overbought—80% of its stocks are trading above their respective 50-day moving averages; 6) the FAANG stocks have lost some of their upside momentum; 7) there is downside cyclical pressure until the end of October; 8) sentiment (a contrary indicator) remains positive—the latest Investors Intelligence data show 58.1% of surveyed advisers are bullish, and bearish adviser readings are at a 2½-year low; 9) the S&P 500 is now 300 units above its 200-day Moving Average; and finally, 10) two nontechnical signals—there is no resolution to the virus, and third-quarter earnings aren’t likely to be better than the previous quarter’s.

—David Tippin, Ron Meisels

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