Stock indices are looking stoppable. Why? Is it fundamentals? Technicals? There is a third explanation that however improbable, might just be the truth.
This is a chart of the US S&P500. I am using CFD data. The key feature in this chart is a set of 4 weekly moving averages namely:
- 13-week exponential moving average
- 26-week exponential moving average
- 52-week exponential moving average
- 104-week exponential moving average
I like to see these moving average lines as showing the quarterly, half-yearly, yearly and 2-year trend of the S&P500.
SPX500 (CFD) weekly chart January 2015 – present
S&P500 very strong index performance
Based on this chart, the S&P500 is very strong. Super strong. So strong that it shrugged off all that fear about Kim’s missiles early this week. How do I know that? The red moving average line in this chart is the 13-week ema. This shows short term trend. The short term trend of S$P500 is very strong and bouncing off the red line. It’s gradient is very steep. That shows a very energetic trend. Until the index falls below this red line, there is no sign of any correction.
I am not talking about danger, like a crash. I am just looking for correction, which should be part and parcel of any stock market and it’s simply not here.
Look at the two grey boxes on the left. The leftmost box shows us 3-month price action leading up to 24 August 2015 Black Monday crash (big red candle on right edge of box). The second box shows us price action in Q4 that year, just before the new year crash beginning 2016 (starting with China).
In both boxes, we can see price moving sideways, eventually beating the 13-week ema (red), beating the 26-week ema, before falling steeply. These are warning signs for traders and investors. At the moment, none of these signs are present.
All that talk about fear and war in the media, about how bad North Korea is, even fear about the US debt ceiling and everything else – none of these matters based on what S&P500 is printing right now.
There are two common reasons floated to explain this chart.
Reason #1 – that US stocks have very strong fundamentals.
Never mind that PE ratios by many measures are higher than the Tech Bubble in the last century. Never mind economic indicators suck, like this US labour participation rate that is lower than the 90s. Never mind banks did not fully recover since the Subprime Crisis.
Reason #2 – that technicals are very strong. Maybe fundamentals don’t matter any more. Maybe algos that rule the markets right now don’t care about fundamentals. They only care about technicals.
Maybe it comes down to one line in the programming code -> buy if price is above line.
That someone who programmed this extremely successful algo could have forgotten to put in any sell rule. Come missile, WWIII or The Great Reset but there is no sell order.
The third ‘unspoken’ reason
I like to think that there is reason #3. This reason #3 I have not encountered explicitly in the mainstream media. Maybe no one wants to dignify it by giving it any attention. Maybe it’s true – that kind of truth that no one wants to say out loud like ‘the Emperor is naked’.
How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth? Sherlock Holmes
This reason #3 explains why the S&P500 is so strong. Explains why the NAS100 and the DJ30 are so damned strong too because they are printing the same patterns. Explains why fundamentals don’t matter and technicals look so unstoppable.
Reason #3 – markets have already decided that ‘quantitative tightening’ will never happen.
Markets are trading like the last rate hike will be immediately followed by rate cuts until NIRP in conjunction with QE infinity.
This market is showing the sign that stocks as a store of value are being snapped up before the final full Zimbabwe.
Zimbabwe Industrial Index ‘store of value’
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."