Technical Tuesdays: Upper End = The End?

As the accompanying chart shows (click image to enlarge), US large cap stocks are at the upper end of their range as determined by the Bollinger Bands (which measure current price levels versus its moving average). When this has happened in the past, stock prices entered into a topping period BUT only when the key momentum indicator (Weekly MACD) joined the rate of change indicator (second and third lines in the chart, respectively) in not confirming the higher highs. As one can see, this has not occurred just yet, which means that price can continue to trend along its upper end Bollinger Band boundary for a while longer.

To add some perspective to this potential extended market issue, consider the following excerpt from S&P Cap IQ's chief equity strategist, Sam Stovall in a report published on May 8 (when the S&P 500 was at 1632): "As of tonight’s close, the S&P 500 was 11.2% above its 200-day moving average, versus the average spread of 2.4% since 1995. In addition, the “500” is 4.3% above its 50-day moving average, versus a more normal 0.6%."

So, here we are with the large cap US equity market that is well above its historical average spread over its moving averages, which leads us to consider if being at the upper end = being near the end of these happy times are here, again?

Investment Strategy Implications

From a fundamentally-oriented valuation perspective, stocks are not overvalued, which is to say that this isn't quite a 1987 scenario (at least, not yet) - something many seem inclined to bring up of late. Earnings yield spreads are still quite bullish as earnings continue to deliver while central bank financial repression actions distort the longer end of the yield curve, which thereby distorts the earning yield to 10 year US Treasury spread.

From a technical analysis/market intel perspective, there are several points to consider:

1 - The Mega Trend is solidly bullish for US and EAFE stocks and neutral for emerging markets.
2 - The equity market is extended, momentum is decelerating, and signs of fatigue are evident (as the above chart illustrates). However, none of the reliable market triggers of a pullback (5 to 10%) or a correction (>10%) have been realized (which means any action taken would be anticipatory).
3 - The seasonality issue (May to November) suggests a healthy dose of caution is warranted (as in - don't overdue the bullish Kool-aid consumption).
4 - Financial market liquidity remains abundant courtesy central bank generosity and its faith in the portfolio-balance effects (more on this in Thursday's upcoming blog posting) along with the willingness of investors to keep their money with their asset managers.

From a thematic perspective, there are an abundance of issues to be concerned about led by whether the extraordinary central bank "highly experimental policies" will produce a sustainable, organically-driven economic expansion. On a more sectoral basis, however, terrific opportunities exist - provided they get a chance to be realized and/or one has the stamina to wait for them to unfold (e.g. the need for potable water).

Bottom Line: The music's playing and everyone needs to dance. It's just a matter of how close to the exit door should one trip the light fantastic.

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Technical Tuesdays is a product of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

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