Last week in What’s going to happen next for the U.S. stock market? I shared an observation the U.S. stock index had reached a point I expect to see at least a stall. So far, that’s mostly what we’ve seen the last week.
The stock index has reached a point that a stall or reversal is even more possible now. As we see in the above chart, the uptrend has been strong and sharp. Volatility, how wide the price spreads out, has also narrowed. After prices trend up, volatility tends to shift from expansion to contraction and that’s about when a trend becomes more likely to change, at least temporarily.
My momentum systems also suggest the velocity of the uptrend has reached a point the short term trend is becoming more susceptible to stall or reverse.
Otherwise, the short term trend has been strong and rising. The longer-term trend as seen in the chart is defined as sideways using a smoothing trend-following indicator like the 200-day moving average. Notice the blue line is virtually sideways and barely adapted to the -20% drawdown. The S&P 500 is now above its average of the past 200 days. However, notice it crossed above it three times October through December before reversing down sharply.
So, I define the current S&P 500 trend and condition as follows:
- Short-term: Uptrend, declining volatility.
- Intermediate term: Non-trending, volatility expansion.
- Long term: uptrend, but being tested with a volatility expansion and a -20% drawdown.
From this starting point, I expect the asymmetric risk/reward from here may be limited. I’m glad we participated in this recent trend, but we are positioned more carefully short-term at this stage.
However, if the current short term uptrend continues with high momentum, it would be very bullish for the longer term and may negate the likelihood that this could be the end of a decade long bull market. If this is an aged bull market ending, we’ll see swings up and down as it shifts. If the nearly -20% decline was enough, we’ll see new highs in the weeks or months ahead.
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