The Stock Market Reaches Another Fork In The Road
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Many investors are wondering if the correction in the U.S. stock market is over. Simply put, we don’t know. It can be over if we get a lot of good news on the economy – and if there are no negative developments on the geopolitical front (a big unknown), and if long-term U.S. interest rates drift lower from their recently-elevated levels. But that’s a lot of “ifs.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
From a historical perspective, September is the worst month of the year, even though in pre-election years it tends to be less bad. Since this August has been negative so far, it is possible that September will not be as bad, or it could even be positive.
With a few more days left in August, I would not be surprised if investors itch to buy stocks at month’s end, if the news on the economic front continues to be benign.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Some are discussing a possible head-and-shoulders top on the S&P 500. That may be a possibility, but many consolidations look like head-and-shoulders tops before they continue higher.
It would only be a head-and-shoulders top if we break the red neckline and gather momentum to the downside, which we have not yet done. There is a lot of support at the uptrend from the October lows as well as the rising 200-day moving average.
A rising 200-day moving average is typically a very strong support area after the market has spent a long time above it – in this case, since March. At best, the present chart formation is inconclusive and would resemble a completed correction phase if we clear last week’s highs to the upside.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Some have suggested that the draw-down of the U.S. Treasury account at the Fed to $44.8 billion as of June 7 may have something to do with the surging bond yields, as we have had bond issuance and corporate taxes putting the U.S. Treasury account at the Fed to a July 26 high of $543.6 billion. That’s money leaving the financial system to get parked at the Fed before it is spent by the U.S. government.
The more the U.S. government spends, the more it will have to pay in interest, but there are many factors affecting long-term U.S. interest rates, so a direct causality of the recent debt ceiling deal and surging long-term bond yields is inconclusive at best.
If we blast past 4.33% on the 10-year yield and head towards 5%, then I believe the stock market would be pressured and that head-and-shoulders top will break and most likely the index will head towards its 200-day moving average.
On the other hand, if bond yields stop rising and head lower due to declining inflation data, it is possible that the correction is over.
A lot will be decided this week, but as of this writing, the bias of the stock market is to the upside.
As the legendary Yogi Berra so aptly put this dilemma: “When you come to a fork in the road, take it!”
It sure looks like the S&P 500 will take Yogi’s advice this week.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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