Day to day it can be tough to make sense of what’s going on in the market. Stories come and go and the “Fed” is uttered almost daily.
But sometimes when we look below the surface, certain patterns may emerge.
Below is a chart of the SPY representing the S&P 500.
As you can see we are bouncing down from the 200-day moving average for the third time on this chart. It’s normal when there is uncertainty about fundamentals (company earnings etc) for the technicals to take the lead (selling at the 200 day moving average, etc). But note the possible change here. In the earliest push back from the 200-day moving average the market moved to a lower low in October.
Again the market rallies to the 200-day average only to be pushed back again in December. But, unlike the earlier price action, the SPY did NOT go down to and break the prior low in October but rather formed a base around 3800.
Source: TC2000 by Worden
This could have significance because it may mean we are gathering strength for a push above the 200-day moving average (bullish). Now we are into the 200-day moving average again but I think higher may be where we are headed. For now I am focused on this short term push back from the 200-day moving average and I am watching for any break below 3800. A parallel occurrence that may be supportive of my above thesis is the push lower in longer term interest rates.
I have mentioned before that while the Fed is continuing to push up the Fed funds rate, longer term rates (10 year and 30 year) have continued to fall. In the chart below you see the shift in momentum of the 10 year treasury yield from higher to lower. While no one can know for certain, once this monthly shift takes place, such a downtrend usually continues for close to 2 years.
My guess is that down the road we may be seeing closer to a 3% rate (or possibly lower) on the 10 year. Why is this important? When doing fundamental analysis on stocks you don’t refer to short term rates, you look at the 10 year yield as a reasonable risk free rate. As this rate comes down, stock valuations can rise and could be another force to potentially push the market higher.
Source: TC2000 by Worden Of course, none of us have a crystal ball that can provide an insight on market moves in the long term. But, sometimes, we can find patterns in the noise that can help us see where the market might be headed.
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