Circuit Breakers Tripped

Well, we’re in for it now. The Kansas City Chiefs won the Super Bowl. And certainly congratulations are in order. But what does this mean for the markets?

If the Super Bowl Indicator is to be believed, we’re in for a bear market.

Of course, the accuracy of this indicator is highly questionable (having been wrong the last four years in a row now). Still, on a purely random basis… maybe?

When considering other factors in this market, it looks like last week’s negative move was ‘good’ in the sense that it moved us out of over-bought territory.

The concern (if there is one) is that we tripped some minor circuit breakers in the BigFoot system. Our confirming indicators shifted from buy to hold on the major stock indexes.

This is not in and of itself a big deal. The confirming indicators have historically been more accurate as entry signals than exit signals (at least anecdotally). Nevertheless, they flipped. So, for the time being, the system is warning against deploying new capital (at least into the indexes – the signals are actually intended to be used on a position-by-position basis).

What this circuit breaker does imply is that markets have pulled back enough we may be moving into a consolidation phase rather than an expansion phase.

The technical picture appears to confirm this. Last week’s move down was not a surprise. Still, the move was enough that it caught people’s attention. And sentiment may shift.

We forget that many market participants have not adjusted their expectations with inflation. To some, a 600-point drop in the Dow still ‘feels’ like a massive day. In reality, it’s less than a two percent decline. So, while a real move, it’s nothing like a 5-to-10 percent move that some associate such a number with.

Regardless of the fact such a data anchor is flawed, the move can damage sentiment. (This sounds worse than it may be.) The good news about a shift in sentiment is that it leaves room for markets to potentially keep climbing a wall of worry.

In reality, little has changed for this market. Despite fears of coronavirus and election uncertainty, the underpinnings of the economy continue to remain relatively intact. And the conditions that drove us to this point are relatively unchanged. Which means the fundamental elements moving this market – low rates and an accomodative Fed – continue to drive this market.

So, absent new evidence, you keep doing what the market tells you to do… until it tells you to do something else.

Right now, on a technical/quantitative basis, the market still says the bull is intact. Last week’s move was corrective in nature, but the 50-day moving average for the SPX held as support.

For the week, keep an eye on 3200 for the SPX. If this support holds the odds look good for a recovery and re-challenge of the highs of the year. If it’s breached, next week’s blog should be more interesting.

Happy February – and fingers crossed the Ground Hog was right yesterday.

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