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Does Downside Risk Outweigh Upside Potential?

After the S&P 500 managed a weekly close above 3000 the wind seems to be coming out of the sails. Last week finished down, with the lows of the week coming Friday at the close. With more and more companies issuing cautious forward guidance, it seems there may be more downside risk than up-side opportunity for near-term investors.

Last week’s pricing move, while not unexpected, makes sense technically. Markets hit an all-time high, so traders, in the face of cautious corporate outlooks, start taking money off the table and locking in some mid-year profits.

3000 was noted as a significant line in the sand. Going into earnings season, investors have questioned whether or not forward guidance would be optimistic.

The issues seem fairly straight-forward at this point – low fixed income rates force people into the stock market, but declining economic conditions and cautious guidance make valuations look more questionable. Fed action continues to wag the dog at this point, and trade policy just adds to the uncertainty. The cocktail really hasn’t changed much for the past several months.

This issue is, at some point, the idea of a market correction can become a self-fulfilling prophecy. The question is, at what point will bears outnumber bulls? Or perhaps a better question: at what point will sellers outnumber buyers? Because that can move prices.

Unless we get some kind of specific black-swan event, it is unlikely there will be a specific point that markets pivot on. Instead, there will be a point at which a negative movement captures momentum and just keeps running beyond what people expect.

Looking at the technical pricing levels, this week may be another negative. After testing 3000, a pull-back would not be un-typical. The question is where might support be found? For the week, 2950 looks pretty strong. But this trend could easily pull-back to 2900 without being considered anything more than a run-of-the-mill pull-back.

That kind of move would put the S&P 500 at its 50-day moving average. A move lower than that would be a more significant shift and could be a sign of further deterioration to come. How aggressive the pull-back occurs could also be important. A few days of sell-off is pretty typical. But a more extended down-draft — especially if based on a specific event — would be concerning.

Perhaps the most important player in all of this will be the Fed. Markets have become near-dependent on the FOMC providing low rates to force a bid under this market. If, for some reason, other factors outweigh these low rates, the stock markets look less attractive to investors. At that point, we will have more to discuss in this blog. Until such time, the story stays the same: TINA until we hear otherwise.

S&P 500 projected range for the week of July 22, 2019

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or ndirectly
in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the
extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

No Foolin’

You can say what you want about the news tape. You can parse the economic data. You can look at the yield curve. And in spite of it all, the technical pattern is looking more and more like a re-test of the 2019 highs will be tested by the SPX.

SPX futures are indicating a spike higher at the open. This after the index has been consolidating around the 2800 level since late February.

Last week’s close above 2800, along with this morning’s futures pop, are a good indicator the that March 21 highs of the year will be tested (and likely surpassed) today.

If this occurs, it’s probable 2800 shifts from being the previous resistance level to the new support level. This gives the SPX the opportunity to push higher, re-testing last year’s highs, and possibly going even higher.

It would take a genuine shift in both economic data and policy to change the trend if this breakout occurs. For the time being, this can almost be called a stability bonus. Even though most media outlets like to stir the pot, the news narrative has not materially changed. And, more importantly, the FOMC rhetoric hasn’t changed.

This stability lends a degree of comfort for the markets. It’s possible we can see slight multiple expansion from these levels simply because, while negative, the current information cycle still indicates less ‘unknown,’ and therefore more risk can be priced higher.

Well, that, plus fixed income just has no meat left on the bone. So anyone looking for yield is forced into the deep end of the credit pool, or back into the stock markets. So the TINA market (there is no alternative) remains part of the story.

However you slice and dice it, the markets look to have a good shot at pushing higher over the next few weeks.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.