Technically Speaking…. It Doesn’t Look Good
Over time, markets move based on fundamental factors; revenue growth, returns on capital, cash flow, and earnings. But in the short run, technical factors (i.e., chart reading) play a large role. We all experience the emotional roller coaster of markets to varying degrees. Technical analysis is an attempt to study that emotional response through price charts. The idea is that all the emotions get funneled into prices and volume traded and because human nature doesn’t change, price patterns tend to repeat. Is it a self-fulling prophecy? Maybe, but enough people use technical analysis that it does have meaning in day-to-day trading.
Lately, the technical analysis has been looking a bit sickly. Examining the S&P 500 chart below, we can see that almost 2 weeks ago, the 50-day moving average (pink line) crossed below the 100-day moving average (blue line). When shorter term averages cross below longer-term averages, that is considered a negative short-term indicator, and in this case has proven to be accurate thus far.
This week, the S&P 500 index also dropped below the 200-day moving average (purple line), which also a negative indicator. If that pink line (50-day average) were to cross below the purple line (200-day average) that is called a ‘death cross’ and would imply even more near-term downside.
The tech heavy NASDAQ 100 Index (NDX) is having technical troubles of its own. Like the S&P 500, NDX also saw the 50-day average (pink line) crossed below the 100-day average (blue line) just after the S&P 500 did the same. The NDX has not yet crossed below the 200-day average purple, but is closing in on that level very quickly. Another weak indicator is that after bouncing off support at about 14,500 (light blue line) several time, it finally broke below that level this week.
This analysis is far from fool proof, but the negative technical indicators are mounting. However, they are at odds with what has historically been the most positive seasonal period for the stock market – the Christmas Rally. The chart below shows the seasonal trend for the Dow Industrial Average, but the trend for the S&P 500 is very similar – Late October/early November typically mark a bottom and stocks rally into year end. But this isn’t fool proof either. Yet another example of why timing markets is so difficult.
The next chart shows the inexorable rise of “Non-Store Retailers”, the most obvious example being Amazon. On-line sales spiked as COVID started, then settled only to begin rising again and is now almost back to its peak (as a % of sales). This trend is, of course, the one that has already doomed most department stores, but it is as much a threat to local business. As you drive, notice the empty storefronts that appear to be multiplying by the day. Understand that those businesses pay taxes and the rent they pay supports the local property tax base (and if you think your taxes are high, commercial properties pay more than residential).
If you want to keep your good schools and you want to live in a thriving community, it is becoming critical that we all do more to support local businesses. Amazon won’t miss us. Just sayin’…
What We’re Reading
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