THE LONG TERM TREND IS OVER – A NEW PARADIGM
The S&P500 is down 26.1% YTD and 29.5% in the last 18 days. Covid-19 represents the worst things that can exist for people and markets – death and uncertainty. For the markets, it is certain that the necessary actions to prevent a worsening epidemic will hurt the economy, but it is uncertain how long it will last and therefore how badly will the economy and businesses be hurt. One thing that is certain is that the 11-year uptrend line, which has supported the S&P500 through much turmoil and the longest bull market in history, is no longer intact (chart below).
On Wednesday 3/12 at 10:00AM, TPA sent out its first note warning about the S&P 500 level 2500:
“Looks like long term support (11 YEAR) at 2500. This is the uptrend line from the 3/9/09 close. That does not mean it is a place to buy. It is a place to watch and see what happens. If we break through 2500, the next support is the 12/24/18 low of 2351, but that would not be as constructive as holding 2500.”
In the 3/13/20 World Snapshot, TPA told clients that the market was very oversold, but how it would respond to the sell-off would be determined by whether it could maintain the long term uptrend as it had for 11 years or whether we were dealing with a situation similar to 2008-2009.
“Stocks have rarely been this oversold. TPA monitors the percent of Russell 3000 stocks (approximately 98% of all U.S public stocks) that are trading above their 200-day moving average (DMA) on a daily basis. As of the close yesterday, 5.2% of the Russell 3000 stocks are trading above their 200DMA. TPA’s analysis in the table and chart below go back to 1/1/95 or over 25 years and as far back as we could get data. The only occurrences lower than Thursday’s number occurred during the 2008-2009 Financial Recession….The question clients need to consider is whether or not we now face a 2008-2009 situation…As TPA said in an intraday note yesterday, the 11-year uptrend line is currently at around 2500. The uptrend from the close on 3/9/09 is a statement about the 11-year bull market. A violation of that uptrend signals that there could be a long term change. Conversely, if the long term uptrend can hold, we are probably not in a new more negative environment and the investing rules that paid off in every other period other than that of 2008-2009, will most reoccur. Clients should monitor the 11-year uptrend line (S&P500 @ 2500) for a good signal as to what will happens next.”
The chart below shows how the long term uptrend line has marked recoveries from various downturns during the past 11 years:
· May 2010 – Flash crash. Many ETFs deviate from underlying value.
· August 2011 – EU sovereign debt crisis. S&P downgrades U.S. debt.
· May 2013 – FED announces it will cut back on its massive bond buying program.
· 2015-2016 – Chinese stocks crash. Crude craters. Energy high yield spreads rapidly expand.
· December 2018 – Tariffs/Trade war. BIGTECH hammered.
The 11-year uptrend is not just a line. It represents a mentality and an investing paradigm that investors have maintained even as their confidence was periodically shaken since the start of the rally on 3/9/09. A violation of the long term uptrend means that something fundamental has changed.
Many clients have asked TPA what happens next. Several pundits and technicians have pointed to the low close of December 2018 as a possible floor for the market (2351), but that is only one data point and does not seem to be a reasonable level to hang one’s hat on. The next level of long term support for TPA would be the market’s breakout level from mid-2016. This marked the point at which the rally that began when Crude bottomed in February 2016 had halted for a couple months, but then regained its momentum and pushed forward. This breakout level was then confirmed in late 2016 and marked the start of a powerful rally throughout 2017. This level of long term support is approximately S&P500 2110 (chart below).