Back in the middle of September, the S&P 500 broke below its 50-DMA in a material way for only the second time this year. The first time it happened (in March), it rebounded within two days and then continued to rally for the next five months. This time, however, it was not able to regain that line quickly. Yes, it did pop above it for a couple of days at the end of last month, but it has not been able to regain that line. In other words, the important “old support” level has now become the key “new resistance” level.
Having said this, the stock market has not broken down either. At its worst level, it was down by only 5% on a closing basis (and that was on just one day). So, instead of breaking down, the stock market has merely stalled-out over the past 4-6 weeks. This is something that is comforting the bulls right now, and for good reason. The S&P has tested the 4,300 level several times in the last month and it has held that level each time. Thus, unless or until that level is broken in a meaningful way, the bulls will keep the upper hand.
That’s great, but until the S&P regains its 50-DMA and pushes to new highs, the bears will have something to hold onto as well. In other words, over the past month, the stock market has been stuck in a sideways range between its 50-DMA and the 4,300 level. Whichever way it finally breaks-out of that range in the coming days and weeks should be very, very important.
The question we keep asking ourselves when we’re trying to figure out which way things will break is whether the situation in the marketplace and the economy has improved or not over the past month or more. In our opinion, the situation has not improved. China has added another sector to its policy to “clamp-down” on risk and leverage (the banks); the Fed has moved closer to tapering on their bond buying program; both price and wage inflation continue to rise; earnings forecasts for the rest of 2021 and the first half of 2022 are now being questioned; taxes are likely heading higher; and global growth estimates are coming down.
With all of this in mind, we think it’s going to be tough for the stock market to breakout of its sideways range to the upside. That said, the futures are trading much higher this morning due to slightly lower long-term interest rates and positive earnings results from several important banks. This bounce will not be enough to take the S&P 500 back above its 50-DMA, but it will certainly take it close to that key “new resistance” level. Of course, as always, we’ll have to see it break above that line in a meaningful way before we can declare that the month-long sideways range has been broken to the upside. (In fact, we’ll probably need a break of the early September all-time highs for that kind of confirmation.) However, there is no question that the pre-market action is helping the bulls’ argument this morning.
The situation as we’ve laid it out this morning is not complicated at all. The market is bouncing back, but in our opinion, the fundamental back drop is not one that is conducive to an upside breakout. The world’s second largest economy is engaged in a significant de-risking/de-leveraging program and the Fed is about to taper back on the level of stimulus it has been providing the system for the past 18 months (and the ECB is about to do the same). In other words, the Fed is about to begin tightening. (Tapering back on $120bn of monthly stimulus to zero over 6-8 months IS tightening.) If the S&P breaks its 50-DMA and then takes out its all-time highs, we’ll have to change our tune. Until then, we won’t “fight the Fed” (or the Chinese government).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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