The Markets in Context
The markets, SPY, NDX, IWM are tracing out the typical December weakness, which usually turns higher towards the end of this week or possibly next week. This pattern has played out more often than not since 1928. Considering we may dip a bit further, we’ve taken the liberty of providing drawdown points to target, whether you are bearish or bullish.
The 50ma is just shy of a 5% drawdown, though I doubt we pullback that far. The reason? Sales and earnings are good and fund managers are under positioned the US equity market.
Market Cycles
The SPY cycle is overheated. Note the previous pullbacks from the red zone did not result in a huge drawdown. We suspect this is because earnings and sales have been strong this year and fund managers are underweight US equities. As a result, we anticipate we could see a repeat of this pattern into the holidays. In other words, we currently see a bit of weakness, then a bounce into year end. Target 259.00 (+/-) pivot high in early November as a low point.
NDX Market Cycle
The same goes for the Nasdaq, which bore the brunt of the recent selling. We see lower highs and lower lows; a descending pattern. The 50ma is just below, with a lower target at 6125 (+/-) pivot high in October.
Fund managers are most likely eyeballing this pullback for an opportunity. A bounce seems likely, as the stocks that have been sold have great earnings and sales. The problem was, the trade was crowded. A shakeout makes sense.
IWM Market Cycle
IWM should be viewed the same way. It should also be considered a risk-off indicator. A test of the 50ma seems obvious. We are watching this index closely, as small caps will benefit the most from a change in tax legislation.
While it may be obvious to some, new members may not have been around long enough to know we start taking smaller positions as the peak of the cycle nears. We also begin scaling out into strength. Once the cycle shows signs of turning from a low, similar to August and November, we begin adding to our positions again. As a result, the ride the wave of buying and selling more effectively.
Hang in there. The above analysis is meant to provide context.
See you then,
Vinny
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