One Chart That Could Curb Your (SP 500) Enthusiasm

Thanks to Ryan Detrick, a technical analyst I’ve followed for many years, I’ve also started following Chris Kimble’s work. Chris is a technician that that started Kimble Charting, and looks to be giving great perspective on charts for many different asset classes for many different time frames, which as a fundamentally-based RIA who has learned the hard way not to ignore technical analysis, is a very helpful approach.

To say that the above chart should, “Curb Your Enthusiasm” is a bit of an understatement, but it is curbing my enthusiasm a bit as well.

As was detailed in this blog post a few weeks ago, projected 2016 returns for the SP 500 are anticipated to be pretty decent – better than 10%, if only from a sentiment perspective. If you look at the long-term return data and “average” returns for the SP 500 (included in the blog post linked in this sentence), the SP 500’s average return since 2000 is just 6%, well below the 11% average return since the early 1970’s.

The other aspect to the forecast is that I haven’t seen projections this gloomy for SP 500 earnings for 2016 since since the 4th quarter of 2012, when we were looking at the election results, the fiscal cliff, tax hikes, etc. etc.

The SP 500 returned 32% in 2013, attributed mainly from Financial’s, some P.E expansion and better economic growth warranting the Taper Tantrum.

It is the continued pessimistic sentiment that keeps me leaning bullish (and that “average” return), however Chris’s chart should help temper enthusiasm (of which there is little anyway). (Goldman Sachs came out this week and told investors to expect another year of flat returns for the SP 500; that makes me even more bullish. If you study the long-term data spreadsheet, during secular bull markets, years like 2015 are followed by strong up years for the SP 500.)

To Chris’s point, I’d like to see that chart resolve itself to the upside shortly, and with volume.

Here is another longer-term crude oil chart which Chris published this week, which if the level holds, and crude turns higher, could be a positive for the market.

Crude Oil Prices As Oversold As 1999 Low

To link the chart work, to Trinity’s earnings work for clients, Basic Materials, and Energy represent less than 10% of the SP 500 by both earnings weight and market cap, and that percentage is falling. If you combine Basic Materials, Telecom and Utilities, three of the SP 500 sectors probably represent less than 10% of the SP 500 by earnings weight and market cap, and if we add the Energy sector to that trio, then 4 sectors represent about 15% of the SP 500 by earnings weight and market cap, with the point being that Technology, Financials, Industrials, Staples and Discretionary just need to hold their own for the market to have an average year in ’16, and really of those sectors, Financials and Technology represent 35% – 40% of the SP 500.

Conclusion: there is an old maxim or saw that has circulated around investing circles for years, that goes something like, “the most bullish thing a market can do is move higher in price” which sounds funny to think about, but the point is if the bull market is to remain intact, then the SP 500 needs to break out of this 12 – 15 month consolidation.

Investors need to see a trade above 2,132, or the May ’15 – July ’15 highs, and preferably on good volume.

Id get pretty worried if the SP 500 broke below the 1,850 area or the uptrend line off the March ’09 low.

Those are the boundaries aI’m talking to clients about. Thanks to Chris Kimble and Ryan Detrick for the thoughtful chart work.

Have a safe and restful Thanksgiving holiday.







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