End Of The Greed Fueled S&P 500 Rally
Parallels between today and the dot-com crash
Over the past couple of months, this newsletter has been focused on analyzing a market that has been characterized by greed. Both active fund managers and retail investors have returned to the market with increased exposure, despite weak market breadth. This newsletter has questioned the viability of the "new bull market narrative" and while it may be premature to definitively label this as a bear market rally, current indications suggest that it was little more than a convincing bear market rally.
Last week, the US Personal Consumption Expenditures (PCE) Price Index, along with the previous week's Consumer Price Index (CPI) and Producer Price Index (PPI), surpassed expectations, implying that controlling inflation may be more arduous than initially predicted. As a result, the stock market is now beginning to reflect the truth of this storyline.
Market Comparison: Revisiting the Dot-Com Crash of 2000-2003
One month ago, I drew a comparison between the current state of the market and the dot-com crash of 2000-2003. Today, I want to revisit this thought. Looking back, the dot-com crash was marked by two false breakouts in quick succession, as indicated by the short-term moving average (20 day) crossing above the medium (50 day) on the S&P 500. The blue line at the bottom of the chart represents a sentiment reading. A high reading indicates a market characterized by greed, while a low reading reflects fear. Although the reasons for the 2000 bubble bursting are vastly different from the causes of today's market conditions, the chart displays an eerie similarity that underscores the presence of a greed-fueled rally preceding the final leg of the decline.
The current market shares a striking resemblance to the dot-com crash with two breakout signals, and similar to that time, the second breakout peaked in a greed oriented environment. It remains to be seen if history will rhyme in the coming weeks and months.
Although the market declined throughout February, the CNN Fear and Greed Index indicates that it remains in the greed zone, albeit less than before.
S&P 500 at Critical Juncture: Key Level to Watch
The S&P 500 is currently at a critical juncture, and I want to draw your attention to a chart displaying the S&P 500 with a volume profile on the right-hand side. The blue line, known as the Point of Control (POC), represents the price at which the highest volume of trades occurred during a given period. The recent decline in February has brought the S&P 500 right to this crucial level. While this level may provide intermediate support, it's important to note that in June, September, and December of last year, when this level failed to hold, the rate of decline almost immediately accelerated. Keep a close eye on the S&P 500's movement relative to this level.
Market Breakdown Warning: S&P 500 Falls Below Key Moving Averages, Market Breadth Turns Negative
The S&P 500 has now dropped below both the short (red) and medium (black) duration moving averages. The cross over of the short moving average below the medium will signal a greater breakdown. Throughout the next decline segment it will be fair to anticipate counter trend rallies where both of these moving averages should act as loose resistance.
This week, market breadth as measured by Net New High/Low across both NYSE and NASDAQ markets turned negative, signaling a potential downturn. If we assume that this new year rally was merely a convincing bear market rally, then we can anticipate further deterioration in market breadth in the coming weeks.
The Net New High/Low is one indicator of market breadth that measures the number of stocks making new highs relative to the number of new lows.
Still A Bear Market Rally—
I previously discussed a technical event that helped distinguish between bear market rallies and actual reversals. When the price rose 5% above the long-term moving average, the rallies sustained into becoming bull markets. Last week has further weakened the “new bull market narrative” the S&P 500 as it closed 0.96% below the long duration moving average.
As we look ahead, it seems that the greed-fueled market rally has finally reached its limit. In the coming weeks, we can anticipate to see the S&P 500 exhibit some telling characteristics, such as closing prices below the 3950 point of control, a bearish crossover of the short duration moving average below the medium, and both of these moving averages acting as resistance during counter trend rallies. Additionally, we can anticipate a continued deterioration in market breadth, as indicated by the Net New High/Low metric. Given these developments, I maintain my market outlook and anticipate a decline in the S&P 500 towards the 3000 - 3200 range.
Thank you for making Lines on A Chart a part of your market reading.
Timely Newsletter Insights
This newsletter has contained timely insights about the stock market.
On August 31, it was noted that the market resembled the environment and chart of 1969, and warned of a bearish crossover. This happened the following week.
On September 18, the article discussed the technical deterioration in the S&P 500 and predicted that the June lows would be revisited, which occurred the following week.
On September 25, the article continued the comparison to 1969 and identified a potential double bottom as an area to initiate a relief rally. This rally started on October 13 and reached its target area on October 28.
From October 30, 2022 through February 2023, the articles discussed the end of the relief rally. *At the peak of the rally the S&P 500 had extended moderately above the target of 3900-4000. The market has remained in this area through February 2023. Accuracy of this call remains to be determined.
Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to ignite thought and discussion.
Tickers mentioned in this article: SPY 0.00%↑
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