The S&P Bear Market Risk to Keep On Your Radar

What's next for tech stocks after Amazon's disappointing earnings report?

Senior Vice President of Research
Jul 31, 2017 at 8:42 AM
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"In the short term, it would not be a surprise if we see some of the major indexes experience a slowing of the momentum generated the past few weeks. Most of their Relative Strength Index (RSI) indicators reflect the fact that they are near, but not yet at, overbought territory. During this uptrend, when the indexes' respective RSIs approach or surpass 70, they tend to undergo a bit of a pause."
    -- Monday Morning Outlook, July 24, 2017

It was a pause indeed for major equity benchmarks, but neither bulls nor bears experienced major pain, as last week's decline was minor. The SPDR S&P 500 ETF Trust (SPY - 246.91) carved out another all-time high during the week, but ran into an unusually large weekly expiration "call wall" at the 249 and 250 strikes; the Thursday intraday high was precisely at $248.00. The good news for bulls is that this call wall disappeared with the expiration of the 7/28 weekly options series. The SPY $250 level, however, represents a half-century mark on the exchange-traded fund (ETF), and half-century areas have historically marked pivot or hesitation areas, as longtime readers are aware.

Moreover, SPY $250 is roughly equivalent to the 2,500 level on the S&P 500 Index (SPX - 2,472.10) -- not only a century mark, but a half-millennium level. While there are only two data points historically that we can look back to for guidance on SPX behavior around half-millennium levels, these data points stand out. For example, in early 1994, the SPX peaked just below 500 ahead of a near 10% correction, and it was not until early 1995 that the SPX took out 500.

And, dare I say it, the 1,500 half-millennium area marked the beginning of the last two bear markets, which began in 2000 and 2007. The peaks in 2000 and 2007 took months to form, so as the SPX probes 2,500 we are not suggesting a bear market is necessarily imminent. But this is a risk to put on your radar as other technical and sentiment indicators are evaluated in the days and months ahead.

spx monthly since 1998 0728

"While the current bull market is the second longest on record, this is only the 11th longest streak without a 10% correction for the S&P 500. Even still, the index has gone a very long time without a 10%+ pullback at 531 days dating back to 2/11/16... it's now been 264 trading days since the S&P 500 experienced just a 3% pullback. The current streak dates back to 11/4/16, which means that even with all that's going on in DC these days, the stock market hasn't fallen 3% since before the Trump victory back on 11/8/16... the 264-day streak without a 3%+ pullback is the 4th longest in the S&P 500's history dating back to 1928."
    -- Bespoke, July 26, 2017

I am fascinated by facts related to streaks, whether it is a hitting streak in baseball, or an eye-opening streak of some kind related to the stock market. Therefore, I was intrigued by the facts published by Bespoke last week, which is another way of saying we are in the midst of low-volatility uptrend. Low volatility would suggest that there has been little in the way of price action to strike fear in the bulls -- although, as I have suggested before, there is much in the headlines to strike fear in market participants.

In the context of this low-volatility uptrend that been in place for months, even years, I find the following sentiment-related streak even more amazing: In a weekly survey by the American Association of Individual Investors (AAII), it has been 134 consecutive weeks -- more than two years -- in which the percentage of bulls has been below 50%. This is the longest streak on record. Moreover, it has been 28 consecutive weeks, or just over six months, in which the bullish percentage of those surveyed was below 40%.

For context, ahead of the two previous bear markets alluded to earlier, the bullish percentage in the weekly AAII sentiment survey got as high as 75% in January 2000, and was at 65% around the March 2000 top. Ahead of the October 2007 peak, a weekly streak of consecutive bullish percentage readings ran below 50% from late January 2007 through late September 2007. The bullish percentage finally climbed to 54% in October 2007. At present, the percentage that call themselves bullish is only 38%.

"Allocations to US equities dropped to nearly their lowest level since November 2008 in July... In contrast, weightings towards Europe in particular have jumped to levels that suggest this region is likely to underperform. These weightings also suggest that Europe is likely to be the source for any global 'risk off' event. Notably, the S&P has outperformed the Europe's STOXX600 by 7% the past two months."
    -- The Fat Pitch blog, July 24, 2017

The AAII survey is not the only sentiment indicator that we track, especially since this is a barometer of the retail crowd, and there are certainly other participants driving this market -- whether it be corporations buying back shares, or mutual fund and hedge fund managers. That said, we are not exactly seeing euphoria among fund managers, either, of the kind that might be indicative of a top, as is evidenced by the excerpt above referring to global fund managers' regional positioning. I agree with the takeaway that Europe presents more risk than the U.S., as European equities are underperforming the U.S. market, even as global fund managers show a preference for the European market.

In any event, it seems the retail crowd and global fund managers are more focused on headline risks rather than price action, which is a positive if you are a bull.

While the half-millennium 2,500 level on the SPX presents a challenge overhead in the short term, and the jury is still out as to the longer-term implications of this level, the round 10% year-to-date (YTD) gain lingers just below at 2,462.17, and has been supportive during the past several trading days.

Another level to watch overhead is 2,477, which is where the SPX was trading at the time of last week's Federal Open Market Committee (FOMC) meeting. In recent months, the market has rallied when the Fed left rates unchanged, as they did last week. Bulls hope this pattern continues, but 2,477 could be another overhead level to key on in the days ahead.


The tech sector, which represents 25% of the SPX, has received a lot of attention, on the heels of weakness last week that culminated in poor earnings reactions from (AMZN) and Twitter (TWTR) late in the week.

A major tech-based ETF is the PowerShares QQQ Trust ETF (QQQ - 143.84). With the QQQ trending up to all-time highs, one way to find potential short-term resistance and support levels is to focus on significant year-to-date percentage gains that could induce short-term profit-taking, or round-number percentages above or below a key low or high on a chart.  

With that said, the $144.48 level is interesting, as it is 50% above the 2016 low. Coincidence or not, the QQQ experienced one close above this level last week, but closed the week below it. At the same time, the $142.17 level is 20% above the 2016 close, and last week's low registered at $142.30.

For what it's worth, since late February, QQQ YTD gains of 10%, 15%, and 20% have represented hesitation and support zones in the short term. Based on the 2016 close of $118.48, the pertinent levels are $130.32, $136.25, and $142.17, respectively. By these measures, it would not be surprising to see the QQQ bounce around between $142.17 and $144.48 in the coming weeks.

qqq ytd returns 2017 0728

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