Another negative outside month has developed in September 2021. It is the fourth negative outside month in the S&P 500 Index (SPX) over the past 2-years. The previous negative outside month occurred one year ago in September 2020, resulting in a 3-week correction of 10.55%. The current pullback from 9/2/21 is -5.87%, placing this market setback as consolidation within the context of a primary uptrend.
The question then becomes - is this another correction or something different?
Negative outside month patterns are not as rare as they may appear. Ahead of the Tech/Telcom dot.com bubble burst, there were four SPX negative outside months (i.e., May 1999, January 2000, July 2000, and September 2000). Before the Global Financial crisis, there were three negative outside months (i.e., May 2006, February, and July 2007). In the past two years, SPX has experienced four negative monthly reversal patterns, including May 2019, February 2020, September 2020, and recently September 2021. Within the past two years, SPX also recorded two positive outside month patterns during October 2019 and March 2021.
There are striking similarities but vast differences between the two negative outside months that occurred last September 2020 and the one from last month. Both monthly reversals developed during the weakest month of the year (September), and the durations were identical (i.e., March to September 2020 and March to September 2021).
However, the March to September 2020 rally (+63.70%) exceeded the returns from the current March-Sep 2021 rally (+22.09%). The spread between the 10-month ma (currently at 4,171) and 30-mo ma (3,476.5) today is much greater than during the prior Mar-Sep 2020 period.
It is also uncanny that last month's SPX rally to 4,545.85 (9/2/21) came within striking distance of the top of the pivotal 2010 uptrend channel (4,580 in Sep 2021) and the Aug 2020 V-pattern breakout projection of 4,595.
When a market index approaches an important technical target, three things can happen. One, the index fails to clear the formidable resistance, confirming a market top. Two, the index moves toward an extensive sideways trading range trend that may last for months, quarters, and even years. A backing and filling process alleviates an overbought condition, resets the market to normal equilibrium levels, allowing for the continuation of the primary trend. Third, the subsequent market consolidation, correction, or deep correction is brief and sweet. No technical damages occur as the prevailing trend resumes.
On another note, it is rare for outside year patterns to develop in the SPX Index. In the past century, SPX has experienced only six (6) of these yearly reversal patterns. Four (4) were positive outside years (i.e., 1935, 1982, 2016, and 2020), and two (2) were negative outside years (i.e., 1937 and 1973). It is also rare to experience two (2) positive outside years (i.e., 2016 and 2020) within one structural bull/bear cycle (May 2013-present). The ability of SPX to rebound from its 10-year ma (now at 2,608) and its internal trend line (blue dash line now at 2,425) during the Feb-Mar 2020 decline may have confirmed the continuation of the May 2013 structural bull trend.
The rally over the past few years has been impressive as it now enters its eighth year. Remember, structural trends in U.S. equities span from eight years to twenty years. Generational trends, on the other hand, can sustain from thirty-five years to forty-two years. As you can see from the yearly chart, the top of the 1920s uptrend channel is still trending higher, currently near 5,048. It would imply the 8-year structural bull may still have some more upside left before a deep correction, or worse, the beginning of a bear decline.
Initial support rises to 3,623-3,760 (2020 high and 2021 low), and below this to 2,192-2,608 (2020 low, internal blue trend line, and the 10-year moving average). The 30-year ma (1,560) and the bottom of its 1920s uptrend channel (1,174) offer generational low support levels.
One final observation. The onsets of two bullish positive outside year patterns (i.e., 2016 and 2020) and the structural (8-20 years) and generational (35-42 years) trends are rising are bullish technical developments. The trick with investing is to be patient but also disciplined. Investors and traders should adhere to the classic stock market pear of wisdom – the trend is your friend until it ends.
Nonetheless, one needs to monitor the 10-month ma (4,171) and the 200-day ma (4,141). Violations of these two pivotal supports warn of the start of a deep and extensive correction that can lead to SPX retesting crucial support at 3,647-3,588 (November 2020 breakout and the 38.2% retracement from the 3/23/2 to 9/2/21 rally). Below this opens the door for an SPX decline to 3,174-3,476.5 (30-mo ma, the bottom of 2010 uptrend channel, and the 50% retracement).
In conclusion, a negative outside month occurred in September 2021, but SPX also confirmed a positive outside year in 2020. As we have alluded to in previous blogs, an inflection point is approaching. It is a moment when significant changes can occur or may occur that can lead to a positive or negative result.