Updated: Mar 19, 2020
We have been experiencing high degree of volatility over the past 3 weeks. However, today was quite unusual as almost every major asset sold off except for the U.S. Dollar. A strong and surging U.S. Dollar during periods of market uncertainties often warns of deleveraging pressures and hints of deflationary concerns as domestic and international investors exit leveraged positions across financial markets. Today’s dislocations in the currency markets, equities, fixed income, and commodities signal not only selling of leverage positions but possibly wholesale liquidations of core asset classes to cover margin type calls.
In the past few weeks, we have concentrated heavily on the near-to-intermediate term trends of major markets including S&P 500 Index. However, this may not be too useful in an irrational market environment that is dominated by widespread fear and market dislocations. We believe it is important for investors to take a step back and take an alternative view of the financial markets from a completely different technical perspective. That is, instead of trying to identify a market bottom focus on identifying the very long-term trends of SPX, namely the monthly and yearly charts. After all, “the trend is your friend,” and the very long-term trends will almost always override the shorter-to-intermediate term trends.
Attached are the monthly and yearly charts of SPX. Both charts suggest an inflection point is near. The outcome of this will likely determine the future trend of U.S. equities for many years to come. Below is a summary of our findings.
Monthly SPX Chart
In the past 100-years, 3 very long-term generational type trends have been defined:
(1) Generational lows are defined by the lower trend lines (red dash lines - 1,342/1,499). The extension of the 2013 breakout (now at 1,584) offers additional long-term support. It is uncanny that generational lows and highs repeat almost every 35-42 years or so. Our technical studies strongly suggest the accumulation of wealth and the transfer of wealth from one generation to the next can have a profound impact on consumer spending, housing markets, savings, investments and retirement thereby leading to these generational trends in SPX.
(2) The middle blue internal trend line (2,307) represents the equilibrium level or fair value. The Feb-Mar 2020 bear decline is nearing an important test of crucial support along the midpoint of its very long-term generational uptrend channel. A successful test signals the end to the recent Feb-Mar 2020 decline and the resumption of the bull trend.
(3) Generational highs tend to occur near the top of its generational uptrend channel (green dash trend line - 4,200+). For instance, the two greatest bull rallies in the past 100 years, namely the roaring 20s bull run (1921-1929) and the tech/telecom dotcom bull rally (1982-2000) generated generational tops during 1929 and 2000. Note that during these two time periods SPX traded significantly above the middle internal trend line signaling a speculative type market condition. Both speculative rallies ended in bubble bursts as SPX soon transitioned toward prolonged downtrends and/or extensive sideways trading ranges. By extending the tops of the two prior structural bulls (1929 - 31.30 and 2000 - 1,553.11) we arrive at SPX target near 4,200+. This may very well be the next generational high. However, the immediate concern today remains that SPX is nearing the middle of its two generational uptrend channels. So, the ability to maintain this pivotal support is crucial to the resumption of the long-term structural bull (2009-present).
SPX Yearly Chart
We are surprise that there are very few analysts that perform yearly chart analysis on SPX. This is probably the best timeframe to deploy when trying to identify generational trends. Like the monthly chart, SPX is also nearing a crucial juncture on the yearly chart. The outcome will decide the directional trend of US equities for the next several years. As the positive outside year in 2016 triggered an explosive SPX rally to the Feb 2020 all-time high, a potential negative outside year, if confirmed, warns of a major top. Nonetheless, the Feb-Mar 2020 bear decline is nearing major support along the long-term internal trendline (middle blue dash line - 2,100). In addition, the 10-year moving average is also rising near 2,168. This support zone reinforces our view that this may be the true equilibrium level or fair value for SPX.
A convincing violation of 2,100 would be bearish as this confirms a major top and warns of the next major bear decline toward the 30-year ma (1,386), and below this to 1,150 (red dash line or the bottom of its long-term yearly uptrend channel). On the other hand, the ability to maintain above 2,100-2,168 can also mark a major bottom setting the stage for the next major bull rally as SPX challenge the top of its yearly uptrend channel (green dash line) at 4,200+.