One month ago, almost to the day, I wrote the article "Did the S&P 500 Just Top?" In that article I mentioned that I had read several other articles predicting that it was the end of the bull market. However, my own analysis, that I have developed over the last 17 years, indicated that it was more likely to be a correction in the context of an overall bull market. As shown by my long and passionate disclaimer near the end of that article, I will admit that I was nervous making that call. But anyone who trades or invests for any significant period of time knows that the market is a manic-depressive beast that cycles violently between fear and greed, and that the individual investor or small institutional investor is insignificant in comparison to its size.
The government shutdown delayed many of the economic data releases, but we will do our best to work through it, and look at some other indicators that don't require government employees to compile the data for us.
We'll start off by looking at some proxies that show us the health of the underlying economic engine of the United States. To start off with, let's look at Durable Goods Orders vs. the S&P 500. Durable Goods are still increasing, which is bullish, but the parabolic run of the S&P 500 has largely outpaced what was otherwise a pretty healthy correlation. While not "bearish", in this case it suggests that the S&P 500 has gotten a little too far ahead of itself.
Let's take a quick look at the St. Louis (Go Cardinals!) Financial Stress Index to see if there are any early warnings taking place in the gargantuan fixed income market.
The Financial Stress Index is shown with recessions shaded. This indicator is not showing any stress in the fixed income market, and is within an overall "safe" level.
An additional statistic that I monitor is the value of Failures to Deliver in the Treasury repo market. In its simplest form a repo or repurchase agreement is when a dealer sells government securities to an investor (hedge fund, money market, municipality, etc) overnight, and buys back the following day. Fails occur when either sellers fail to deliver or buyers fail to receive Treasury securities in time to settle a trade. There are several perfectly innocuous reasons that a Fail to Deliver can occur. However, prior to the collapse of Lehman in 2008, there was a huge spike in FTD's. A long-term chart of FTD's has been provided by Zerohedge in the past.
This chart indicates that a value of roughly less than $250 billion in FTD's is within a normal range of FTD's in the Treasury repo market.
The DTCC (Depository Trust and Clearing Corporation) now provides FTD data going back one year. The latest data is provided here. We can see that with a maximum value of $85 billion over the past year, the Treasury repo market is not indicating any significant stresses as well.
Finally, we will look at one area of concern. When I wrote the last article, we had just begun the correction that took about 10 points off the S&P 500 ETF (NYSEARCA:SPY). As I write this article, the underlying market breadth indicators (as shown by the New Quarterly Highs in green and the New Quarterly Lows shown negatively in red) have returned to an almost identical situation as before the correction. That coupled with the fact that we have had an almost near vertical run over the last 7 trading sessions leads me to believe that we are once again due for a pullback of some sort, and again, within the overall context of a bull market.
Until further notice, an upcoming pullback should once again be used as a buying opportunity to add to positions at a more attractive valuation.
Finally, I will share with you a common technical indicator known as the Stochastic Oscillator. As with most indicators, it has both strengths and weaknesses. It's greatest weakness is its record at calling market tops. Just because a market gets "overbought" stochastically as it is right now, does not mean that it can't become more overbought. I do not use this indicator to identify market tops. What this indicator excels in is its ability to spot market bottoms.
Using this indicator on a daily chart is a fantastic way to allocate money into a long-term investment strategy. Buy points are marked on the chart with a box. I have several clients that build up funds in their money market accounts, and then deploy them every time we reach an "oversold" level in the stochastic oscillator on the daily chart. It is a "buy and hold" strategy, but it effectively deploys your money at the most opportune times. I hope this is something that you can use in your own retirement planning.