Checking In On The 1929 Stock Market Parallel

 |  Includes: QQQ, SPY, TLT
by: Chris Ciovacco

Houses Appreciate At Slower Rate

With the Federal Reserve tapering their bond-buying program, investors are looking for evidence of an improving economy. Given that mortgage rates are well off their recent lows, it is not surprising to see some slowing momentum in the housing market, which is exactly what the data showed Tuesday. From Bloomberg:

The S&P/Case-Shiller index of property values in 20 cities rose 13.4 percent from December 2012 after increasing 13.7 percent in the year ended in November, the group said today in New York. It was the first deceleration since June. The gain matched the median estimate of 33 economists surveyed by Bloomberg. "The housing recovery continues, but perhaps not as vigorously as it did in the first half of last year," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and the best forecaster of the home-price index during the past two years, according to Bloomberg calculations. "Even so, appreciation trends still look pretty good even though they may not be as strong as they were."

Head-and-Shoulders Off Table

On February 11 we outlined a simple "don't lose too much sleep" strategy for the scary 1929 parallel chart that has been making the rounds on Wall Street. The 1929-like scenario involved a pattern known as a head-and-shoulders top. Monday's new intraday high in the S&P 500 pretty much put the head-and-shoulders scenario to bed, which for the most part negates the 1929 analogy for the S&P 500. describes the elements needed to form the final piece of the head-and-shoulders puzzle, or the right shoulder:

The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack.

Consumers Not Expecting Economic Surge

As we have noted many times in the past, bear markets typically begin prior to periods of economic contraction (aka a recession). While the economy is far from awe inspiring, consumers do not expect an imminent collapse either. From Reuters:

The Conference Board, an industry group, said its index of consumer attitudes fell to 78.1 from a downwardly revised 79.4 in January. Economists in a Reuters poll had expected 80.0. "While expectations have fluctuated over recent months, current conditions have continued to trend upward," Lynn Franco, director of economic indicators at The Conference Board, said in a statement. "This suggests that consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead."

Investment Implications - Hesitation Continues

When markets are hesitant, sometimes it is best just to remain patient as noted in the strategy tweet below.

Monday's rally in stocks tried to convincingly take out the previous record close of 1,848 on the S&P 500, but the index could not hold that level. Therefore, from a closing perspective, 1,848 remains relevant to both bulls and bears.

From an intermediate-term trend perspective, the slope of the 50-day below suggests improving bullish odds.

The short-term bearish case will strengthen if the downward-sloping trend channel formed by parallel lines A and B remains intact.

The market's resolution near 1,850 (bullish or bearish) will most likely be dictated by the reaction to economic reports released before week's end. Wednesday brings data on new home sales. Thursday will be marked by a report on durable goods. GDP will grab the headlines Friday. As of 2:45 p.m. EST Tuesday, the market's recent hesitation has not translated into meaningful changes in the market's risk-reward profile. Consequently a mix of U.S. stocks (NYSEARCA:SPY), leading sectors (NASDAQ:QQQ), bonds (NYSEARCA:TLT), and cash provide needed flexibility relative to a migration path. The market will guide us if we are patient and willing to listen.

Disclosure: I am long SPY, QQQ, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.