Similarities To Previous Major Market Turns
The chart below shows up/down volume (1998-2017) for the NYSE Composite Stock Index (NYSEARCA:VTI), along with its 50-week moving average (thick blue line). Notice how all-things-being equal, the probability of bad things happening increases when the 50-week moving average is flat or negative (see red arrows below). Conversely, the probability of good things happening increases when the 50-week moving average turns back up in a bullish manner (see green arrows below). The S&P 500 is shown at the bottom of the image below for reference purposes.
Not Much Talk About A Major Bottom
Instead of 2016-17 looking like a major stock market (NYSEARCA:SPY) topping process, a strong case can be made 2016-17 looks very similar to a major bottoming process. The charts below compare the breadth-based 50-week moving average in 2003, 2009, and 2016.
You Can't Compare 2016 To 2003/2009
It is easy to understand how a major stock market bottom can form after a bear market (2003 and 2009). However, it is more difficult to understand how one could have possibly formed in 2016, given the S&P 500 did not hit the 20% bear-market threshold. While the major indexes held up relatively well in late 2015/early 2016, the story was quite a bit different for the average stock. From a January 11, 2016 USA Today story:
There is mounting evidence that the U.S. stock market is being decimated and undermined by a so-called "stealth" bear market…Indeed, the Standard & Poor's 1500 index - a broad basket of large, mid and small company stocks - shows that the average stock's distance from its 52-week high is 26.9%, according to stats compiled by Bespoke Investment Group through Friday's close. "That's bear market territory!" says Paul Hickey, co-founder of Bespoke Investment Group, the firm that provided USA TODAY with the gloomy price data.
Does 2016-17 Look More Like A Major Top Or A Major Bottom?
This week's stock market (NYSEARCA:VOO) video uses facts to complete check marks in the table below. If you review the evidence with an open mind, the conclusions may be surprising.
Tech Breaks Long-Term Barrier
The NASDAQ's (NASDAQ:QQQ) long-term chart (1982-2017) also leaves the door open to better than expected outcomes in the coming weeks, months, and years.
Broad Market Has A Constructive Set-Up
The NYSE's long-term chart below aligns with the volume-based breadth analysis above. The NYSE Composite was unable to clear the orange box below between 1996 and 2015; a break occurred in 2016.
Breadth Aligns With Stocks
The NYSE's up/down volume indicator has also recently cleared some areas of past resistance. The longer the indicator remains above the orange boxes below, the more meaningful it becomes from a bullish perspective.
Remaining Open To All Outcomes
The facts we have in hand today align with a growth-oriented investment stance. As long as that is the case, our allocations will continue to be heavily tilted toward equity ETFs. If the evidence shifts in a meaningful way, flexibility will allow for prudent adjustments.
Disclosure: I am/we are long SPY, VOO, VTI, QQQ.
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.