The 1-Minute Market Report - March 15, 2019

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Erik Conley
Summary

The S&P, and other equity indexes, have trended ever higher over the very long term.

That's why most market pundits advocate a heavy exposure to equities for most investors.

But it's important to be aware of how far the market is, both above and below trend.

market direction

What happened last week.

What we're watching for next week.

[The 1-Minute Market Report is brought to you by Brawndo. It's got what plants crave - electrolytes.]

You all know by now that I try to make this article as brief and to the point as possible so that busy people can get a sense of what's happening in the market quickly. This week, however, it may take you 1.5 minutes to digest the material, rather than the traditional 1-minute. I think the extra 30 seconds will be worth your time.

I'm going to lead with the Chart of the Week because I think it's important. Jill Mislinski of AdvisorPerspectives produced a chart of the S&P 500 that is packed with valuable information. I have showed this chart before, but it deserves another look.

This is a very long-term chart, going back to 1871. So put on your big picture glasses if you want to get the most out of this chart.

The chart title says "Inflation-Adjusted Regression to Trend." For those who aren't familiar with this idea, it means that the chart tracks the rising price, after adjusting for inflation, for the S&P 500.

The S&P, and other equity indexes, have trended ever higher over the very long term. That's why most market pundits advocate a heavy exposure to equities for most investors. But it's important to be aware of how far the market is, both above and below trend. Today the market is clearly above trend in a big way.

Why does this matter? Because the market always regresses back to its long-term trend line. This is the essence of mean-reversion, which states that when asset prices become too over- or under-valued, they always correct by reversing direction and returning to long-term trend.

When will this mean-reversion happen? I don't know, and neither does anyone else. But I have an opinion, and it's that we are within 12 months of a major reversion to the mean in the stock market.

Chart 1. S&P periodic returns.

The market broke its streak of 8 up weeks in a row. It is now up 12.6% year-to-date. That is a breathtaking start to a year that appears to be fraught with all kinds of risks, both geopolitical, political, and economic.

Chart 2. Distance from Key Markers

The next chart reinforces what we saw previously - a market that has rallied sharply off the recent lows and is challenging the bears. How will this confrontation end? I'm still betting on the bears. I just hope I don't get gored by the bulls.

Final Thoughts

We've had a nice rally in the market. But I'm not yet convinced that we will make a new high before we finally succumb to the next bear market.

I could be wrong, of course, but I follow my models and they are showing increasing risk and diminishing prospects for a new high.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.