Technically Speaking…. It Doesn’t Look Good

Over time, markets move based on fundamental factors; revenue growth, returns on capital, cash flow, and earnings. But in the short run, technical factors (i.e., chart reading) play a large role. We all experience the emotional roller coaster of markets to varying degrees. Technical analysis is an attempt to study that emotional response through price charts. The idea is that all the emotions get funneled into prices and volume traded and because human nature doesn’t change, price patterns tend to repeat. Is it a self-fulling prophecy? Maybe, but enough people use technical analysis that it does have meaning in day-to-day trading.

Lately, the technical analysis has been looking a bit sickly. Examining the S&P 500 chart below, we can see that almost 2 weeks ago, the 50-day moving average (pink line) crossed below the 100-day moving average (blue line). When shorter term averages cross below longer-term averages, that is considered a negative short-term indicator, and in this case has proven to be accurate thus far.

This week, the S&P 500 index also dropped below the 200-day moving average (purple line), which also a negative indicator. If that pink line (50-day average) were to cross below the purple line (200-day average) that is called a ‘death cross’ and would imply even more near-term downside.

The tech heavy NASDAQ 100 Index (NDX) is having technical troubles of its own. Like the S&P 500, NDX also saw the 50-day average (pink line) crossed below the 100-day average (blue line) just after the S&P 500 did the same. The NDX has not yet crossed below the 200-day average purple, but is closing in on that level very quickly. Another weak indicator is that after bouncing off support at about 14,500 (light blue line) several time, it finally broke below that level this week.

This analysis is far from fool proof, but the negative technical indicators are mounting. However, they are at odds with what has historically been the most positive seasonal period for the stock market – the Christmas Rally. The chart below shows the seasonal trend for the Dow Industrial Average, but the trend for the S&P 500 is very similar – Late October/early November typically mark a bottom and stocks rally into year end. But this isn’t fool proof either. Yet another example of why timing markets is so difficult.

Shop Local

The next chart shows the inexorable rise of “Non-Store Retailers”, the most obvious example being Amazon. On-line sales spiked as COVID started, then settled only to begin rising again and is now almost back to its peak (as a % of sales). This trend is, of course, the one that has already doomed most department stores, but it is as much a threat to local business. As you drive, notice the empty storefronts that appear to be multiplying by the day. Understand that those businesses pay taxes and the rent they pay supports the local property tax base (and if you think your taxes are high, commercial properties pay more than residential).

If you want to keep your good schools and you want to live in a thriving community, it is becoming critical that we all do more to support local businesses. Amazon won’t miss us. Just sayin’…

What We’re Reading

Tech stocks suffer two-day selloff as investors find ‘wrinkle or two’ in Alphabet, Meta earnings

Global bond rout looks ‘tremendously dangerous’ for stocks, hedge fund manager warns

U.S. GDP grew at a 4.9% annual pace in the third quarter, better than expected

You Don’t Need a New iPhone. You Just Need a New Battery.

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

A nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people.

John F. Kennedy

General News

By: thinkhouse