The Standard & Poor’s 500 index (SPX) pushed past the widely watched 200-day moving average near 3000 last week, as we headed into May’s month-end. A short-term negative divergence has been developing over the past two weeks with VIX not falling below the May 12 lows at 26 while the SPX has made new recovery highs.
Another short-term pullback in early June would not be a surprise but overall, the technical behavior remains positive. I continue to expect weakness to relatively shallow and short lived. For traders focused on levels, first support is at the 15-day moving average at 2940 followed by the now rising 50-day moving average at 2772 with resistance at the March bounce highs at 3136.
For longer-term investors, the more important technical developments are twofold. First, at the market level, the SPX recaptured its rising 200-week moving average in April and the 15-month moving average in May. These are noteworthy milestones given, the 200-week simple moving average has proven to be a good proxy for the underlying trend in secular bull markets, while the 15-month sma has represented the trend for markets over a 2-4 year market cycle.
In fact, the 4-year cycle analysis that I use to track multi-year bull cycles, suggests the lows in March likely marked the beginning of another bull cycle. For reference, prior 4-year cycle bull markets in secular bull markets have averaged 100% rebounds from their lows with the minimum return in the 62-65% range. No one knows what the current cycle will deliver but the historical pattern suggests there is still more upside in equity markets through year-end 2020 well into 2021.
Second, following up on theme discussed in this space over the past few weeks, investors should be expanding their exposure to more cyclical groups, given a growing list financials, consumer discretionary, industrials and resources, are completing bottoming patterns and in the early stages of reversing their Q1 relative performance downtrends versus the S&P 500.
In short, leadership within the equity market is once again shifting in favor of groups sensitive to a slowly improving economy. My colleagues Tom Lee and Brian Rauscher and I recommend reducing safety/defensive exposure in bond proxies, particularly on near-term bounces to fund additional cyclical exposure.
Bottom Line: While volatility heading into next quarter’s earnings season, and of course the election, should be expected, the longer-term trend and cycle work I follow suggests corrections are likely to be shallow and NOT the beginning of a new bear-market downside move.
Figure: Weekly Sector Review
Source: FS Insight, Factset
Figure: Best and worst performance sectors over past 3 months
