February 7, 2023 at 9:03 AM ET6 comments
Summary
- The S&P 500 is overbought or extended to the upside in the short term and needs a break to cool down.
- The jobs report, followed by predictably aggressive rhetoric, is the excuse for this to happen.
- I see a range of 3950-3983 acting as a magnet, with a drop to 3900 resolving the overbought condition.
- This would be a 7% correction from last week's high.
- This idea was discussed in greater depth with members of my private investment community, The Portfolio Architect. Learn more “
sitex
In my view, it's shortsighted to infer that the 517,000 jobs created in January will boost wages and put pressure on inflation when measures of both fell in the same month. Regardless, Atlanta Fed President Raphael Bostic signaled yesterday that the jobs number "would translate into more interest rate increases than I expect at this point." Like Pavlov's dogs, investors fled for the second consecutive day as interest rates rose and stocks fell, but losses were concentrated in the more rate-sensitive technology sector. I wouldn't be surprised if we see a much less dovish tone from Chairman Powell when he speaks today, as the Fed wants to control investor enthusiasm until it feels we're on the path to disinflation. This doesn't mean interest rates are rising for anyone for longer than they were before the jobs number, but the Fed's rhetoric is designed to make us think they're trying to control inflation expectations.
Finviz
We need a pause or decline in the major market averages, and last week's strong jobs number, followed by predictably clumsy hawkish rhetoric, is the perfect excuse to see it happen. However, I believe this will set the stage for stocks to continue climbing the wall of concern that seems to be rising by the day. In an annual Gallup poll conducted from January 2nd to 22nd, a record number of Americans predict a decline in the stock market, and a majority see an increase in inflation. This is music to the ears of this contrarian, as it should fuel the upward trend in risk assets going forward.
Bloomberg
As for the pullback everyone is counting on, I think a 7% drop from last week's peak of nearly 4,200 is reasonable. This would take the S&P 500 to around 3,900, which is a dip I think would be aggressively bought. I'm not using ratings, which are a terrible timing tool, to achieve this goal. Instead, I'm using a combination of technical analysis and trigger points for many of the momentum indicators I discussed in January. From a technical standpoint, the S&P 500 completed a golden cross last week around 3,950, which is a long-term signal but should have some short-term support relevance. This is where the rising 50-day moving average crosses the 200-day moving average.
Stock charts
A more important level comes into play at 3,983, where three different breadth indicators are recorded simultaneously on January 12th for the first time since the birth of the S&P 500 index in 1957. I've discussed Walter Deemer's Breakaway Momentum signal more than once in this report, along with Wayne Whaley's Advance Decline Thrust and Quantifiable Edges Triple 70, which I won't detail in this report. The relevance is that on the seven previous occasions when two of them were triggered on the same day, the monthly futures yields, shown in the chart below, were very attractive. The index was higher six of seven times in the one- and two-month periods following the trigger, but it rose 100% of those times from the third month onward. Will this time be different? Perhaps, but I think 3,983 will serve as a sort of magnet as we move forward. It looks like we'll see a positive return one month after the trigger, which falls on Friday.
Quantifiable edges
Therefore, I see a range between 3,950 and 3,983 as a sort of magnet, which won't necessarily be invalidated if we temporarily dip below that range to 3,900. I can see this happening next month, as a pullback to refresh a market with modest bullish bias.
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Lawrence is the editor of The Portfolio Architect. He has over 25 years of experience managing portfolios for individual investors. He began his career as a financial advisor in 1993 at Merrill Lynch and worked in that role for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. He graduated from the University of North Carolina at Chapel Hill with a degree in political science in 1992.
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