Chart Talk {Valentine's Day Edition}

Happy Valentine's Day.  Today we'll take another look  at a weekly chart of the S&P 500.  What we're trying to do is to build a template for what might be unfolding in the markets right now.  Again today the chart is from Tradingview.com and again the annotations are mine.  Also you can double-click on this chart to make it larger.  

I'm beginning to wonder if we are entering a period similar to what we saw from roughly 2015 to the latter months of 2016.   Going into that period the markets had seen a nice steady advance from lows it had developed in late September of 2011.  Over a better than 3-year period from that point the markets advanced nearly 90% before stalling out in the spring of 2015.   From that point on the markets hit a wall.  It took 14 months for stocks to again reach a new high.  During that period stocks also experienced two drops from high to low of greater than 10%.  The first came in the summer of 2015 and the 2nd in the winter of 2015-16.  

Stocks had become expensive back then.  The economy was growing but not at the clip we're seeing today.  Also you had the political issues of the "Brexit" vote and the looming American Presidential elections as a background.  In reality and in retrospect, stocks had simply become too expensive relative to their earnings growth rate and needed a reset.  Markets correct by three ways: price, time or a combination of both.  During that period we saw a combination of both price and time.  The key thing to take away from this is that while stocks went sideways for a considerable period of time, they ultimately found their footing and set the stage for the next move higher.  

One other thing which I hope the chart above shows.  The move we've seen in the last few weeks corresponds to abut a 12% move lower from the top to bottom.  Not that much different from what we saw back in 2015, although that move took a much longer period of time to play out.  I've shown both of those declines in the chart above for comparison.  The point of this is that from the levels we're at today it simply takes more points on whatever index you're looking at or whatever one the news media is focusing on to move the needle.  A 1% move in the S&P 500 is about 27 points right now.  A similar move in the Dow Jones Industrial average is about 250 points.  The papers can scream all they want about a 1,000 point drop in the Dow, but that's only about a 4% loss in terms of value.  Now that's a lot of points and a large percentage drop, but it is not unheard of to see this sort of thing occur and historically a loss in the 3-5% range happens about once every three years.  Usually these things occur at the end of a large run or when something unexpected arrives that catches investors unprepared.

Next we'll look at what we might expect going forward if what we're showing above is indeed a good template to use for the rest of the year.

Back Friday.

Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.