What is the general feeling and outlook among top market technicians right now? Robin Griffiths spoke with Financial Sense Newshour this past week as the International Federation of Technical Analysts met in London and said, “no one is expecting a crashing wipeout right now,” and the market is simply “overdue for a setback.”
That said, Griffith believes “if the setback looks like it’s getting too big, well, the central banks will step in.”
Such is the recurring theme among countless analysts, traders, and strategists we’ve had on the show over the past couple years: central banks are calling the shots and are determined to do “whatever it takes” in the event of a major downturn.
This does not mean caution is not warranted, however, as Griffiths makes clear:
“Interest rates in Europe are actually at a 500 year low. So it’s not normal. No one alive has ever seen this before and many of the old relationships and ratios that we technicians are students of, they are breaking normal bounds, even on fundamentals. You know the CAPE P/E? The cyclically adjusted P/E is 26. And we know it’s only ever been there on three occasions historically: 1929, 1999, and 2007. This is not a nice period to be.”
Let’s take a big picture technical look at the market and see where things are at.
Here is a chart of the S&P 500 going back to 1997 with the 12-month moving average shown (click image to enlarge).
A few notes on the image above. Prior market tops have been confirmed by the following three technical signals:
- A clear divergence between lower highs on the RSI in the top panel and higher highs by the S&P 500. Prior market high on September 19th led to marginally lower to flat RSI reading. No clear divergence yet.
- A falling and crossover in the MACD (bottom panel – see vertical dotted lines), which has not occurred.
- A failed retest and pullback below a falling 12-month moving average (red circles), which has also not occurred.
A key point to keep in mind: market tops are a process. Only in hindsight can we say where the ultimate high took place. Thus, to confirm when a major market peak has formed and the beginning of a new secular bear market is taking place, it is helpful to see the following three technical signals above.
Given the current duration of the bull market, historically high valuation levels, risks to global growth, and heightened geopolitical tensions, it is possible that the all-time high set on September 19th marked the ultimate peak. Although it is tempting to try and time the market top, we should note that such attempts over the past four years have consistently failed. Thus, a strategy that looks for confirmation via a continued breakdown in fundamental and technical levels and lowers risk exposure seems highly prudent.
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