Warning signal flashing for stock investors?
We may be at an inflection point in the stock market. With the S&P (^GSPC) sitting at or near it’s all-time highs, bulls say the spate of better than expected earnings will drive a break out. Bears however argue weak economic data abroad will lead to an important top.
When fundamentals are at odds, pros often turn to the technicals and analysis from Carter Worth, head of technical analysis at Cornerstone Macro, suggests the bears may prevail.
Looking at a standard chart of the S&P 500, you’d wouldn't know it.
In fact, a standard chart of the S&P, which you see to the left, looks rather bullish. The long-term trend is from the lower left to the upper right. “In nominal terms we’re 30% higher than the prior bull market peak in 2007,” said Worth.
However, looking at the chart below, which is adjusted for inflation, the picture isn’t nearly as pretty. If you take inflation into account, “We’ve only just now returned to the highs of 2000, the epic bull market,” he said. “From this chart, you can argue that we’ve made no progress in 16 years.”
Given the market is struggling at current levels, this chart suggests the struggle could be a sign that the market is about to make a meaningful double top, a very bearish pattern, and reverse direction.
“The breath of the market is also an issue,” Worth added, in confirmation of his outlook. “The performance of the median stock is not keeping up with that of the index. Typically that foreshadows trouble.”
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Although Worth concedes that the market could advance somewhat from current levels, he thinks the amount of upside left in the S&P isn’t worth the risk. “This is a fairly mature bull market,” he said. And if the trends suggest the risk is to the downside.
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