Monday, June 5, 2023

Charts of the Day: Recession Changes Everything!

While doing our weekly technical analyses I'm discovering a resoundingly bullish setup developing for stocks in one of our historically-accurate, long-term indicators.

Here's an 8-year monthly Bollinger Band chart for SP500... Note price (white bar) moving above the grey line (20-month moving average, April saw price close above)... That nearly always signals the official end of a bear market, or correction:

Now note the same phenomenon occurring in October 1973:

Again, in almost every historical instance a close back above the 20-month moving average has confirmed a new, or extended, bull market... Operative word there being "almost."  The rare exception occurs when recession (red shaded areas) follows shortly after that bullish confirmation signal gets triggered.

Here's taking that 1970s chart 1-year further:

So, yes, indeed, our original bear market target (3,500 hit last October) in all likelihood holds if we avoid recession over the coming months.

We still see that as a relatively high bar, given the weight of the indicators, and given the tough spot today's Fed, who has promised a sustained return to their 2% inflation target, finds itself in.

Like I said when we made that 3,500 call in early 2022; if our assessment when we get there says recession odds favor continued expansion, while a bounce (bear market rally) would be likely, we'll be lowering our ultimate bear market target... I.e., recession changes everything.

Hence, we continue to hedge against any extreme downside risk right here.

Another relatively rare (albeit somewhat benign compared to the above) signal shows up on the daily Bollinger Band chart... And that is the present level of "overboughtness" -- which is price closing above the purple line (2 standard deviations above the 20-day moving average).

Note (yellow circles) the previous 5 occurrences over the past 5 years... Without exception price proceeded to correct to the tune of 20%, 10%, 4%, 3% and 9% respectively shortly thereafter:

Stay tuned...

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