S&P 500 Rose for 5 Consecutive Weeks

S&P 500 index in the past It has risen 15 days out of 17 days. Since the end of September, the index has risen by more than 9%.

The improvement in revenue, effective cost reductions, strong seasonality, and loose policy environment may be the result of a strong upward momentum. Invest in the core assets of U.S. stocks with one click, click here to start now

But, will this momentum continue?

I want to know when the market will see a relatively large correction. Perhaps we should pay attention to the following warning signs.

1. Technically, the index has reached a bottleneck

From the perspective of short-term indicators, the S&P 500 Index is in an overbought state, which has been basically the case since before the outbreak. Tom McClellan, editor of the McClellan Market Report and senior market observer, stated: “Supporting such an upward momentum requires tremendous energy. Whether it is a continuous rise or a fall, it will make people feel tired, because the strength of the bulls will also be exhausted. They always It will be weak.”

McClellan said that he is paying attention to 3 possible turning points, and their appearance will herald the lack of success in the market:

1. When the “Wall Street Panic Index” Chicago Board Options Exchange Volatility Index (CBOE VIX) began to rise, the market continued to rise. This shows that traders believe that the rise will slow down or even reverse, and they are already buying defensive assets;

2. The market continues to rise, while indicators such as the Relative Strength Index (RSI) begin to decline. The relative strength indicator reflects the momentum of the market in the past two weeks. If this number starts to fall while the market is still rising, this indicates that the gains are slowing.

3. Divergence between S&P 500 Index and Advance/Decline Line. When the S&P 500 index continues to rise, but the number of rising stocks begins to decline, this indicates that the number of front-runners in the rise has decreased. This is a typical red flag.

McClellan said: “We are now able to look back on the performance of the stock market in the past few decades. Obviously, the market has a limit to the rate of increase. It can continue to rise, but the rate will be slower, and that is the prelude to the callback.”

2. The market’s expected corporate profit growth rate is declining

Analysts no longer raise corporate earnings expectations as they did earlier this year, and the market’s continued rise is largely based on the continued rise in earnings expectations. This happened in the first three quarters of this year, but now this momentum is slowing down. Nick Raich of The Earnings Scout said in a report to clients: “The earnings season is not as bright as the second quarter of 2021, and few people have raised their earnings per share expectations.”

In fact, the company’s fourth-quarter profit forecast peaked a few weeks ago, when analysts at the time expected an average increase of 22.8%. Now this figure is 22.0%.

Raich claimed: “The current market pricing corresponds to a perfect situation, that is, the market believes that the supply chain problem will be resolved in the next quarter, inflation will also be temporary, and demand will continue to remain strong.”

He added: “The perfect situation is not impossible to achieve, but the current price also makes the market almost no room for fault tolerance.”

3. The 10-year U.S. Treasury yield is declining

Peter Tchir, head of macro strategy at Academy Securities, believes that attention needs to be paid to the recent decline in 10-year U.S. Treasury yields.

“If long-term U.S. Treasury yields (over 10 years) remain low, this is not a good sign for the stock market,” he said. “This shows that investors in the bond market believe that economic growth will slow. But I still believe that the economy is performing well and the yields on 10-year U.S. Treasuries will start to rise. If they don’t rise, I think there is a problem.”

4. The Fed is tightening quantitative easing policy

Recently, in the latest November interest rate resolution, the Federal Reserve officially announced that it would activate Taper as the market expected, reducing the size of monthly asset purchases by US$15 billion.

The Federal Reserve’s quantitative easing brings additional liquidity of US$120 billion to the economy every month. McClellan said that many of these have been absorbed by the stock market, and the market has become accustomed to this.

As for possible changes in the future, McClellan pointed out: “It’s like you stop fertilizing roses. If you don’t fertilize, the stock market will not perform better than before.”

McClellan said the role of currency liquidity in helping to support the market is underestimated.

McClellan said: “As far as the market is concerned, the most important thing for investors is, ‘how much money is there in the market?’ and ‘how much is the possibility of this money flowing into the stock market?’”

“In the past 10 years, a large part of the additional liquidity has entered the stock market.”

Behavioral economics: a little loss can have a greater impact than a little gain

“When the situation is the opposite, everyone becomes extremely vigilant,” Peter Tchir said. “If the stock market has not risen by 7% or 8% in the past few weeks, but has fallen by 7% or 8%, then the discussion about the callback will fly again. Then the market will be full of fear and panic.”