By Cory McPherson | August 2023
The long-awaited correction in the market has been playing out as we near the end of August. So far as it’s played out, it appears to be just that- a correction. And not something deeper signaling another top in the market yet. Another push to new highs could be on the horizon, but historically the month of September can be tricky.
Taking a look at the S&P 500 chart, I find there’s a few different important levels to be watching. Resistance right now on the S&P is in the 4,490-4,500 area, which, as of this writing, it is bumping right up against. A sustained breakthrough above that level would signal the bottom of this correction being in place. If it cannot get above that level, then a drop below the 4465 region, which is near both its 20-day and 50-day moving averages, could signal a lower low occurring for this correction. Such a tight range makes this an important point in the short-term. A drop below 4,300 on its next decline could then occur and point it closer to its 200-day moving average, near 4,200. A drop to the 200-day moving average during an uptrend would be ordinary.
Even with a drop that low, it appears the overall structure of this drop from the 4,607 high will remain corrective. That area near the 200-day moving average could serve as solid support leading to another rally higher, possibly pushing it to new all-time highs. If a drop like that occurs, we will act accordingly by adding more risk where prudent.
The next stage higher of this market could look significantly different than what’s been experienced so far this year. As has been documented, much of the rally this year has been led by the big technology and A.I.-exposed stocks. The charts on some of those stocks look like they may have put a top in place, leading other areas of the market to most likely pick up the baton and begin to lead. Areas like healthcare, aerospace/defense, industrials, and even energy could begin to lead again.
Seasonality could play a factor in the timing of the next big market move as well. As you can see below, over the last 10 years the month of September has been the worst performing month for the market. Only 33% of the time has it closed higher than where it opened the month. August has been another weaker month for the market historically as has played out so far. A drop in September followed by a year-end rally would fit with what the market has done historically using seasonality.
In our last newsletter we explored some of the extremes in sentiment, as investors got overly bullish and complacent. Looking at where some of those indicators are today, the greed in the market has eased off. The fear & greed index from CNN is now at a neutral reading and began to creep into the fear level last week. The VIX index, which measures volatility in the market, has stayed mostly subdued during this correction. Only seeing a slight bounce to 18 before receding again. So far it signals investors remain complacent and not concerned. A spike above 20 on the VIX could signal a shift in sentiment.
Volume in the market has also remained low over the last few months, which isn’t necessarily abnormal over the summer, especially the last few weeks of August. Typically, after Labor Day is when volume begins to pick back up. We’ll follow trends in volume to see if it lends any clues as to market positioning and leadership in the market.
In looking at the economy, it doesn’t appear much has changed recently. The Conference Board’s leading economic indicator, which we looked at in our last newsletter, continues to decline. Inflation continues to moderate, and the Federal Reserve is most likely near the end of their interest rate hiking cycle if not done. Initial jobs reports that come out each month continue to look strong. What’s interesting, though, is the continuous revisions occurring. And every revision this year has been negative. Each of the monthly payroll numbers in 2023 has eventually been revised lower. In looking at job openings, that also continues to be revised lower. The number of job openings, as seen below, has also seen its biggest 3-month drop since the middle of the pandemic in 2020. As you can see, though, it is still at historically high levels after such a dramatic rise following the pandemic. Looking at history also tells us that a continued drop in job openings precedes a rise in unemployment and weaker labor market. The question is, will this time be different due to the dramatic change in the labor market post-covid?
Banks continue to be a concern to me. Not only in looking at the chart of regional banks, as shown below, but also because of sustained higher interest rates. Rates on longer-term treasuries have risen over the last few months, back to highs seen near the end of 2022. Higher interest rates, leading to a decrease in the value of bonds, are what initially caused problems in the banking sector earlier this year. Continuing to follow the banking sector will be important for the overall market and economy.
So far this drop in the market appears corrective in nature, which should lead to another leg higher in the short to intermediate term. Longer-term risks are still there that can topple this market. Using technical analysis and charting can help us in identifying those important turning points as we continue to rely on our indicators we’ve developed. The last few years have been a challenging market environment, and I don’t expect that to change anytime soon.
We hope everyone has had an enjoyable summer and look forward to cooler weather this fall. As always, please reach out with any questions or concerns.
Cory McPherson is a financial planner and advisor, and President and CEO for ProActive Capital Management, Inc. He is a graduate of Kansas State University with a Bachelor of Science in Business Finance. Cory received his Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services in 2017.