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Be Ready When The Music Stops


In my January 7th article for Forbes, I shared two of Asbury Research’s tactical models — Correction Protection Model (CPM) and Cross Asset Relative Performance (CARP) — and said they collectively indicated a “risk on” environment for US equities while indicating an aggressive appetite by investors for risk. The latter could be seen in recent relative outperformance by large cap over small cap stocks, growth stocks over value stocks, and emerging markets over US markets.

The benchmark S&P 500 responded to those positive readings with an additional 101 point, 3.1% rally since then. Meanwhile, our CPM still remains on an October 17th Risk On status. However, things look a little less rosy as we look out over the horizon.

Seasonality, Price Momentum Warn Of Potential Trouble Ahead

Chart 1 below shows that, based on data since 1957, SPX has historically had a seasonal decline during January and February – and especially February – one that eventually leads into a March-April recovery.

In addition, the red highlights in Chart 2 below show that the benchmark S&P 500 (SPX) is currently situated 11% above its 200-day moving average.  The 200-day moving average is a widely-watched major trend proxy.

This puts the US broad market index at an over-extended extreme, one that has previously only been reached about a half-dozen or so times during this period. We view this as evidence that the current 2019 advance is historically over-extended, and as a warning that the market is vulnerable to an overdue corrective decline. 

In baseball terms, Chart 2 basically suggests the current 2019 US stock market advance is in the 8th or 9th inning and warns that everyone may soon be heading for the exits – at the same time.

So, bottom line, our near term tactical metrics still point higher, but our strategic metrics say make sure you have an exit plan all ready to go.

John Kosar CMT is Chief Market Strategist at Asbury Research LLC, an independent provider of technical and quantitative financial market research to both professional and individual investors. John is also a Managing Principal at Asbury Investment Management LLC, which offers professionally managed accounts driven by Asbury Research investment ideas.

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