TG Watkins – The Technical Bear and Bull Cases For The S&P 500, And A 1970’s Style Macroeconomic Backdrop
TG Watkins, Director of Stocks at Simpler Trading and Editor of the Profit Pilot website, joins us to review his technical bear case and bull case for the S&P 500, the potential parallels to a 1970s style sideways market grind, as well as some comment on the energy sector.
When discussing the general equity markets TG has been watching to see how the S&P 500 was reacting to the 10 month simple moving average (SMA), and more short-term how it reacts to the 21 day SMA. Medium-term he is watching to see if a rally up to the 200 day SMA will result in a move back lower to test the 50 day SMA, which he sees as a key support level. For the bearish case, if the SPX was to break below the 50 day SMA, then that would bring into focus the 50 month SMA, down around 3500, and then after that the 3rd ATR, based on Kelter channels, down around 3200. This potential lower support level would also be aligned with where a 35% correction would fall, which is a standard move lower in a true bear market.
On the bullish case TG outlines a quantitative analysis study that shows a number of bull markets kicked off in the general equities (except 2 times) where over 90% of equities rallied above their 50 day SMA in a bear market rally, which we did just see play out on this recent relief rally. The concern would be that if we see this already 13 year long rally in general equities start a new bullish leg higher, that it may get stuck in a multi-year sideways trading channel, quite similar to what we saw play out in the mid 1970s. TG highlights the similar environment to the seventies where we have high inflation, and a Fed “chasing their tail” trying to hike rates to reign in the persistently high inflation.
If we were to see that longer sideways grind, then TG noted that safer value sectors like consumer staples, like Coca Cola, Herseys, etc.. would fair best. We wrap up with getting the technical outlook on the energy sector, another area of the market that did quite well in the 1970s, and has outperformed most other sectors over the last 2 years. TG lays out some levels he is watching in US natural gas, which has really been on a tear higher, and then reviews the more sideways and mixed technical set up with oil.