After rallying over 120% from the lows of March 2020 to the highs of December 2021, the S&P500 broke down below its major long-term uptrends in January. Stocks have established a distinct pattern of lower highs, a downtrend, in 2022. Chart 2 shows that the recent 16% rally from the lows of October, which culminated in yesterday’s 3% rally, puts the market right at its 2022 downtrend line. What will happen now? While a breakout above the 2022 downtrend line would be significantly positive, as a decline from here would confirm this year’s overwhelmingly negative pattern.
TPA leans toward a positive outcome at this juncture. Not only does the FED seems poised to be less draconian in their inflation-dampening efforts, but underperforming parts of the market are showing outperformance. Chart 3 shows that the ratio of Small Caps versus Larges Caps broke out of a steep 17-month downtrend in August and appears to have established a series of higher lows. Small Caps are the most vulnerable to an economic downturn and their outperformance is a reason for optimism.
Jeff Marcus founded Turning Point Analytics (TPA) in 2009 after 25 years on trading desks and 13 years as a head trader to provide strategic and technical research to institutional clients. Turning Point Analytics (TPA) provides a unique strategy that works as an overlay to clients’ good fundamental analysis. After 10 years of serving only large institutions, TPA now offers its research services to mid and small managers, RIA’s, and wealthy sophisticated individuals looking for a way to increase their returns and outperform their peers.
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