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Will Everyone Now Become an Armchair Technical Analyst?

Will everyone now become an armchair technical analyst?  I have opined several times it appears market trading has been co-opted by the machines.  To hell with earnings and valuations as it is now all about trend lines and moving averages.

Because of Columbus Day holiday, there were no earnings or economic data to guide yesterday’s market participants.  Stocks fell below a level that since November 2012 has stood as a floor…the 200 day moving average of the S & P 500.

I either read or heard a gazillion comments about the significance of this level with some pontificating an additional $1.5 trillion will be erased from the S & P in the next several weeks, the same amount of monies that has disappeared during the last three weeks.

While I will profess little knowledge about technical analysis, I will write the 200 day moving average is of some psychological significance, but the violation of such no way guarantees additional losses.

Bloomberg writes twice during 2012 the 200 day moving average was violated only two recover within two weeks.  When it happened in 2010 and 2011, stocks needed four months to return to prior levels.

As I have noted many times, the S & P historically declines between 5% and 20% in a midterm election season. [Note:  The start and end date is arbitrary in this discussion and today’s decline can also be blamed upon a slowing global economy and monetary policy fears]

Bloomberg comments 57% of all stocks in the S & P 500 are trading below their 200 day moving average and almost 80% of the companies in the Russell 3000 are down over 10% from their highs.

A strong argument can be made stock performance during the 2014 midterm election season has followed its typical path.

The corollary to the above historical observation is the markets traditionally rally after the mid-terms, led by the weakest sectors.

Will the averages follow 2012 course, the course that is also steeped in electoral precedence, or will they follow 2010 and 2011 direction, a direction that in many aspects lacks precedence?

A minor breach in the 200 day moving average and then a recovery is a bullish sign.  Will or can this bullish sign be amplified by seasonal and electoral strength?

If we are really technical analysts, the answer is yes.

What will happen today as all markets are open and there will be earnings and data released?

Yesterday the Russell 2000 has outperformed its larger capitalized brethren for the second consecutive day as the Russell only declined by 0.4% while the S & P 500 and NASDAQ fell 1.64% and 1.46%, respectively.  It is off about 4.3% for the last three days with the large part of this decline was last Thursday.  Is this a start of a trend?

The NASDAQ is now down 5.7% in three days, the worst performance since 2011.  The Dow is off 4% for the same time period, its worst performance since November 2011. The S & P 500 off 4.8% during the last three days.  And the S & P energy is off 7.6% in three days, its worst performance since September 2011.

Last night the foreign markets were down.  London was down 0.16%, Paris down 0.63% and Frankfurt down 0.45%.  Japan was down 2.38% and Hang Sang down 0.41%.

The Dow should open moderately higher on earnings. Moreover the averages are vastly oversold.  The 10-year is up 26/32 to yield 2.19%.


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Ken Engelke

Chief Economic Strategist Managing Director

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