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Weekend Reading: Market Breaks Support, Time To Worry?

Written by Lance Roberts | Oct, 14, 2016
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market-breaks-support

This past Tuesday my blog was titled: “A Decision Point Is Coming…Soon.” I just didn’t realize when I wrote it, that “soon” would mean “immediately.” 

“The chart below is the last 3-months of daily price movement. As you will see, while prices have been quite volatile, there has been virtually no progress in the market during the period.”

sp500-marketupdate-3-101016

“The two dashed lines so the tightening consolidation pattern more clearly. With the pattern becoming much more compressed it is quite likely a breakout is going to occur within the next few days. The direction of that breakout will be most important.”

Unfortunately, the break occurred to the downside this past week as shown below in the daily price chart.

sp500-marketupdate-101316

As I have been noting over the last few weeks, the consolidation that was occurring was eventually going to break and the expectation has been it would be to the downside given the ongoing overbought conditions with a very relevant “sell signal” in place.

That’s the bad news.

The good news, so far, is the support level which coincides with the markets break out to “all-time” highs is holding for now. The problem is currently is that all the gains since May of 2015 have now been erased.

Unfortunately, this breakdown keeps portfolios on risk-adjusted allocations with higher cash levels. It will now require an advance of the market to effectively new highs before risk allocations can be increased. Given the weak economic and fundamental backdrop, particularly given the stronger dollar, such an advance may not be in the cards currently.

Let me be clear, the break of the consolidation to the downside is not “bullish.” These breaks tend to be a warning of often bigger events in the works. As such, it would be wise not to quickly dismiss this event as a “Buy The Dip” moment. It might turn out that way, but from a risk/reward standpoint, the opportunity for gain is greatly outweighed currently by the possibility of capital destruction.

Next week will be extremely telling as to what happens next.

In the meantime, here is what I am reading this weekend.


Fed / Economy

 


Markets


Interesting Reads

 


“The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.” — Jesse Livermore

Questions, comments, suggestions – please email me.

2016/10/14


Lance Roberts

lance_sig

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter and Linked-In

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