Current Long-Term Stock Market Outlook:
We now think that enough time has passed that the August 2015 low is the new key low to break for the market. A decisive break of that low would be the first real downtrend on the weekly chart since 2009. This would essentially be step 1 of a bear market as seen in the chart below. With a break of that low; we could be looking at an eventual test of the long term breakout point at around 1600 or so.
Currently, the bulls are not safe until a clean new all-time high is made. This means that bulls should be very cautious, and that buying the dip will not be the normal high probability trade that we take here at Savetradeinvest.com.
Bulls have not been able to make a decisive new high and it looks like now it is the bears turn. We are now close to confirming the first down trend since the 2009 lows if we see a decisive break of the August 2015 lows.
We still have not confirmed a decisive break below the August lows. Bulls keep buying every dip as if this was 2012 which is not a sign of bearish capitulation. If the bears keep the pressure on, we could see bulls throw in the towel and see a quick drop around 1700 or so. I expect to see market volatility continue at least until there is more confidence on who will win the 2016 presidential election.
The market volatility has continued as expected. Since bears were not able to make a decisive break below the August lows, bulls took back the ball and are now approaching the top end of the range. Bulls must make a decisive new all time high on this turn because the game is starting to get late. We have been in this range for about 2 years now and another turnover by the bulls could easily lose them the game. Overall, bulls are not safe until a clean new all-time high is made.
On the fundamental side, we can see that GAAP earnings are still declining for over a year now and prices may be looking to catch up to this decline in corporate earnings.
Bottom line is: we are still stuck in this range that has been going on for over 24+ months now. Consolidation below 1960 would be bearish, a break above 1960 and we could see new highs. Below are each of the range targets: bullish(2350) or bearish(1675) breakout. If the downside target is met, the next logical target will be the 2007 top. One last thing to note, if we do break to the upside, we believe this may be a final flag breakout. This will lead to a quick fall back into the range within a year or so.
The market has been very slow since our last update and not much has changed. Since bears were not able to make a decisive break below the August lows, bulls took back the ball and have since exceed the high of the 2 year range. This currently makes being a bull safer since we at least know technically, the next pullback in the medium-term should normally be bought. At that point we can reassess our positions.
However, in the long-term: the consolidation above the breakout does not suggest a strong bull breakout at this point. Bulls need to push past 2225 and break the red trend line on RSI to leave no hesitation in the chart pattern. That would lead us to believe we are on the way to the bullish target (2350 – 2400).
If we do not see this strength from the bulls soon we believe this may be a final flag breakout. This will lead to a quick fall back into the range.
On the fundamental side, we can see that valuations continue to rise while GAAP earnings are flat to down for over a year now. This same problem holds true on a number of different valuation techniques including: PB ratio, Price to Sales, etc. This divergence is not sustainable in the long-term.
The bottom line is: for the medium term+ we think it is slightly safer to be a bull, but caution is still needed if we are thinking about putting on any new long term positions. Taking some profits may also not be a bad idea.