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Analysis

Trade Recommendation: The S&P 500 is on the Verge of a Correction

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The stock market recently celebrated its eighth birthday on March 09, 2017. It is the second longest bull market in history, only second to the 113-month rally from October 1990 to March 2000.

  • The bull market is getting stretched on the upside
  • S&P 500 is overvalued both on a TTM P/E and a forward P/E basis
  • Economic expansion cycle warns of a fall within the next two years
  • Low volatility shows that the traders are not prepared for a fall
  • The chart shows a rising wedge, which is a reversal pattern

Will the bull market see its ninth birthday without seeing a 20% correction and take over the pole position, or do we see cracks developing?

A number of experts have been caught on the wrong foot calling a top of this bull market. Therefore, we will not delve into that territory. We are not interested in making outlandish claims, which are not tradeable. We want to put our money where our mouth is, without risking our house on it.

At the current levels, we see the first signs of weakness in the markets and expect a correction to 2320 levels in the near future. What is the basis for our assumption?

High Price over Earnings Multiple

The markets have developed a myriad of P/E ratios – the trailing 12-month P/E, the forward P/E, the inflation adjusted, the Shiller P/E – that it becomes difficult to correlate all of them to take a decision.

We, for ease of simplicity, will consider both the TTM and forward P/E ratios, as these give a good idea about the pricing of the markets from a medium-term perspective. The charts have been sourced from FactSet.

The chart shows that at the current price the markets are way above the average P/E multiples. There is nothing stopping the markets from getting pricier before a correction sets in. However, with every rise, the multiples will only tick higher and narrow the gap, which started the crash in end-2007.

The stock markets are forward looking, hence, a forward P/E will be a better yardstick for valuation.

However, even if we consider the forward estimates of growth, the market seems to have priced in most of it. Here too, the index is ruling above the 5 and 10-year average forwards 12-month P/E.

With the two charts above we have been able to establish that the S&P 500 at the current levels is pricey – though not in a bubble. Such high valuations leave only a small window for surprises. With any major upheaval, the traders rush to the exit can start a deeper correction.

Economic Expansionary cycle Tells Us to be Careful

Currently, there is very little that can be pointed as being negative for the economy – strong labor markets, high confidence levels, strong earnings projections, low interest rates, etc. However, a study of business cycles done by the National Bureau of Economic Research (NBER), the official arbiter of U.S. shows that we should be careful.

Since 1945, the US economy has witnessed 12 expansionary cycles – including the present one. The average age of those cycles has been 58.4 months, while the current one will complete 96 months. There have been only two cycles that have exceeded the present one – the one from 1991-1969, which lasted 106 months and the other from 1991-2001, which holds the record as the longest one for 120 months.

Though at the first instance one can argue that there is still room for the economy to extend the cycle. Certainly! But let’s see how did those two cycles end.

The S&P 500 peaked in November 1968, a month before the expansion reached its ninth year. The S&P 500, thereafter, dropped 36% by the spring of 1970. Post the fall, the following three-year and five-year returns were an abysmal negative 1.7% and negative 6.1% respectively.

In the 1990s, the economy entered its ninth year of expansion in March 1999 and the S&P 500 celebrated it with a 17.5% return over the next twelve months. However, it was followed by a crash and dismal three-year and five-year returns of negative 10.8% and negative 12.45% respectively.

Hence, the economic expansion cycle is raising a red flag for the next two years.

Low volatility shows that market participants are lax

These days, nothing seems to worry the markets. The market participants are confident that any fall is a good buying opportunity, which has sent the VIX – the US equity fear gauge – to the lowest in a decade, though the global economic policy uncertainty is at elevated levels.

However, this is a dangerous situation when traders concentrate only on the returns, ignoring the risks involved. BofA Merrill Lynch said that the traders are piling on the inverse VIX exchange-traded products (ETPs) linked to the CBOE Volatility Index, which bets volatility to remain low for long.

“A sudden shock to U.S. equities could pressure those invested in such strategies to short cover, thus exacerbating the rise in volatility,” the bank says, as reported by Reuters.

Middle East tensions, North Korean misadventures, Chinese debt problems, central bank withdrawing stimulus – any of these can cause a scare that can increase the volatility and bring the markets down.

Risk to our analysis

The market conditions are benign for the rally to continue further. If the S&P 500 goes on to hit new lifetime highs and sustains above 2453.8 levels for three days, it can continue moving higher till the 2480-2500 levels. A market can remain overvalued for an extended period of time.

Shorting the markets is an advanced technique, which should only be used with proper stop losses. The risk on the upside is theoretically unlimited. Hence, please maintain the stop losses mentioned in the analysis and only enter the trade once the said levels are reached.

What do the Charts Forecast?

The index is rising in a rising wedge pattern, which is a bearish formation. This setup comes into play on a breakdown from the trendline support. Until then, the S&P 500 can continue rising within the wedge. Hence, we shall wait for the price to break and close below the wedge – below 2400 levels – to initiate our short position.

On the daily charts, we find that the index is rising in a channel. The support zone on the index is between 2400-2420. If the index breaks this support zone, it is likely to fall to the channel support line at 2320 levels, which is also a significant support. We expect the index to find a strong support at these levels.

Hence, our short position will be taken at 2395 with a stop loss of 2455 and a target objective of 2320. We risk 60 points for a gain of 75 points. Once we enter our trade, we shall try to lower our stop loss and trail it to reduce our risk.

Traders can use the ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU) to initiate the short positions. As this is an inverse ETF, please buy it at the existing value when S&P 500 hits 2395 levels. We shall sell our position at the existing level when the S&P 500 hits 2320 levels. Once we enter the trade, we shall keep the lows as the stop loss.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. jedadoo

    June 29, 2017 at 7:43 am

    How will this affect the cryto market? We haven’t seen a stock market downturn since it’s existed. Does it follow the same pattern as the stock markets during past corrections?

    • fkohist123

      June 29, 2017 at 11:30 am

      I would think alot of the small-cap cryptos will suffer from this if their revenue models depend on adoption of their blockchain solutions by industries. Think Civic and the likes: they will need companies to sign up in a recession where cash is scarce.

      Most small-cap crypto issuers are start ups themselves and their growth could be suppressed in a general recession. On the other hand BTC could serve as a hedge seeing as it’s volatility is converging to more stable levels.

    • fkohist123

      June 29, 2017 at 11:30 am

      I would think alot of the small-cap cryptos will suffer from this if their revenue models depend on adoption of their blockchain solutions by industries. Think Civic and the likes: they will need companies to sign up in a recession where cash is scarce.

      Most small-cap crypto issuers are start-ups themselves so their growth is vulnerable to suppression aswell. On the other hand BTC could serve as a hedge seeing as it’s volatility is converging to more stable levels.

  2. Rakesh Upadhyay

    June 29, 2017 at 5:39 pm

    jedadoo,

    A risk-off trade in the S&P 500 will give us a better idea whether traders turn to cryptocurrencies as an alternate asset class? If even a portion of the money that leaves equity markets enters into cryptocurrencies, we should see the uptrend continue.

    On the other hand, if the market perceives cryptocurrency investments as risky and there is a risk aversion across the board, then we might see correction set in.

    Difficult to predict, as there is no precedence and cryptocurrencies are still emerging as a new asset class.

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Analysis

Crypto Update: Market Still in Deadlock

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The choppy, directionless period in the cryptocurrency segment continues, with no meaningful change in the technical setups of the major coins. While the broader trends are still clearly bearish and sellers remain in control of the market, we saw another minor bullish shift in the past 24 hours, with modest gains across the board.

Most of the top coins are trading in the range of the Monday session, which saw the spike triggered by the turmoil in Tether. Stellar is the apparent positive outlier of the past few days, while Dash, Litecoin, and Ethereum have been the weakest so far this week.

DASH/USD, 4-Hour Chart Analysis

On a positive note, all of the majors remain above last week’s levels, and especially Bitcoin’s continued stability is encouraging for crypto-bulls here, even as our trend model paints a negative picture of the segment.


BTC/USD, 4-Hour Chart Analysis

Bitcoin avoided a test of the $6275 level despite moving below its recent very narrow trading range yesterday, with still no meaningful bearish or bullish momentum present in the coin’s market. BTC continues to trade below the $6500 level, and its volatility is very low, even after the move below the previously dominant broad triangle consolidation pattern.

Further resistance levels are still ahead near $6750 and $7000, while support levels below $6275 are found near $600, $5850 and between $5000 and $5100.

Altcoins Little Changed as Ethereum Still Glued to $200

XRP/USD, 4-Hour Chart Analysis

The weekend has been very quiet for altcoins so far, with even the recently active Ripple settling down near the $0.46 level. XRP is around the midpoint of Monday’ s range but the lack of follow-through after the breakout from the triangle consolidation pattern is a negative sign, and the coin remains on a short-term sell signal in our trend model. Strong resistance is still ahead at $0.51, $0.54, $0.57, while support is found near $0.42, $0.375, and $0.35.

ETH/USD, 4-Hour Chart Analysis

Ethereum continues to hover around the $200 price level still being in bearish short- and long-term patterns and the relative weakness of the second largest coin remains a huge concern for the whole segment.

With no evidence of meaningful capital inflows to the market, the outlook is neutral at best, and traders and investors should wait for at least a short-term trend change before entering new positions. Strong support is found near $180, $170, and $160, while resistance is ahead near $235 and $260.

EOS/USD, 4-Hour Chart Analysis

EOS is also among the relatively weaker coins, and the coin is stuick in a broad Trading range around the $5.35 level since August. Volatility in the coin’s market has been progressively declining, but the vicinity of the bear market low suggests that the long-term downtrend is still intact, especially given the segment-wide trends.

A test of the lows is still more likely than a bullish break-out, with strong support found near $4.50 and key resistance ahead near $6 and $6.5.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 380 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Altcoins

Cardano Price Analysis: ADA/USDT is Eyeing a Big Move Out of Current Technical Setup

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  • Positive update from IOHK audit of Icarus by Kudelski Security.
  • ADA/USDT is moving within a pennant pattern formation, subject to breakout.

Solid Icarus Audit reported by IOHK

IOHK recently announced in their forum that an audit was conducted by Kudelski Security, which is an independent and third-party security audit firm. The audit conducted demonstrated that the Icarus project implementation for Cardano looks all good and set to go, without any major problems. However, a few changes may need to be executed. IOHK developed the Icarus code as a reference implementation, for Cardano light portfolio.

The important of “independent audits, like this one was stressed by IOHK. Stating “they are critical for identifying security issues in the Icarus wallet, that may not have been identified by internal audits”.

Furthermore, IOHK has elucidated Icarus as an open source code base serving as a reference for the creation of safer and easier mobile wallets for Cardano. They said, “this guarantees our customers and clients the safest portfolio we can offer.”  Given the benefit of an external audit, the developers can resolve any problems identified during its product launch audit.

Positive Updates from Cardano Founder

Cardano’s founder, Charles Hoskinson, was recently commenting on Cardano’s future. He said “We have so many amazing things coming out.”

Mr Hoskinson further added that one of their scientists has flown in from Switzerland. They will be doing a video, which will be the first time they have ever talked about their sharding design that we have for Cardano. Further commenting on other updates, including videos about Shelley and the Rust project.

Technical Review – Daily Chart

ADA/USDT daily chart

ADA/USDT is moving within a triangular pattern or a pennant formation, as seen via the daily time frame. It is narrowing, moving closer to a breakout. Ranging ahead of another drop to the deep south. Although, fundamental developments coming out from the Cardano foundation, remain very much upbeat currently.

Over the past 8 days, the price has been grinding higher, after receiving support at the lower trend line of the above-mentioned pattern. In terms of resistance to the upside, this can be seen at 0.08310000. The upper tracking trend line. Further north, a supply zone is running from 0.09000000-0.09500000. ADA/USDT  last traded here on 23rd September. Finally, support is tracking at 0.071800000, lower part of the pennant, also within a demand area. Another strong buying territory is observed from 0.06500000-0.06000000.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 33 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Analysis

Crypto Update: Top 10 Worst Performers Make Bottom Picking List

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Yesterday, October 18, 2018, Cryptoglobe published, a list of the 10 worst performing cryptocurrency investments of 2018. These altcoins suffered heavy losses of between 97% – 99%. With tremendous devaluation, it may lead you to think that altcoins or cryptos are dead. After all, other assets such as stocks or commodities may likely never come back to life after losing all but one percent of their value.

But this is crypto where coins nosedive one day and skyrocket the next. Cryptoglobe can show you a picture of tragedy, but us; we see opportunity. In this two-part article, we reveal how the top 10 worst performing cryptocurrency investments can make a good bottom picking list.

Zclassic (ZCL/BTC)

% Down from All-time High:

99%

Current Status:

Zclassic/Bitcoin (ZCL/BTC) is currently finding footing at its historic support level of 0.0005. In the last four weeks, the pair has been range trading between 0.0005 and 0.000074.

Bottom Picking Candidate?

An altcoin that’s down 99% is a great bottom picking candidate. Aside from the possibility of a technical bounce, you can expect whales and expert bottom fishers to accumulate positions at this level. So, you can either trade the range or accumulate with the best of them.

Weekly chart of ZCL/BTC

Game Credits (GAME/BTC)

% Down from All-time High:

98%

Current Status:

GAME/BTC is attempting to carve a bottom at the parabolic support of 0.000025. Over the last four weeks, the pair has been trading between 0.000025 and 0.0000346.

Bottom Picking Candidate?

Yes, GAME/BTC has the potential to generate a strong rally in the coming weeks. Volume spikes on September 23 and October 4 hint that someone is accumulating at these levels. More importantly, the market is flashing oversold readings on the weekly RSI. GAME/BTC has the essential ingredients of a powerful bounce.

Weekly chart of GAME/BTC

Bitcoin Diamond (BCD/BTC)

% Down from All-time High:

97%

Current Status:

BCD/BTC is currently trading inside a huge falling wedge on the daily chart. It is still bearish as it continues to generate lower highs and lower lows.

Bottom Picking Candidate?

No, BCD/BTC is not a great bottom picking candidate. However, the pair looks ripe for a breakout. The usual catalysts are present: flashing extreme oversold readings, nearing the apex of the wedge, and trading at all-time lows. Look for volume spikes as a sign of a breakout.

Daily chart of BCD/BTC

Ethos (BQX/BTC)

% Down from All-time High:

97%

Current Status:

BQX/BTC has been carving a bottom at 0.000045 for over a month now. Those who were able to buy at this level are lucky because BQX/BTC is looking ripe for a rally.

Bottom Picking Candidate?

Yes, if you can still manage to get as close to 0.000045 as possible. The volume surges in the last few days suggest that the pair is in the final stages of base building. On October 14, BQX/BTC printed volume that’s over 250% of its daily average.

Daily chart of BQX/BTC

SALT (SALT/BTC)

% Down from All-time High:

97%

Current Status:

SALT/BTC may already be in an uptrend but it seems that only a few people are looking. The 4-hour chart shows that the pair is currently generating a bullish higher low after pulling back from its first higher high in months. SALT/BTC looks bullish in our book.

Bottom Picking Candidate?

Yes, this pullback gives you an opportunity to buy the higher low. We expect SALT/BTC to trade near the support of the ascending channel as it consolidates.

4H chart of SALT/BTC

Bottom Line

In trading and investing, the worst performing cryptocurrency investments and other assets often provide the maximum financial opportunity. We’re seeing that in the first half of the list. We have a feeling that we’ll see more or less the same in the second half of the list. Stay tuned.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.7 stars on average, based on 252 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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