The market’s winning streak had to end some time, and today was the day.
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The S&P 500 fell 0.2% to 2,115.48 today, while the Dow Jones Industrial Average declined 0.1% to 17,985.19. The Nasdaq Composite dropped 0.3% to 4,958.62.
Of course, those weren’t big losses. Instinet’s FrankCappelleri notes that “rallies can simply levitate on apparent fumes.” He explains:
…the most persistent rallies can simply levitate on apparent fumes for weeks, if not months, with nary a blip. This may not seem like a probable outcome now, especially knowing how raucous things were earlier in 2016.
The best example from recent history of a seemingly innocuous breakout and unexciting follow through happened in the spring/summer of 2014. While the majority of market participants were getting a head start on their Memorial Day weekends back then, the SPX closed above 1900 for the first time in history. This wasnt a huge deal because it had recently kissed this level twice and immediately sold off both times.
But it never turned back the third time around.
All in, the SPX went over 60 days without a 1% move up or down, gaining nearly 10% through the middle of July. The advance actually started a few weeks earlier, as the SPX aggressively pivoted soon after a bearish pattern was triggered.
We have a long way to go before anything like that can be repeated, and with the June FOMC meeting and the Brexit vote all on the horizon, it seems unlikely that the intra-day ranges will stay this calm
But the SPX’s most recent rally commenced right after a similar looking bearish formation was triggered, AND the index closed just shy of 2,100 on the Friday of Memorial Day Weekend in 2016, quietly extending since…
Guild Investment Management’s Monty Guild and team recommend heading to Europe:
Europe — ripe for a reversion-to-the-mean trade. Most European markets have historically traded at a discount to U.S. markets. Our analysis of forward estimates of corporate profits over the past 10 years, however, shows that this discount has become significantly larger. Aside from Spain and Denmark, all the major markets of the continent are trading at significant discounts to their usual relationship to U.S. market multiples. Notably, Germany, which over the past ten years has traded at an average 17.8% discount to the S&P 500, now trades at a 31.2% discount. There are macro reasons for these discounts, as our regular readers know we are well aware. However, we think that when the potential departure of Britain from the European Union is settled on June 23, Europes troubles will be medium- and long-term — and in the meantime, if the U.S. market breaks out to new highs, and European growth continues its current recovery, the resultant optimism will create an investment opportunity in Europe.
Of course, that means the U.S. needs to break out. Anyone feeling optimistic?
