The market correction trends for the Dow Industrials and the S&P are in place for the near term as the indexes had their first down month of the year in May and are now down for the last six weeks in a row. The total move has been around 7% from the peaks, and we see potential risk to the 50% retracement level of 2600 to 2640 on the S&P. The reasons for market pullbacks are different each time, but the overall process is normal within the context of the trading range of the past 18 months and the long-term bull market that started in 2009. The challenge going forward could be more of time than price as the pullbacks delay the longer-term bull trend for perhaps a few more months into the fall. Typically, pullbacks can have their biggest days at the end, so we expect volatility to continue over the near term.
The major market indexes are in corrections that we think still have no clear indications of how long they will last or how far they will go, but we continue to believe this is an ongoing intermediate-term trading range that will see more volatility and some decent moves in both directions over the summer months. We are watching the daily volatility for signs of shocks to the markets.
On a more positive note, the markets are building a reverse head and shoulders pattern. Even with a retracement, back to the 50% to 2640 would not violate the shoulder. Couple this with the fact that the reverse head and shoulder is developing at the all-time high indicates to us that if confirmed an explosive rally could occur in the second half of the year. This would create a new floor at the all-time high and new upside that could persist.
Unfortunately, no amount of analysis or financial modelling can account for random Twitter posts that swing the markets hundreds of points in either direction. All it will take to reverse this market direction is a single tweet. Any kind of trade resolution or de-escalation with China could happen at any moment and, absent mitigating factors, requires investors to stay in the market, lest they miss the recovery move.
There is much to worry about in the world, as there always is, and that can take our focus away from the fact that the overall market trend continues to be bullish. The news and noise we hear each day can lead us to believe that any of it may have an effect on the long-term outlook, but later it tends to blend into the long-term cycle in a way we can no longer see. The long-term bullish trend should be our guiding focus but it is hard to remain committed to that point of view when there is so much other information that is trying to talk us out of it. The speed and volume of the information available should allow us to make better decisions, but more often it becomes overwhelming and may instead have the opposite effect of making the process more confusing. The bull market of the past 10 years has been taking place within a channel that is about 20% wide, which allows for much movement and volatility along the way, but the overall bullish trend remains intact as long as the market continues to follow this path.