"...the SPX's 2,800 level is on the radar of many chartists as a potential resistance area -- a level that is now very much in view. This is an important level, as it is a round number and the site of the past highs as I mentioned last week. But if indeed a short-term top or a hesitation in the upside momentum occurs, I would find it interesting if it occurred at 2,820 -- a level that is a round 20% above the December closing low, and not on the radar of many as a potential hesitation point."
-- Monday Morning Outlook, February 25, 2019
Perhaps the answer lies somewhere in between. I am referring to the S&P 500 Index's (SPX - 2,803.69) two separate daily intraday peaks at 2,808 and 2,813 last week, above the round 2,800 century mark that has been the focus of potential resistance by many technicians quoted in the media, but just below the 2,820 level that is a round 20% above December's closing low, which some in the "too far, too fast" camp might view as a profit-taking level. Whether it is 2,800 or 2,820, an area of resistance seems to have been established, at least as it pertains to last week's trading.
For traders, the question is: Does last week's hesitation in the 2,800-2,820 area repeat recent history? In March 2018, after a rally up to 2,800, the SPX began a 2-1/2 week tumble of more than 7%. This pullback began one week prior to a Fed rate hike. In October, the SPX broke below 2,800, quickly retested it, and then declined 6% in a two-week period beginning in mid-October. A second retest of 2,800 in early November preceded another 6% decline over two weeks. And it was a third retest of 2,800 in early December that marked the beginning of a near-16% retreat into the Christmas Eve lows at the 2,350 half-century mark.
With the SPX rallying back to 2,800 last week, the theory among some technicians is that sellers will emerge again, fearing a repeat of the action that followed retests of 2,800 in 2018 -- and specifically in the fourth quarter. Moreover, with 2,800 on many radar screens due to the action around this level that I just described in late 2018, potential buyers may perceive danger at 2,800, potentially flipping the supply-demand equation back in favor of the bears.
At the risk of saying, "this time is different," perhaps it is best to describe what I see as the similarities and differences between 2018 and the present, with respect to the SPX trading in the 2,800 area that technicians have been cautioning as resistance.
The first has everything to do with the Fed and its "body language," even as "known unknowns" like the impact of slowing growth in China, strained trade relations between the U.S. and Europe, Brexit, a flat yield curve, and the potential for an earnings recession are the same now as they were in 2018.
Specifically, the Fed now has an outlook of "pause" and "patience" regarding interest rate increases, in sharp contrast to its previous approach to "raise" and "further gradually raise" rates in the future (as it did in March, September, and December 2018). This change in both Fed actions (it held rates steady in late January) and in its tone looking forward has stabilized markets. It was clear that market participants were growing uneasy about the Fed's rate hikes amid lingering political and financial scenarios that could stunt economic growth.
In fact, the SPX rallied 4.4% in the one month following the Jan. 30 decision to hold interest rates steady. Per the accompanying table, stocks -- as measured by the SPDR S&P 500 ETF Trust (SPY - 280.42) -- have clearly performed better in the month following a rate hold vs. a rate hike since the current tightening cycle began.
With the Fed having an obvious impact on the short-term direction of the market, traders should be aware that after the market closes this Friday, Fed Chairman Jerome Powell will make an appearance at the 2019 Stanford Institute for Economic Policy Research (SIEPR) Economic Summit, in a speech entitled, "Monetary Policy Normalization and Review." This speech could impact the market's direction next week, especially if Chairman Powell appears to telegraph Fed actions through the rest of 2019 that contrast with the dovish tone of the past several weeks. The next monetary policy decision will come on March 20 and the Fed is expected to again hold rates steady, roughly one year after the first of four rate increases last year by the Federal Open Market Committee (FOMC).
Secondly, the SPX's technical backdrop is on more solid ground relative to the fourth quarter of 2018. Prior to the three major sell-offs that occurred as the market was trading around 2,800 in the fourth quarter, the SPX had already been displaying weakness, and was trading below its 80-day and 120-day (six-month) moving averages.
That said, the SPX was trading above these moving averages when it rallied up to 2,800 in March 2018, but it experienced heavy selling immediately after touching 2,800, and heavy selling also occurred within only a couple days in the three times it rallied into 2,800 in the fourth quarter of 2018. Now, the SPX is showing signs of simply hesitating in this area, as opposed to this being a huge technical roadblock, given the current Fed tailwind that is in place.
"...data show that many investors remain nervous: In every week this year, money has flowed out of domestic stock market mutual funds and exchange-traded funds -- as much as $15 billion in the last week of January, according to EPFR Global, which tracks flows into and out of funds. These investors, overwhelmingly individuals, have moved money into bonds and cash."
-- The New York Times, February 25, 2019
Finally, the excerpt above from an article in the New York Times should give a bull with a contrarian mindset reason to believe that the move up to 2,800 last week proves at worst to be a speed bump with very limited drawdown, unlike 2018 when such moves up to the 2,800 were excellent short-term selling opportunities. Such moves into cash represent fuel to drive a move through 2,800 -- if not now, then eventually.
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