After toying in the 1340’s over the past several days, the SPX finally flushed out to close at 1338–a 50-day low close. There has been only one instance in the past five years that the S&P 500 made just one 50-day low prior to making new 50-day highs (SPX 1256 on March 16, 2011). After closing at 1363 a little more than a month later, the SPX nearly round-tripped to back to 1265 by mid-June. Looking at history, there is good news and bad news if you’re bullish on equities. The good news is that 50-day low closes are often followed by sharp rallies within short order. The bad news is that those rallies are often short-lived.
Equity bears are definitely in control at this point; the question is whether or not a sharp rally will unsettle them enough to relinquish control. I like to view things in context of the current conditions and take historic patterns as just that–history. However, the SPX hasn’t closed on a 50-day low in more than eight months; and with a period of that length, we are likely to see new 50-day lows at some point in the near future. At this point, I see one of two scenarios:
- Equities continue to consolidate for the next 1-2 weeks; followed by a significant rally
- Selling subsides in equities as profits are taken on the short side and equities reverse course almost immediately
In both scenarios, I think it is likely that the SPX makes new highs on the year. To be fair, I thought the SPX would have been there by now. I still have a bullish stance, but what has changed from my point of view is the potential for equities. In other words, in both of those scenarios above, I will be looking for opportunities to lighten up on equity exposure as I do not see much capacity for the SPX above 1450.