"I have been listening with interest to your comments on the current pullback in the market and how the S&P 500 is due for further weakening to bring it nearer to / below the 200 day MA. In light of this, could you comment on the S&P 500 Banks Index which you have often cited as a lead indicator and which, if I am viewing it correctly, is tracking higher, suggesting that the S&P 500 is likely to move up, not down?"

David Fuller's view Thanks for an astute email of general interest.

Stock markets often provide the best returns following bear markets, when valuations are cheap because many people have sold, and central banks are beginning to stimulate an economic recovery with monetary easing. During the last four years plus, Fullermoney has generally been bullish near the S&P's lows, as the Archive will testify, while crowd sentiment has been bearish. Currently, I believe the position is close to being reversed. In other words, crowd sentiment regarding Wall Street is more bullish and Fullermoney is cautious, although we would not reduce positions in the performing Autonomies reviewed by Eoin, unless they clearly become overstretched relative to their MAs.

The S&P 500 Banks Index, mentioned in the email above, is certainly not weakening in line with a possible bear market, although it is somewhat overextended relative to its MA. We have had a further look and my thanks to Eoin for this list of constituents, by weighting. Wells Fargo is the largest by far, at 48.24%. It has a strong chart, which bounced from its MA last week with a large upside key. However, a look at broader US bank indices in the Library (Sector Indices - Banks & Utilities) shows that they too are currently trending higher. Therefore, if the S&P 500 Index reaches new highs before testing its MA, the email above will have explained why.

The main reason for our current caution has been the strength of the rally since last November, which was overextended relative to its 200-day MA at the May high. Additionally, we are also seeing a spike in T-Bond yields. While this has led to a transfer of some funds from fixed interest to equities, rates are rising because investors in T-Bonds, some of whom are leveraged, have overstayed at a time when the Fed has been discussing the possibility of tapering its purchases.

As for the future, the key point is that we are currently looking for a choppy ranging phase for equities over the medium term and perhaps longer, possibly from two to four years. However, we do not envisage a bear market for the S&P 500 Index, at least not one anything like the big slumps of 2000 and 2008. Nevertheless, risks are increasing somewhat and a few previously leading high-beta markets, such as the Philippines, Thailand and Mexico, have already fallen by 20% or very close to that percentage from this year's highs, before rebounding or at lest steadying more recently. Additionally, mining sectors remain in a bear market. I conclude that some caution is justified.