We do not believe that five-year bull market in risk assets has ended, despite global equity markets’ rise in volatility and falling prices over the past six weeks.  We believe:

1. The S&P 500 is enduring a typical pullback before resuming its upward climb.  Investors are alarmed by the recent surge in volatility because, thanks to the Federal Reserve’s (Fed’s) Quantitative Easing (QE), the market has not had a normal pullback to the 200-day moving average for almost two years.  We expect the S&P 500 to find support around 1870, just under its 200-day moving average, and we see secondary support around 1830 (see Chart 1 on page 2).  We expect the S&P 500 to be back above 2000 by year end. 

These are bold forecasts and more follow.

David Fuller's view

Here is The Strategic View.

These are bold forecasts and more follow.

The S&P comments would have seemed uncontentious a fortnight ago, but when persistent trends eventually change, they can do so very quickly.  I take the view that a consistent trend is a trend in motion, until it loses its consistency characteristics.  That is the equivalent of a bucket of ice water in the faces of many trend runners, particularly if the use of leverage (margin debt) is significant, as we know to be the case (hat tip to Doug Short once again for his presentation variation on the same data shown in my first item above). 

Today, the S&P 500 and every other US stock market index that we follow has lost their most important consistency characteristic - the progression of higher reaction lows.  These had not been broken on the S&P for three years.  We have also seen the biggest correction since 2011.  There is now a short-term oversold condition but over the next few weeks we will see if the S&P forms a lower rally high.  If so, ‘three strikes and you are out’, as they say in the USA, and we would also have a broadening pattern.  The lead ‘canary in the coalmine’, you may recall, was the smaller-cap Russell 2000 Index.