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The Roadmap To 2015 (Part 1)

U.S. stock market may catch a “winter cold” in Q1 2015

The dreaded the month of October has just passed us where it brought a lot of intriguing moments in the financial markets. For instance in the first three weeks of October 2014, the closely watched stock market index, the U.S. S&P 500 has tumbled by 150 points to a low of 1820 printed on 15 October 2014. This translates into a decline of around 9% from its previous all-time high of 2019 seen on 19 September 2014.

It was deja vu all over again where market pundits revisited the 10 to 20% correction scenario and some even painted a “Doomsday” event akin to the 1987’s Black Monday crash and 2008’s  U.S. subprime housing mortgage crisis.   

As usual when the herding behaviour is “too” fearful, Mr Market will end up surprising you on the opposite side which the S&P 500 did a “V”-shaped recovery to end the month of October in a positive note even before the global risk on “explosion” triggered by Bank of Japan’s move to increase its magnitude of quantitative easing programme.  

Since the European’s sovereign debt crisis exploded in the summer of 2011, the S&P 500 has not registered a “sizable” decline of at least 10% and the current multi-year uptrend from the low of 1074 seen on the week of 03 October 2011 had rocketed by 87% to its current all-time high of 2024!

As 2014 is coming to a closure, what will be in store for the U.S. stock market in 2015? Let’s us dissect the market using an integrated approach. 

S&P 500

Key elements on the S&P 500

  • The Index is still supported by the rising 20 and 50-week Moving Averages (MA) where the 50-week MA is providing support at 1883 which also coincides closely with the lower boundary of the ascending channel (in dark blue) in place since 03 Oct 2011.
  • The upper boundary of the ascending channel (in dark blue) stands at 2070 follow by 2170 next.
  • The 2140/2170 resistance zone is also defined by multiple Fibonacci projections from various degrees.
  • From Elliot Wave Theory (fractals), the Index is in the midst of a long-term impulsive (bullish) wave structure since the 666 low printed in March 2009. An impulsive wave structure typically consists of five waves and the Index is now likely to be in the midst of a 3rd wave, III (the strongest) in place since 03 October 2011 low.
  • The potential wave III target is set at the 2140/2170 zone which confluences with multiple Fibonacci projections from various degrees and upper boundary of the ascending channel (in dark blue).
  • Upside momentum is showing weakness as indicated by the bearish divergence signal seen in the RSI oscillator, take note that such a similar observation can be seen in February 2011 before the 21% plunge that occurred in the summer of 2011.
  • The 1730/1630 zone corresponds closely with the lower boundary of the longer-term ascending channel (in orange) in place since March 2009.  

U.S Sectors

The two key defensive sectors, Consumer Staples and Utilities have underperformed the S&P 500 since April 2013 and November 2008 respectively. Interestingly, the relative value chart of Consumer Staples against the S&P 500 has broken above a former descending channel recently in late September 2014. In addition, the relative value chart of Utilities against the S&P 500 is now challenging the long-term trendline resistance in place since November 2008 with a bullish divergence (pre-signal) seen in the MACD Histogram that indicates a that downside momentum has started to wane.

From a sector rotation perspective, the defensives (laggards) have now started to show signs of leadership (outperformance) against the benchmark S&P 500. When the laggards begin to rally and outperform the general market, odds tend to favour that the multi-year uptrend of the S&P 500 in place since 03 October 2011 is nearing its end. Refer to the relative value charts of the Consumer Staples and Utilities sectors as per highlighted below for more details.

Sentiment Indicators

These indicators measure the attitude of a particular group toward the market. They act as contrary indicators where extreme sentiment levels are normally associated with significant market tops and bottoms. For example, most market participants are extremely bullish near the tops just before the market stages a significant decline.

One key sentiment indicator is the American Association of Individual Investors (AAII)’s weekly survey which polls its members if they are bullish, bearish or neutral on the stock market over the next six months. We have taken the difference between the bulls and the bears and plot it as a histogram as shown below.

The current reading is coming close to an extreme “bullishness” level of 31 seen in the past two years.

Conclusion

After an integrated study on the U.S. stock market (technical analysis, sentiment and sector rotation), it appears to that the S&P 500 is coming close to a key inflection juncture at the 2140/2170 zone where a potential 10% to 20% correction may occur towards the 1730/1630 support zone before resuming its long-term upside movement to target the 2335 level (exit breakout potential of the former 13 years of consolidation phase since March 2000).

Charts are from eSignal & StockCharts.com

Stay tune for next month Roadmap to 2015 (part 2) where I will discuss on the current strength of the USD seen and its implication towards Asian and emerging stock markets.

Disclaimer

The information contained in this material is intended for general circulation only.  It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs.  Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.  All queries regarding the contents of this material are to be directed to City Index Asia Pte Ltd. 

 

kelvin_wong
Kelvin Wong

Chief Technical Analyst - Asia

Kelvin is a professional technical analyst with extensive experience in stock indices, equities and foreign exchange. Kelvin employs a combination of fundamental and technical analysis and specialises in utilising Elliot Wave and Fibonacci analysis. He has also conducted technical analysis related seminars and training programmes for thousands of private traders in Singapore and Malaysia