The report below was sent to Asbury Research subscribers mid morning yesterday, February 1st.  We wanted to share it with you today as it s a good example of the comprehensive and timely research that we provide to our subscribers.  The S&P 500 (SPX) held 2808 support yesterday, but broke down below that level today and is now trading 54.00 points lower, closing in on our next support level at 2748.

Conclusion, Investment Implications, Strategy

The benchmark S&P 500 (SPX) is testing minor underlying support at 2808 amid favorable conditions to resume its current uptrend between now and early next week — IF that trend is still healthy and valid.  A sustained decline below 2808 over the next few days, however, would clear the way for a deeper decline to the next key level at 2748 to 2712, which would equate to a 6% decline from the recent highs.

Analysis and Rationale

Te market  is vulnerable to an overdue corrective decline according to a growing list of metrics.  One of these is mean reversion.

The blue line in the lower panel of Chart 1 below plots the daily percentage that the S&P 500 (SPX) is above or below its 200-day moving average, a widely-watched major trend proxy, with a corresponding daily chart of SPX and its 200-day moving average in the upper panel.

Chart 1

The chart shows that this metric reached a high extreme of 14% on January 26th before backing off over the past few days, and that 10% to 13% above the moving average has defined the high extreme in this metric since 2011.  The current high reading warns of the market’s vulnerability to a mean reversion-driven corrective decline, before it moves appreciably higher.

Chart 2 below plots annual seasonality in the S&P 500 based on data since 1957.  It shows that February is the 9th seasonal strongest or 4th weakest month of the year based on these data, but leads into a two-month seasonal recovery in March and April, which are the 4th and 2nd strongest months.

Chart 2

This metric suggests that, if a US broad market correction is coming, it is likely to occur during February.  For perspective, the most recent significant US broad market correction took place between December 31st 2015 and February 12th 2016 when SPX declined by 272 points or 13%.

The blue line in the lower panel of Chart 3 below plots the NYSE 26-week New High/New Low Ratio since 2017.  The green highlights show that this metric is currently rebounding from a low extreme of 17%, indicating recently weakening market breadth, and that previous similar extremes coincided with every near term bottom in SPX during  the past year.

Chart 3

This metric simply indicates that this is where the current market advance should resume, probably by early next week, if it is still healthy and valid.  Conversely, continued weakness over the next several days, despite this indicator extreme, would suggest that the corrective decline that Charts 1 and 2 warn of is beginning.

Chart 4 below plots SPX daily since August 2017 and highlights underlying support levels below the market.  The chart shows that the first support level is at 2808, the January 16th high.  This level is being tested now as the index traded as low as 2813 yesterday (January 31st).  Chart 3 above suggests that, if the current market advance is still healthy, the 2808 area is a likely place for it to resume.

Chart 4

However, we would view a sustained decline below 2808 between now and early next week as evidence that a deeper decline is emerging, which would clear the way for a move to the next support level at 2748 to 2712.  This would equate to a 6% decline from the 2873 January 26th all-time high.

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