A client with a technical eye recently sent me a chart of the S&P 500, wondering what I thought about the classic triple top pattern that had formed through September and October. So it was perfect timing when the guys at the Stock Trader’s Almanac (who produce great work) wrote about this pattern in their latest piece. They believe it’s an ominous sign for the markets, especially as we enter 2013, and this seems to be a popular opinion among technicians.
Whether it is weekly momentum signals that have turned bearish, EuroDollar data that implies a rough 2013, Dow Theory non-confirmation, or relative performance of market leaders (including the breakdown of Apple), there’s a lot of ammo for the bearish crowd to fire. However, there are also a variety of data points that suggest this is merely a well-deserved correction in the ongoing bull market. The election year cycle is playing out with precision, the momentum indicators display very strong overbought conditions (implying strong buying pressure), and now high growth emerging stocks are starting to outperform.
As a sum of the parts, we’re at a clear inflection zone according to technical readings. Doing nothing is an excellent strategy for investors when the data demands it, but if I were to venture a guess, I would still lean toward the positive side of neutral right here. Sentiment remains very bearish right now, and playing contrarian to bearish sentiment has served investors well all year.