Since we identified the bottom in the bond market last year, we have seen quite a strong rally in bonds, with rates dropping rather precipitously as we expected they would. In fact, the speed at which rates have dropped have surprised many investors, especially since the overwhelming perspective at the end of 2018 was that rates were only heading higher. Moreover, until recently, the Fed was still talking about raising rates.
Recently, with the Fed signaling a change of course, much debate has been seen as to whether the Fed change in perspective will affect the stock market. Many believe that lower rates will have a positive impact upon the market, and allow the market to continue much higher over the coming years.
And, with the upcoming Fed meeting at which there seems to be 100% certainty that the Fed will lower rates, many view this as the Fed “blessing” this stock market rally. The “Powell Put” will be seen as placing a floor under the market. But, when there is 100% consensus about something in the market, it certainly makes me concerned.
While I also believe that the market will head higher in the coming years, I am not as convinced that it will be a direct move higher. Rather, the market has now moved into a target/resistance zone we identified a number of years ago between 3011 and 3045 on the S&P 500 (SPX). And, when we identified this target, we expected it could set off a significant market decline. I am still of this expectation.
Our long-term target/resistance has been in the 3011-45 SPX area for quite a number of years, and on Friday, we have finally moved into this target. I believe this target has the potential to provide us with a significant market top. And, should we break down below 2987 SPX, with follow through below 2950 SPX, we have confirmation that the rally off the June low has completed, and a potentially larger degree decline has begun.
So, while the market rally has been quite relentless this year, the bulls now have a major test within this long-term target/resistance region we identified years ago. I think caution should be considered by investors at this time.
Should the market top out as we expect, then the structure with which we begin to decline will provide us with better indications of how deep that decline can take us.