It has been an ugly start to the year not just for equities, but for risk assets in general. Ten trading sessions into 2016, and the S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — is in the hole to the tune of 7.9%.
The rough start to the new year, however, has brought the SPY ETF to levels where at the very least a strong oversold bounce looks increasingly likely.
Couple this with a big corporate earnings calendar this week as well as the World Economic Forum in Davos, Switzerland, and the probabilities for a bounce are even higher.
As last week’s trading session began to wane down, I made my weekly calls with hedge funds and other institutional investors. Not surprisingly, their sentiment and outlook for 2016 have significantly deteriorated due to the weak start to 2016. A good many of them are coming into this week still net-short stocks after coming into the new year well net-long.
While I respect these institutions that I speak to on a weekly basis, their near- to medium-term timing tends to be less than good, which is just one more reason for me to increasingly look for a counter-trend bounce in equities sooner rather than late.
In the bigger sense — and as I have continually reiterated in this column over the past few months — as long as the price of oil does not stabilize, it is difficult to see risk assets such as equities be able to do more than small dead-cat bounces. So my playbook is to watch for oil to get some sort of better bounce on less-than-awful headline news, then pounce on stocks for a trade.
SPY ETF Charts
Looking at the multiyear weekly chart of the SPY ETF, things have notably deteriorated. A mean-reversion move back toward the $160 area — which roughly coincides with 1,600 on the S&P 500 — looks likely at some point this year, although not in a straight line.
A move back to this area would also satisfy a retest of the blue horizontal line, which was the breakout point to new all-time highs in 2013.
On the daily chart, we see that the SPY as of last Friday has had 11 consecutive daily closes below its blue 8-day simple moving average. Contrast that to the seven consecutive daily closings that this ETF saw when markets corrected last August, and the selling at present looks to be overdone.
A logical initial upside target through a multiday/multiweek lens is the $200 area, which would be a retest of the blue horizontal box that formerly acted as support.
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