S&P 500: Week in Charts

Week of July 31 - August 3 

Takeaways:

• SPX does not appear to be over-extended in the longer timeframe.

• Price action this year has oddly close seasonal characteristics to 2019 when compared.

• Short term price action indicates more selling is possible.

The SPX is Not Appearing Overbought

One method to look at whether a equity is overbought or oversold is to look at the long term moving averages. In this case we see peak highs in the SPX and its distance from the 200ma. 

At 15% the current market is hardly showing overbought long term in context with the previous measurements.

Market Breadth is still indicating a bullish bias. With 62% of stock still above their 50MA 

From a seasonal perspective, the 2023 SPX has a very similar cadence to 2019. 

• Strong start to January almost identical to 2019

• Then a 4 month divergence 

• Another almost identical 2 month uptrend to end up nearly 22% starting in June. 

• August looks to be starting very similar as well.

Short term, intra-week, the SPY broke below the previous day's intra-day low. 

• Typically this price action sets up for lower price discovery. 

• Friday was characterized by a strong morning then a sharp high volume selloff second half of the day.

Another interesting technical feature was there have been only two other times since March where the SPX ticked below 1500. In the few occurrences this year, it has been followed by and uptrend. It is a possible signal of capitulation.

Long Term Portfolio Strategy

The long term (5-10 year) growth based investment strategy:

The following is a result of months of research to develop this strategy. I use a combination of fundamentals and technical analysis to make these investment decisions.

There are 3 components to this strategy to make it work:
• Equities that have high growth potential.
• Use the value averaging method to invest in equities
• Set monthly or quarterly targets.

S&P 500 Based Equities with Growth Potential:

S&P 500 - SPY, VTI
Over the past 20 years the S&P has outperformed the Dow Jones and the Nasdaq indices by over 192% so I use the SPY as my baseline investment. VTI is a lower cost ETF that invests in slightly broader markets than the SPY.

The SPY has greatly outperformed the DOW and the NASDAQ over past 20 years.

This chart illustrates the best time to buy over the past 3 years is close to the 50 week moving avg.

Equal Weighted  S&P Index - RSP
Smaller to Mid-Cap stocks tend to perform stronger over time. This ETF  weighs the S&P equally so the small to mid capped stocks have equal weight to the larger capped stocks

RSP out performed the S&P by 62% over 10 years

FMI Large Cap Fund - FMIHX

This is a highly rated mutual fund that has outperformed the S&P by over 33% over the past 10 years. I use this as a stable fund that I never sell and reinvest any dividends.

FMIMX has outperformed the S&P every yearby 33% over

Growth Sector ETFs

I've identified 3 growth sectors and their ETFs that I believe will have exponential growth over the 5-10 years. The ETFs I've chosen are the best capitalized and most liquid in the sector.

Solar - TAN
Solar has been basing for a year now after getting crushed. Photovoltaic technology is getting cheaper and more efficient to produce. The price of the technology is becoming cheaper and more attainable. I believe this sector will breakout of this long base have explosive growth. The more competitive solar is with other energy sources such as oil, the less likely it is to fluctuate in disparity with it.

Updated chart:

Updated chart since first writing

Natural Gas - UNG
Similar to solar, natural gas has been basing for a year since it was pounded. The US has massive, untapped natural gas reserves and could be a real potential export if we can efficiently tap and transport it. Both solar and natural gas have been surging this year and showing signs of a breakout.

Year long base has formed. A breakout will likely be explosive.

New Media - PBS
The landscape of television and the way we consume it will change significantly over the next 5-10 years. I am building an investment in this area because I believe that this sector will grow exponentially.

New media stocks have outperformed the SPY by 27% over the past 5 years

Value Average Investing
Quick explanation: The investor sets a monthly target growth rate say 5% per month. Every month the investment grows by 5%. If you have $15,000 in April, in June your target would be to have $15,750. In value investing, you use an equity to leverage your investment. The more expensive shares get the less you buy, the cheaper it gets the more you buy. In the end your average cost is lower than if you were to have used the cost average method.

Here is more info and a longer, better explanation:
http://www.valueaveraging.ca/how_va_works.html

Backtest of a 15,000 investment in the S&P over a year (2012-13):

Although an investment was required every month, almost 8k was invested but notice more shares were purchased when the shares were cheaper and less when they were expensive.

Using Support & Resistance Areas

This post is to demonstrate how I use areas of support and resistance to analyze performance.

The term "area" is defined by a trading range across a period of time. Stock prices tend to have 3 phases:
1. Accumulation: the day to day or week to week rise in a price. This action return soaks up supply from the markets.


2. Consolidation: When a stock trades within a tighter defined range causing a compression in volatility.


3. Distrubution: The selling off of stocks and the day to day, week to week decline in price. This returns supply to the market.

The areas of support and resistance are when the same group of people and institutions trade with in a tighter lateral (sideways) range. Think of these areas as zones where either traders want to retain their capital. At support, traders tend to keep what they have. At resistance, traders tend to want to get their money back from losses.

SPY (the ETF that trades the SPX index) I use this chart because it shows buying and selling volume.

Click to enlage

Conclusions:

• After the April/May 2010 peak and decline, there was 18 weeks of a choppy difficult to trade market ahead, with an eventual accumulation period breakout in September 2010. This break out had much less overhead resistance to work through to climb higher.

• We are in a much more severe correction period with a lot more supply on the market. The market will likely chop around in a bound range bound area between the underlying support area and overhead resistance before climbing higher (125-110)

• There is a lot more overhead resistance to work though. We need significant good ecomonic data in order to break through this resistance. This is not likely to occur for a while.

IBB (ETF that trades with Biotech stocks)

Note the price action demonstrating these areas of support and resistance.

Click to enlarge

Conclusions:

• Underlying support from last year shows a higher volume of traders holding on to their positions not willing to sell off.

• 2 levels of overhead resistance will make it difficult for this ETF to climb higher. This stock could be range bound keeping it under $100 for a while.

I use these areas on a weekly timeframe to demonstrate longer term trends. These tend to be more useful than lines in this case.