We’re not out of the woods just yet.
The S&P 500 staged an impressive relief rally from support around 2,300 as identified in our monthly investment report. This support level marked a low in 2018. We expect the S&P 500 to stall around 2,720 and perhaps gather more buying interest from bargain hunters at lower levels.
Clear signs of capitulation are not yet evident. Despite the relative strength index (RSI) flashing oversold, it can simply mean that downside momentum has waned.
Instead, we measure weekly money flow in the bottom panel of the chart below, which suggests capitulation is close, but still needs some time. Money flow measures the amount of money coming in and out (volume of buying vs. selling) and its impact on price direction (up or down). The indicator is not yet negative on a weekly basis, similar to what we saw at the 2018 price low.
This chart shows the current S&P 500 drawdown (percentage level off the high) is extreme, but not yet matching levels seen during the 2008 recession or shortly after the 2001 recession which signaled capitulation.
The copper/gold ratio is useful to determine risk-on or risk-off market conditions. A rise in the copper price correlates with economic growth and as a result tends to lead risk assets higher. On the other hand, gold is viewed as a safe-haven. The weekly copper/gold ratio made a new 20-year low last week, which suggests risk-off conditions for the time being.
Our next strategy update will examine historical bear markets going back to 1920. We’ll use that as a guide for entry signals and positioning in the current market environment.