From the desk of Tom Bruni @BruniCharting
Tuesday I posted a mystery chart and asked you all to let me know what you would do. Buy, sell, or do nothing. By my unprecise and unscientific count, many of you said you’d do nothing and wait for the range to resolve itself, while others were anticipating a breakout.
So today, I want to reveal the full chart and share why I feel it’s relevant.
The chart I originally shared was an inverted daily line chart of the Momentum ETF $MTUM relative to the S&P 500 (told you not to guess).
The correct chart is below, showing prices below a now downward sloping 200-day moving average and momentum in a bearish range. Since February a rounding top had formed and finally broken to the downside in November. Prices have retraced part of that decline and are clinging to support, but look vulnerable.
Click on chart to enlarge view.
So the question remains, is this a consolidation within an uptrend line we saw in 2015-2016, or is it a reversal? My inclination is that it’s a reversal, however, I want to see some acceleration to the downside to clear this choppy range and make it clear that sellers are in control.
The more important question this chart prompts is, can the stock market continue higher without “momentum stocks” leading to the upside?
We often hear that momentum stocks leading to the upside is something needed for the market to stage a sustainable rally, but when I looked at the rolling 66-day correlation of this ratio with the S&P 500, I found no clear relationship. Sometimes they trade together, other times they do not.
While this analysis is far from foolproof due to the lack of a long-term data set and the fact that there are many ways to define the momentum factor, I think it’s a good reminder that we need to constantly question our own assumptions and those of others. Just because something sounds like logical, does not mean there is actual data to support it.
In conclusion, the Momentum ETF $MTUM is potentially transitioning from an uptrend to a downtrend relative to the S&P 500. Whether you’re trading the pair or just using it to inform your market view, this is definitely one chart/theme worth watching as the first quarter progresses.
Tuesday was our first Member’s Only Conference Call of 2019 where we discussed our top-down view of the market, the major themes we’re seeing, and ways to take advantage of them.
Thanks for reading and let us know if you have any questions!