The last trading week of August was equally painful for the bears and bulls. The market closed the volatile month of August in a neutral position, which means the immediate trend in motion may see follow-through into September. The pivot range (2985-3004) of the S&P 500 cash index for the second half of 2019 is calculated from the high, low and close of the first ten trading days of July. S&P 500 index 2985-3004 price level will serve as the resistance for the second half of 2019.
Even though the S&P 500 is currently only about 60 points below the resistance zone, it seems to be easy for the market to penetrate the resistance zone when the market receives good news on the trade war since the market rallied and crashed randomly in August based on the Presidential tweets. The Fed rate cuts and trade war are the topics the mainstream investing community has been paying attention to, the business cycle is seldom mentioned. The real truth is that the global economy was slowing down without the trade war stress. With the trade war, the global economy is under tremendous recessionary stress. The US economy is not immune to the global slowdown, it is the last man standing and eventually it will reach the correction low.
Because of the backdrop of the global slowdown while under the trade war stress, the current macro conditions are very different than 2016, therefore the December 2018 low might be different than the February 2016 low, the previous 4-year cycle low. The chance of testing the December 2018 low has increased with the newly added tariffs.
This is one of the main reasons that we should be open minded about the correction downside target. It is actually healthy for the economy to go through recessions to clear out excesses. Recession is part of the natural phenomena. A market correction can only make the next bull market rally stronger and last longer.
So we believe the second half of 2019 will be murky. It will not fall out of the bottom, so the bears are stressed out. It will not rally into the new highs, so the bulls are equally frustrated.
This is a cyclical bear market correction, which is a consolidation for the secular bull market. Once we finish the consolidation period, the secular bull market will resume.
In cycle terms, it is 12 weeks into the current weekly cycle. Most likely the market has made an alpha weekly cycle bottom, and the final weekly beta cycle bottom is yet to be seen. We are expecting the S&P 500 to bottom around 2600 or 2485 depending on how the market reacts to the catalysts such as the Hong Kong protest resolution and or Brexit outcome.
While the S&P 500 cash index has corrected a little over 5% from high to low, the market leader Microsoft hardly corrected any. The growth stock ROKU continues to make new highs on a daily basis since the earnings report. Another AI software growth stock LPSN also showed tremendous resilience in the face of market correction, it advanced over 30% in the month of August.
These three stocks (MSFT, ROKU and LPSN) demonstrated strength when the general market is showing weakness. When the market enters real correction later down the road, these strong stocks will go down with the general market for sure. The inevitable correction will happen to all stocks.
When we see the turn of the market, i.e. when the correction is over, we will open sizable positions with the above mentioned three stocks.
Stay calm and keep your powder dry.