The S&P 500 Index is flirting with bear market territory, down almost 20% year to date.
There are plenty of reasons for equity investors to tread more cautiously these days. Most importantly, the Federal Reserve has pivoted to a hawkish monetary policy while economic momentum is starting to slow. Historically, that’s an unhealthy combination for risk assets.
If you’re thinking about selling down equity exposure now, though, you may want to push pause on that decision. One of the best technical indicators on the planet just registered an oversold buy signal.
DeMark Indicators are a suite of market timing tools developed by Tom DeMark. During his career, Tom has consulted with many of the world’s top hedge fund managers, including Paul Tudor Jones and Steve Cohen. His indicators are the most popular app professional traders use on their Bloomberg terminals.
I’ve mentioned the DeMark Indicators in prior posts. The last time I flagged a TD Combo was when the MSCI All Country World Index printed a buy signal in March 2020. In hindsight, that turned out to be a major market bottom.
I use DeMark Indicators as part of my risk management toolkit because they help quantify when a trend (bullish or bearish) has an above-average probability of inflecting. In other words, they provide objective clues to help achieve our paramount goal as investors: Buying low and selling high.
Two of the most important Demark Indicators are called TD Combo and TD Sequential. Basically, when 13s print over or under a particular price bar on a chart, that tells you to avoid chasing the prevailing trend, because there’s an above-average probability of a short-term trend reversal.
Below is a look at the S&P 500 Index, which just printed the first TD Combo since 2011 yesterday. Note: TD combo prints magenta 13s, whereas TD Sequential prints the 13s in red.
As you can see on the above chart, there have been three TD Sequential 13s over the last six months. One was what I would call a “Sell 13,” where in December 2021 the S&P 500 rallied up to a 4800 risk level tied to the red 13 and subsequently reversed. After that, there was a TD Sequential buy signal in March of this year, which led to a sharp rally. Last week, a TD Sequential 13 printed and yesterday a TD combo 13 printed (magenta 13).
TD Combo buy signals for the S&P 500 are rare. Yesterday was only the seventh time we’ve seen one since 2000. The table below profiles what subsequent returns looked like.
One of Tom DeMark’s favorite sayings is, “A trend is your friend until it ends.”
Even if you think stocks will keep spiraling into a prolonged bear market, the “Highway to Hell” isn’t likely to be a one-way road. Some of the biggest rallies happen in bear markets.
In the strategies I manage, I’ve been defensively positioned for most of this year. Fundamentally, I still don’t love the macro setup. But the big tactical difference between now and January is that many of the things I’ve been worried about others are now worried about, too. A lot of bad news has already been priced in. Eventually, sellers will get exhausted and that is what creates interim market bottoms.
DeMark Indicators are excellent at spotting times when selling exhaustion and short covering tend to occur. This is one of those times.
It’s also a good time to remember one of Warren Buffett’s famous investing tips: “Be fearful when others are greedy, and greedy when others are fearful.”
Along those lines, here is where CNN’s Fear & Greed Sentiment Index stands as of today:
Disclosure: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation.