Make Sure To Look At The Big Picture

At 360 Investment Research, we study price to understand the interaction of supply and demand in the marketplace. When there is more demand than supply, price goes up. When there is more supply than demand, price goes down. This is a simple, but often overlooked, concept that all investors should pay attention to on a regular basis. Studying price is paramount because it gives us an edge in the market and is the only coincident, or even leading, indicator available. Nothing is more current than price.

In market environments such as the current one, it can be a valuable exercise to step back and review price from a big picture perspective. Rather than being shortsighted and look at the past few weeks, we can gather tremendous insight from looking at price over the past 30 years (or more).

Below is a monthly chart of the S&P 500 dating back to 1987. Overlaying the monthly price candlesticks are some proprietary moving averages that do a great job indicating when to be long or short U.S. equities. Check it out:

02-01-2016 S&P 500 Monthly

By function, moving averages lag price. Even though these averages lag price, they are still more actionable than any economic indicator the BEA, BLS, or Federal Reserve can provide (if you’re from any of those agencies and reading this, please don’t take offense). And upon reviewing the most recent crossover, we can see that the S&P 500 is not buyable or ownable right now.

We can look at the same chart, but from a different perspective, by removing the moving averages and studying previous areas of supply and demand. Going through this exercise, we can see that sellers appeared in a big way around the 2100 level on the S&P 500. Likewise, during the recent price correction, buyers stepped in near the low 1800s. Take a look.


Upon inspection, we can see that we’re in “no man’s land” – an area between 1812 and 2134 where buyers and sellers will determine the markets next big move. In order for the market to regain solid ground and not deepen the current correction, demand needs to keep price from breaking the 1800 level and eventually drive price on to new highs. From a historical perspective, a major trendline (in green) dating back to 1987 carries significance. If that trendline is broken, more sellers will step in. And if not enough buyers are available in the 1812-2134 window, selling will intensify and price will seek demand (aka price discovery) through further price declines until demand is reintroduced. The next most likely area of demand is near 1550-1600, which is an area of price polarity where previous supply (the tops in 2000 and 2007) became an area of demand.

We’re not predicting further price declines, but the study of price indicates that there are more sellers than buyers from this vantage point. Until that changes, and buyers step in to take the S&P 500 to new highs, we’re not interested in owning this market.

Until next time, trade safe.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions