When markets experience a bout of short-term turbulence, long-term passive buy-and-holders usually say something like “zoom out.” They want you to look at a long-term chart of the market and recognize that if you are patient and willing to stay invested, the market drifts up over time.
Today, we’re taking the opposite approach. We’re going to zoom in on the S&P 500 and NASDAQ 100 and see that conditions are optimal for a near-term reversal of recent turbulence.
S&P 500 & NASDAQ 100
Both closely watched indices have pulled back from their recent record highs amid concerns about inflation, Fed movements, and government shutdowns. We’ve been highlighting the bullish trend in the market for weeks—and it remains in place.
Zooming in on the candles in the green boxes, we can see both indices have closed near or below their lower bands for the past four sessions. Said differently, the markets are short-term oversold within the context of a long-term uptrend.
Source: Optuma
Dow Jones Transportation Average
The Dow Jones Transportation Average has been stuck in a trading range for more than four years, oscillating around the 27-week moving average. Some have pointed out that this average has failed to hold new highs while the broader market makes new highs, as a reason to be bearish.
Zooming in, we can see that the average has been holding above the moving average recently—and that said moving average is turning higher.
Source: Optuma
The Magnificent Seven
The Roundhill Magnificent Seven ETF (MAGS) is pulling back from record highs after a massive bull run from the April lows. That run has brought a second argument from bearish investors: they claim the market is not healthy because performance is concentrated in the largest stocks.
Zooming in, we see that relative to the S&P 500, the Mag Seven are only making a weak attempt at a breakout.
Source: Optuma
Stock/Bond Correlation
Meanwhile, if we zoom in on the S&P 500 Equal Weight Index, we see a short-term consolidation near record highs. In other words, more proof that the rally from the April lows was not just because of seven stocks.
Source: Optuma
Final Thoughts
While conventional wisdom for long-term investors is to zoom out during bouts of turbulence, we can also zoom in to identify potential opportunities and push back on lazy bearish narratives.
The trend remains bullish—and short-term oversold conditions within that trend tilt the odds in favor of a rebound.
Dan Russo, CMT
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