Ari Wald, Technical Analyst at Oppenheimer, is maintaining his corrective outlook and has lowered his downside target to 1740 from 1900.
The S&P 500 has fallen below its lower trend channel and without a base Wald expects upside bounce attempts to be limited to 1950 resistance. In the medium-term, Wald says 1740 is a key retracement of the S&P’s advance since 2011 and this level would fulfil his cyclical correction criteria (see Chart 1).
Wald’s longer-term view is that the S&P’s cyclical correction (which began in May 2015) should bottom out in the first half of 2016, ahead of a resumption of the index’s secular advance. This cyclical correction is based on his non-recessionary bear market scenario, where, on average, the S&P has dropped 20% over an 8-month period during similar downturns since 1928.
Key positives suggesting his scenario is correct include deeply oversold participation measures and a swift rise in investor pessimism. For example, Wald points out that the % of NYSE stocks in an uptrend has fallen to 15%, the lowest reading since Q4 2011 and the Bull/Bear ratio is back below 1, a signal that’s been followed by an average 17.5% return over the next 52 weeks since 1985 (versus 8.2% when the ratio is above 1 – see Chart 2).
For now though, Wald recommends accumulating large-cap growth on weakness (i.e. now) and selling small-cap value on strength.