Buyable pullback coming in SPX, NDX?

Markets have stalled out, looking for a tag of 30 Week MA

Since my last post on February 3rd, markets have continued to churn out relatively small gains, but some gains nonetheless. The NDX has been choppy but has managed to go up 3% in 2 months, but nothing to get too excited about. The SPX is up about 5%, and some rotation from Mag 7 and some other tech into quality industrial and material sectors, or what I call “real economy” stuff has found some upside as that part of the economy (manufacturing, etc.) has bottomed out and turned higher. But the markets had a down week, and Thursday saw some heavy selling, which ideally is a sign that we could finally get this pullback to the 30 week moving averages we have been looking for, before the next leg of the rally really gets going in the 2nd half of the year. I will show examples below to show markets often get a pullback to these levels in strong bull markets, and I am expecting this. With the weakness in tech relative to the real economy stuff, it is setting up this scenario perfectly to play out.

I expect this “real economy” part of the market to continue to be strong into the summer. Historically the economy is the strongest in Q2 on the average expansion year, so expecting this is simply thinking this plays out once again. Housing stocks historically peak in July if there is a major top forming, so be on the lookout for XHB(Home Builders ETF) to continue to see strength as well into the summer months. A early peak in that would signal an earlier peaking of the US economy.

The NDX 5 year weekly chart, shown below, paints this scenario of BUYABLE pullbacks into the 20/30 SMA moving averages. This is the key, it is buyable. We are not yet seeing any signs of bearishness forming under the hood. Credit spreads are subdued, housing/construction payrolls are increasing once again, and overall economic activity is strong.

In the second half of 2019(bottom left area of chart), the NDX had a picture perfect pullback in the 30 week MA(blue line) three different times, all finding buying support. The 20 week is up for reference to show it also works the odd time, but the 30 week is the best. Institutions and major pools of capital buy at these levels, and they are great because it resets the market for the next leg higher. The market pulled back into this level in May 2019, went straight to new highs, pulled back again into July, had a smaller pullback into August, set a higher low into late September, then found its legs and ripped from that 7500 level into February before forming a blow-off top high at 9700, good for a 29% move. It went up 38% from the initial low mentioned in May. A pullback here and now is our friend in my opinion.

Same thing in 2021. It had 3 different pullbacks as you can see above into the 30 week, all being bought right at the critical level, and going straight to new highs and beyond. March, May, and September were the pullback lows. We are in the period were these pullback often happen. March, April, May are great for pullback periods, along with the September/October period. One reason is major institution selling/rotation, which is why these periods often have volatile periods. Another is markets are forward looking, I believe about 3 months, and often see tops and bottoms in the economy, no matter how big or small they might be. The September/October lows are often extremely powerful as they are seeing a bottom in Q1 economic activity looking forward, which is a risk on bullish indication the deploy new money and redeploy capital into risk on sectors. If we a pullback here in April/May, look for this support to hold once again.

The SPX is largely the same concept. As shown below, it is a little less volatile than the NDX at times, so the 20 week acts as support as much as the 30 week does. They are often within a couple percent of each other, and you will see that if the 20 week doesn’t hold as initial support, it goes down to the 30 week and finds that support we are looking for. The same periods the NDX found support in 2019, May, August, late September, the S&P also found support. In 2021, this market held up better on pullbacks than the NDX, only testing the 20 week in March, not even getting to the 20 week in May, and reaching the 30 week in October. I see this 2021 market much the same as I see today’s market, this is due to economic expansion time-frame we are seeing, and strength in the “real economy” stock sectors. The NDX is always more volatile, and when industrial and material stocks are strong, pullbacks in the SPX are less than the NDX.

What are the two key themes we see from both these previous bull markets? 1. May can indeed produce that initial buyable pullback we are looking for. 2. If supported, the market should go back to new highs and remain stable into the summer months, ie August, before the historically volatile period of September/October. A buyable pullback into the 30 week, specifically in the NDX because it consistently produces, should be the market’s fuel for the next leg higher.

For reference, the NDX 30 week is currently down at 16,500. About 9% down from this past week’s close. The SPX 30 week is down at 4720, also about 9% down from last week’s close. That just happens to fall right in the historical range which the markets will give on downside corrections. A 7-10% pullback is perfectly normal and ideal for that next leg higher.