Quick Look Report


A Compendium of the Most Critical Considerations for Investors This Week


Sample Quick Look Report Index
When stocks and bonds are making significant moves, ETFOptimize Premium Strategy Subscribers receive our 'Quick Look' report on the factors affecting today's
investment markets. These articles, released before Monday's market open, are intended to keep you informed about what to expect in the coming week.

This section provides samples of our Members-Only Quick Look Reports

Brick Wall of Resistance Hovers Just Above

Note: All market analysis content published on ETFOptimize reflects the writer's interpretation of the signals from our proprietary indicators. However, you shouldn't use this content for trading signals. Preferably, you use it only only to assist in your understanding of current market conditions. All ETFOptimize Strategy holdings are determined solely by the proprietary investment algorithms used in our systems, without the influence of discretionary judgment. The ETFOptimize Strategies provide you with an investment system that needs no additional outside input, and we recommend that subscribers follow the recommendations of their systematic model to the letter.



The charts in this week's article are intended to be idea-starters for the subject of this article – i.e., various forms of technical resistance that sits just above the S&P 500's current price level. It would be best if you did not construe this information to be used as investment advice or recommendation.

For Three Weeks, the S&P 500 Has Stalled at Support/Resistance at 2930

A fundamental tenant of technical analysis is that prior Resistance levels, when pierced, become a new Support Level (and vice-versa).

Chart 1 below shows that the S&P 500 Index ($SPX) has been battling the level of 2930 to 2950 since late 2018 – alternatively establishing it as Resistance (red arrows), Support (green arrows), and now Resistance again.

Chart 1: The S&P 500 Index ($SPX) has run into stiff resistance at 2950 after an epic, 30% bull-market bounce since March 23.


Chart 1 above makes it clear that when all is said and done – with the phenomenal -34% selloff followed by an epic 30% recovery – the S&P 500 has only declined about -13.5% from its All-Time Closing High (ATH) at 3386 on February 19 – a fact that (so far) barely qualifies the market impact of the global pandemic to be nothing more serious than a correction – a blip.

Moreover, many bullish investors believe that stocks are going to continue even higher to set new all-time highs in the coming weeks. Really??? Let's examine a few more facts…


Sorting the Madness From the Profound

The United States' GDP recorded an decline of about -4.8% in the first quarter of 2020, and the consensus forecast for US GDP now expected to plummet by a phenomenal -30% in the second quarter. As of last Friday's Employment Report, some 20 million Americans lost their jobs in April, and about 33 million Americans are now unemployed – the fastest pace of collapse in American history.

Therefore, it only seems logical that the economic and market impact of the Coronavirus pandemic is just beginning, with tens of millions of small businesses expected to file bankruptcy in the coming months, and the value of equities potentially declining for many months or years ahead.

Regardless of all of the options for investing in our modern world – and particularly with the plethora of ETFs available to tap into every market niche on the planet – it seems phenomenal that millions of investors are still attempting to claim "this time is different," and the world-changing events we have all recently watched on our screens or experienced firsthand either didn't happen or didn't matter.

Alternatively claiming that "the Federal Reserve has investor's backs like never before," or "the Coronavirus is really a Democratic hoax to take down a president" – or whatever blather comprises this hour's internet-based, conspiracy-theory narrative, craziness is mixed seamlessly with reality – sheer madness blended with the profound – seemingly nonstop 24-seven.

Intelligent investors are being challenged like never before to cut through all this noise to identify and sort the real from the fake – the pertinent from the meaningless. Driven by this nonstop, non-reality in which there seems to be no recourse for total fabrications, many investors have apparently been convinced that things truly are different this time – powerfully assisted by one cable TV station's nonstop, 24-7 media saturation of the following two talking points:

1) The current economic downturn was triggered by the Coronavirus pandemic, was only temporary, and...

2) The economy is quickly being restarted, and things will rapidly get back to 'normal.'

While these talking points ostensibly have a political motivation, they are serving the dual purpose of convincing many investors (actually, a more accurate word would be speculators) to bet long the market – and the result will likely be losses for these politically-motivated investors.


This Time is Never 'Different'

Systematic, rules-based investors are urged to embrace cold, hard facts, ignore opinions, turn off the tube, and to consistently discount their political party's narratives – particularly because the narratives of their own political party are especially appealing, and therefore, more convincing.

Nevertheless, the conditions for a severe recession had been established well in advance of the development Coronavirus pandemic, with GDP already in decline, US corporate earnings in decline, and the yield curve already inverted in late 2019.

Granted, the COVID-19 related pandemic vastly accelerated the downturn, but with human decision-making consistently biased by recency, many believe that as soon as the pandemic is 'over,' the economic impact will be over. Millions of people seem to believe that we just had a snow day across the world, and the world's economy will quickly resume normalcy in the coming weeks and months.

However, even if we assume that the virus "will just disappear – like a miracle," as one person put it, investors should keep in mind that the so-called "world's greatest economy" (apparently, beginning in early 2017) was – in actuality – a lethargic, moribund stagecoach that didn't even match the trotting speed attained under the previous administration – let alone outpace the growth in past decades when the American economy was a thoroughbred racehorse.

Chart 2 below shows the US Annual GDP Growth Rate, trending downward from 1948 to 2020 – a reminder to investors to deal in facts – not the political fantasy that would have you believe the last few years have provided "the greatest economy of all time." The US economic reality just wasn't that great – even before the world went into lockdown and dropped off a cliff.


Chart 2: US GDP Annuallized Growth rate by Quarter, 1948-2020.


Truth be told, no one knows exactly how the current combination of medical and economic catastrophes are going to develop – or resolve. We can conclude, however, that US equity markets are going to see far more damage than the minor, -13.5% correction that S&P 500 investors have experienced over the past 60 days. So far, all we've had is a common correction.

Most thoughtful investors will agree that the damage to markets is going to be far greater than experienced to date. However, as discussed previously, disciplined quantitative investors needn't experience any of that damage.

One example is our S&P 500 Conservative Strategy, which did not experience any pullback from the -34% selloff – instead it continued gaining ground – a result of relying strictly on robust rules-based algorithms, while ignoring the hyper-emotional, so-called 'news:'


Chart 3: The S&P 500 Conservative Strategy did not participate in the Coronavirus selloff at all, and continued gaining ground throughout the selloff.

Therefore, let's bring this investigation back closer to home and to get a glimpse what's in store for investors in the near and intermediate-term timeframes.

Subscribers should remember that this analysis is intended only as an informative adjunct to the specific recommendations of our systematic models, and you should never use our analysis information to over-ride those recommendations. Employing composites of as many as 38 quantitative data sets, our rules-based models combine, correlate, distinguish, and appropriately weight each data point using sophisticated algorithms that defy the ability of the human brain to do the same – particularly when that brain is swayed by ever-present, human hyper-emotions related to matters of money.


Bad Things Happen Below the 40-Week Moving Average

The 200-day moving average, 40-week moving average, or 10-month moving average are all essentially the same line on either daily, weekly, or monthly price charts. We use the 40-week Exponential Moving Average (EMA) because daily prices are far too noisy for investment purposes. Many amateur investors use this moving average as a rule of thumb for determining when an index or a stock is seen as either bullish or bearish. For example, many investors have the rule of thumb to never buy a stock when it is trading below its 200-day moving average

Because of this attitude about the 40-week moving average among the general investing population, prices above or below that line tended to behave in different manners. Put bluntly, when prices are below the 40-week moving average, ugly things tend to happen.

For example, since 1950, 23 of the worst 25 days have occurred below the 40-week moving average. Of the 100 worst days since 1925, 89 have them have happened below the 40-week moving average. Since 1960, the average 30-day return of the S&P 500 is 0.89%. When the S&P 500 is below its 40-week moving average, the average 30-day return is -2.63%.

Similarly, the greatest spikes in S&P 500 volatility – the bane of all investors – occurred when that index was below its 40-week moving average – annualized volatility was 18.7% when the S&P 500 was below its 40-week moving average, and annualized volatility was 12.6% when it was above its 40-week moving average.

Chart 4 below shows the S&P 500 index for the last 12 years, going back to 2008, and featuring its 40-week Exponential Moving Average (dashed-purple line). The upward-pointing green arrows shows when the 40-week moving average served as Support – stocks often bounced from above - off of that level higher. On the other hand, when stocks were below their 40-week moving average, it often served as Overhead Resistance (red arrows), stopping stocks from proceeding higher. That's what we are seeing today...

This doesn't mean to say that prices won't sometimes drop just below or move just above this crucial moving average – sometimes investors will test the market just above or below this line – so it usually can't be used in a quantitative formula as a threshold (although we sometimes use moving averages as scoring mechanisms – i.e., above a certain level is +1 while below a certain level is -1).


50-Week EMA since 2008
Chart 4: Today, the S&P 500 Index ($SPX) remains below its 40-week Exponential Moving Average – equivalent to the 200-day EMA.



ZOOM in to the Last Two Years of the 40-Week EMA

Chart 5 below shows a zoom into the last two years of the S&P 500, featuring the 40-week EMA as a dashed-purple line.The S&P 500 has struggled to get across this level where there is a confluence of the 40-week EMA and the Support-Resistance level at 2930 shown in Chart 1 above.

This confluence of levels, which is also the 61.8% of the Fibonacci retracement zone, makes for extremely significant resistance at the current level. If the S&P 500 should breakthrough this level in the next few days (or week), it is likely to be a harbinger of significantly higher prices. On the other hand, the probabilities of this breakthrough are relatively low – considering all the resistance zones at the same level. Expect prices to decline from here...



Zoom Into Last Two-Years of 50-Week EMA
Chart 5: A zoom into the last two years provides greater detail. We can see that the 40-week EMA provided support throughout 2019, but after crashing below this level in March, it has been unable to regain the 40-week EMA (red arrows on far right).

Don't Try to 'Improve' on Your Strategy's Decisions!

Overriding your model's recommendations with discretionary judgments or "waiting for a dip" is a well-worn path that eliminates the many benefits you receive from a quantitative investment model. Over time, this practice will guarantee that your results will return to the average for all discretionary investors – about 2.6% per year – compared to the 31% average return since inception for our models and 77% average AR in 2019 for our top strategies.

Collectively, the ETFOptimize quantitative investment strategies have produced 77 of 77 consecutive winning years since inception. So, please stay with your model's recommendations, and we'll all make it through the Roaring '20s intact!


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