Our Cross Asset Analysis Suggests a Sell in May and Go Away

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Jean-Francois Owczarczak CFTe, MSTA, FRM and CEO of Management Joint Trust SA

Jean-François Owczarczak is the CEO of Management Joint Trust SA (MJT), a Geneva based market consultancy firm founded in 1969, which has been publishing on-line charts since the mid 1980s using its envelopes and oscillators methodology (www.mjtsa.com).

Jean-François has 19 years experience in institutional cross asset advisory, holds the CFTe (for which he received the Bronwen Wood Award for the best CFTe II exam paper in the world in 2012) and the FRM Financial Risk Manager certification. MJT’s products were nominated 13 times over the last 7 years in the Technical Analyst Awards and its cross asset research product The Capital Observer won the Best Specialist research category in 2018. Please don’t hesitate to contact Jean-François on support@mjt.ch or through his LinkedIn or Twitter accounts.

A review of the S&P500 Index using Management Joint Trust’s methodology and newly developed automated approach.

Executive Summary:

Considering our methodology over our bi-monthly, weekly and daily frequencies, our manual analysis suggests that the S&P500 could retest up into April, perhaps May and may reach marginal new highs. It then retraces back below current levels into the Fall in first instance. On our bi-monthly charts, this top appears quite secular and could weigh on equity markets into 2023.

Our automated price projections do confirm this scenario, or at least a retest up into April for the S&P500 Index. The cross asset environment we expect using our automated projections on other Key Market Drivers, suggests a possible Growth recovery from March into late April / early May. During this period, Growth may lead US markets in an attempt to retest their highs. Thereafter, from May, inflationary/stagflationary pressures should make a come back leading the S&P500 to top-out again and correct down into the Fall in first instance.

S&P500 Index

Weekly chart or the perspective over the next 2 to 4 quarters

Copyright © 1985 - Management Joint Trust SA - www.mjtsa.com

MJT has been editing on-line charts since 1985. These range from long term bimonthly charts to Weekly, Daily, Hourly and intra hour frequencies. They cover circa 5’000 instruments worldwide across all asset classes as well as any relative studies or basket portfolios you may want to analyze. For an initial introduction to our

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methodology, please revert to our article presented in this same publication in the June 2011 edition titled , “3T methodology.") (page 1 to 5 of that issue).

As a short introduction, our approach can be summarized into 3 main focus points:

Monitoring trends: using a combination of standard deviation envelopes: these are centered, and re-calculated dynamically on the last point of each chart (i.e. these are not historical envelopes such as Bollinger bands). The formula uses a centered moving average, extrapolates its last portion using a seasoned formula, and then calculates the standard deviation around it over the whole history of prices in the chart. The wider envelope (the yellow one) uses a longer term moving average as the basis for its calculation, the thinner white one a shorter term moving average. The system aims to identify trend direction and exaggerations in these trends at the point in time of the analysis. Trend direction is usually considered as the direction of the wider envelope over circa a 1/3 of the chart. Exaggerations in this trend are then identified when both envelopes touch each other. In this example on the current Weekly graph of the S&P500, the yellow envelope is still heading up (i.e. in an uptrend), while both envelopes recently were touching each other to the upside (this uptrend is getting stretched compared to recent history).

Price Targets calculation: these are based off historic volatility. The formula uses the width of the larger yellow envelope as a starting point (a measure of historical amplitude/volatility). It is named Delta (here at 1’306 in the Weekly graph above – middle rectangle, right-hand side). The approach calculates Corrective and Impulsive target ranges by factoring Delta by either Corrective or Impulsive Factors and adding/subtracting the product to important turning points. The Corrective Factor which is used in 0.5 to 0.8 times “Delta” added to a bottom or subtracted from a top. Once this Corrective range has been broken through, we then calculate an Impulsive target range using a Factor range of 1.3 to 1.7 times “Delta”. For very extended moves, an Impulsive 2 target range can be calculated (perhaps 10% of cases). It then uses a Factor range of 2.3 to 2.7 times “Delta”. Price moves beyond this Impulsive 2 target range are extremely rare. The main purposes of this price target system is to define prospective price target ranges as well as to assess if a price move is still Corrective (below 0.8 times “Delta”), or if it has turned Impulsive (and then has a stronger chance of reaching up/down to the 1.3 to 1.7 times “Delta” range), or if it is getting really extended as it nears the Impulsive 2 range (2.3 to 2.7 times “Delta”). In the example above, the Weekly graph of the S&P500 has fulfilled its Impulsive targets to the upside (right-hand scale). The uptrend is hence quite exhausted in terms of risk/reward. Corrective targets to the downside over the next 6 to 12 months calculate in the 4’180 – 3’690 range.

Timing Oscillators: MJT uses timing oscillators to understand at what stage we currently stand in a trend (e.g. at an important turning point?, in an early stage uptrend?, reaching an intermediate top?, ready to resume a previous trend following some consolidation?, …).

Timing Oscillators: different price cycles are captured by our 3 Timing oscillators. Monitor how their relative positioning defines specific situations (Cases), which will help you position yourself in the Trend (e.g. "Intermediate Top", "Resume Uptrend", "Low Risk", ...)

Figure 1: Timing Oscillators

Shorter term Medium term Longer term The system uses a combination of 3 oscillators (a long term black one, a medium term red one and a shorter term blue one) to identify positions when all three oscillators bottom or top at the same time, marking important lows or tops and possible trend reversal (far left and far right situations in Figure 1). It also aims to understand how the trend develops between these important reversal points. Each one of our Timing oscillators has a specific timing parametering (i.e. a specific cyclicity), which implies that once you understand in which position you stand in either an uptrend or downtrend sequence, you can then project when the next timing point is likely to happen using a time unit of X (see model). X theoretically has a set value for each frequency +/- 10% (e.g. Weekly, Daily, …) and is usually standard for all instruments on the platform for that frequency. Note: each graph presents 2 series of 3 oscillators (lower and upper

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rectangles). The oscillator calculations on our Long Term oscillators (lower rectangle) are more momentum driven and twice as long as the ones used for our medium term oscillators (upper rectangles), which in turn also have more of a stochastic element to them. When analyzing a graph, the approach aims to find the best fit of each oscillator configuration to an idealized model (Figure 2) and then to coordinate the resulting sequences between our Long term (lower rectangle) and Medium term (upper rectangle) oscillator series into prospective timing scenario.

Figure 2: Timing Models:

MJT's Timing oscillators allow investors to position themselves along the trend (uptrend or downtrend). Indeed, their relative position defines specific cases (Low Risk, Immediate Top, Fast velocity up, High Risk), so that when you know where you are, you can anticipate the probable future sequence of events. Trend Direction and Price targets are factored into algorithms to favour either on uptrend or a downtrend sequence.

Uptrend Model Downtrend Model

Copyright © 1985 - Management Joint Trust SA - www.mjtsa.com

In practice, our platform allows users to manually Overlay these idealized models onto the oscillator series, thereby offering a visual output of which models (or half models) best fit the current oscillator configuration. In the example above on the Weekly S&P500 graph, both oscillator series (lower and upper rectangles) are still following uptrend sequences. Yet, our medium term ones has now entered a High Risk position with a top expected between January and early Q2 (upper rectangle), while an important top is also expected on our long term ones at the end of the quarter. Hence, any attempt to retest up would lapse by late Q1 / early Q2.

Summary:

Considering our Weekly graph above, the uptrend seems quite stretched in terms of our envelopes (they are touching each other), upside potential is also quite exhausted, while from a timing perspective, any attempt to retest up probably dies out from late Q1 / early Q2.

MJT’s analysis always aims to coordinate such analysis over several time frames. Hence, below, we also consider the S&P500 Index on a bi-monthly graph (scoping-out in term of timing) and on a Daily one (scoping-in in terms of timing).

Management Joint Trust SA (MJT) has been providing market advisory and research services since 1969. Its approach is based on Trend and Cycle analysis which is available on global markets from long term to intraday. Clients include Investment Committees, Advisory desk, Family Offices, Traders and Asset Managers.

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S&P500 Index

Bi-monthly chart or the perspective over the next 1 to 2 years

S&P500 Index

Daily graph or the perspective over the next 2 to 3 months This long term bi-monthly graph of the S&P500 presents a very extended picture. After 13 years of uptrend, our envelopes are still uptrending, yet touching each other to the upside, a sign of stress. Targets-wise, prices have moved beyond our Impulsive targets to the upside and entered our extended Impulsive 2 target range. The remaining upside potential is hence limited although a last move up to test towards 5’000 cannot be excluded (right-hand scale). On the Timing front, our long term black oscillators on both oscillator series (lower and upper rectangles) have entered Overbought positions, and both sequences are calling for a major top. Perhaps is it already done, if not at some point during H1 2022. Such situations would usually result in 1 to 2 years of consolidation to the downside at least (or flat), as was for example the case (yet theoretically then with less consequences) for the intermediate top which was identified in late 2017 / early 2018.

While our long term oscillators (lower rectangle) could still see a resume uptrend situation, which may extend into April/May, our medium term ones (upper rectangle) may now be positioned in a downtrend. We are currently working around crucial support (around the lower end of our C Corrective targets to the downside – right-hand scale). Such levels (around 4’300) really need to hold if a full upside retest is to be envisaged. If not, we would probably get a break down now and a mere rebound into early April (upper rectangle).

Concluding remarks for our manual analysis on the S&P500 Index:

When considering our Bi-monthly, Weekly and Daily graphs for the S&P500 Index, we can note than all three frequencies are stretched in terms of targets while our envelopes are showing some stress to the upside on our Bi-monthly and Weekly, and have started to head down on our Daily. Timing-wise, a last push higher can still be justified into late Q1, perhaps into earlyQ2, but current levels need to hold for it to materialize. Whatever the extent of the upside retest we still expect into late Q1 / early Q2 (with lower or marginally higher highs), our Weekly and Bi-monthly charts then point to an important top, possibly leading to several quarters of consolidation at least.

Automating our manual interpretation:

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identify the best and second best fits for each oscillator series and then weigh these projections according to the position of our envelopes and the risk/reward situation implied by our targets calculations. A price projection is then calculated based on a weighted average of these oscillator projections using “Delta” our measure of historical volatility.

Example of this automatic analysis on the Weekly graph of the SPY (the main ETF representing the S&P500):

Source: MJT Model Copyright © 1985 - Management Joint Trust SA - www.mjtsa.com

Our automatic analysis suggests a potential intermediate top in circa 3 months and an initial consolidation phase into the Summer. For now, according to this initial automatic analysis on the Weekly graph of SPY, further strength cannot be excluded later on this year. Our Daily model however suggests that the trend may have already turned down. The conjunction of both points to a retest up but not necessarily new highs.

Including Cross Asset confirmations within these projections:

We then move on to confirm and complete this projection by performing the same automatic analysis on our Daily graphs and complement it by running similar studies on other assets which show a similar cyclical dynamic. This process which we describe as identifying Cyclical Analogs, running their own projections and integrating these for up to 50% of the final projection of the instrument we are analyzing confers cross asset robustness to our automatic projections. It is described in more detail in a recent IFTA (International Federation of Technical Analysts) webinar we held on the 19th of November 2021 for which you can assess the underlying slides on this link. What we can briefly say is that each projection combines 4 alternative scenarios (2 on each oscillator series) for each frequency (Weekly and Daily) on the instrument we are analyzing as well as 4 projections per the best 10 Daily Analogs we use and 4 more per the best 10 Weekly Analogs. All together, each final projection integrates almost 100 automatic projections from the reference instrument and its Cyclical Analogs. The weighing of these different projections is done following an adjustment to normalize volatility across all the different assets so that no projection takes an unnecessary predominance.

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Automated Projection on the S&P500 Index (data from the 18th February 2022, EOD):

S&P500 Index fully automatic, with Analogs

Legend: The boxes correspond to the following information:

Model fit: compares the models to the history of the oscillators (average from the 88 models which are used): 5-4 is Good, 3-2 is Fair, 1-0 is Poor.

Cross Asset Robustness: compares the final combined projection to the projection resulting from the Analog projections: 5-4 is Good, 3 -2 is Fair, 1-0 is Poor.

Estimated Max upside potential over 12 months.

Estimated Max downside Risk over 12 months.

Copyright © 1985 - Management Joint Trust SA www.mjtsa.com

This prospective graph presents our forward looking estimate of how the price of the S&P500 Index could involve over the next 9 months. It does so by presenting these projections using our Standard Deviation envelopes based off forward looking data.

In this example, the model expects the S&P500 Index to reach back up to its previous highs or slightly below them by late April / May. We then expect a reversal down which could last into the Fall in first instance. The upside potential could justify an 8% bounce from current levels, while the downside risk into the Fall may amount to 9%. This is not catastrophic yet, but does highlight the risk of an important top in the making.

For historical reference, this is the same graph we presented at the IFTA Webinar on the 19th of November 2021:

Our projection was quite accurate in identifying the period of correction that took place from late November into December. Yet, did have too much of a positive bias into the Spring.

S&P500 Index fully automatic, with Analogs

Building the cross-asset scenario:

To finalize this analysis, we move on to consider our automatic projections on a set of Key Asset Drivers in order to understand which type of environment could justify some kind of retest-up move on the S&P500 into late April / May and then a reversal down into the Summer / the Fall.

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S&P500 Index US10Y Treasury Yield US10Y - US3Y Treasury Spread

US Staples sector (XLP) vs S&P500 (SPY) EUR/USD S&P500 Value (IVE) vs S&P500 Growth (IVW)

Copyright © 1985 - Management Joint Trust SA - www.mjtsa.com

Since last November, the upside progression on the S&P500 has been more difficult resulting in a correction from early this year. While Growth has faltered on an absolute and relative basis, a strong rotation into Defensive sectors such as Staples or Utilities, as well as Value (e.g. Energy and Financials) has materialized.

These dynamics can be related to the sharp rally we’ve see on US Yields, generally across the curve, yet especially on the short end. EUR/USD held up in a rather flat consolidation.

Going forward, long term yields could be topping out over the next few weeks and could retrace into April. Staples and Value could follow this retracement on a relative basis while Growth makes a come-back. These dynamics could help US markets rebound / retest up, while EUR/USD resumes lower as the yield curve flattens to new lows (i.e. a less cyclical environment).

Thereafter, from Mid/late Q2 into the Summer, we expect yields to resume higher again. The yield curve could attempt to steepen slightly, while Staples and Value could outperform again and EUR/USD bounces. The S&P500 Index on the other hand, retraces down again, probably towards the Fall as these renewed inflationary pressures trigger further rate hikes anticipations.

About our automated projections: our program to automate our projections is currently Excel based, yet fully functional. We are currently programming it into Python and by the Summer expect to be able to feed these forward looking price projections through an API. We will then be looking for strategic partners with strong distribution networks to convert this service into a functional platform. Please don’t hesitate to contact us on the details below if you would like to learn more about these developments.

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