The SPX continues to follow the 2004 momentum comparative in which the equity markets had four successively larger percentage declines while digesting the Fed's transition to tighter monetary policy. Following this wave structure, the SPX has flirted with the backside of its 50 day sma this week.
Should the SPX continue to follow this momentum pattern, the market will briefly stick its nose above the 50 (~1659) shortly before turning back down next week.
With that said, we continue to feel risk is towards the upside in the equity markets and work from the perspective that the long-term breakout this March through the Meridian was significant. Our expectations with the current correction has been that it would not violate long-term support on a monthly basis which comes in for August ~ 1565 and September ~ 1570.
Despite the tumult yesterday, on a comparative performance basis we like emerging markets over developed markets in the back half of this year, and view the recent retracement decline in EEM as a successful retest of the panic lows this June.
As noted in June at the lows, the last time the Fed pivoted on monetary policy, emerging markets had a similar reaction. Contrasting the most emotional and reactive structure as expressed in the sector's waterfall declines, in the spring of 2004 the EEM cascaded ~ 22% , bounced 14% - before having a 7% retracement/ retest. This spring the EEM had roughly an 18% waterfall decline, followed by a ~ 13% bounce - and a 7% retracement/retest.