S&P 500 - technically bearish, fundamentally still bullish, which is right?

Stocks markets started the year in much the same manner as it ended it with sharp moves up and down. By definition, the S&P 500 entered in bear market last December with a correction of more than 20% from its peak, joining Europe, China and most emerging markets. The psychological damage of such a move on investors and companies could have lasting effects. According to CNBC a bear market phases lasted 13 months on average historically, and it took 22 months to recover the losses; in other words, we are in it for some time.

Technical indicators are clearly flashing red with moves that go beyond healthy corrections. The price action, the market breadth, as well as intra-sector analysis all point to further downside ahead and that the long-term top may be in.

Nevertheless, Wall Street strategists remain optimistic for 2019, mainly based on still solid fundamentals. Indeed, the US consumption, job market or even company earnings have remained encouraging. Additionally, recession indicators such as the reversal of the US yield curve are rather flashing orange not red with a recession not foreseeable before 2020. However, the housing market has peaked, and ISMs have started to descend from very high levels. Moreover, the macro environment will be equally or even more challenging for stocks in 2019:

1. Further monetary tightening:

After years liquidity injections, central banks are forced to take the inverse path in the face of record public and corporate debt. The Fed not only raises its rates, it also reduces its balance sheet by about $ 50 billion a month (quantitative tightening). The ECB has ended its buying program while Japan may be the next to follow, which will contribute to a reduction of liquidity on a global scale, all the while growth is peaking.

2. Increasing cost of debt:

Credit spreads between US corporate bonds and treasuries have risen sharply since last October but remain at historically low levels. The cost of credit is likely to continue to rise as a result of monetary tightening which, in the medium to long term, will undoubtedly impact margins, investment and sentiment.

3. Vulnerable earnings:

Earnings and sales growth have been remarkably strong in 2018, however the effects of the tax reform could fade in 2019, whereas the impact of trade tensions is beginning to show (i.e: FedEx, Apple recently ...). Higher cost of debt will also be a headwind, with potentially first cases of insolvency emerging. Although valuations have lost two figures, analysts' expectations are elevated with double digit growth expectations in some sectors such as financials or even energy. Company management sentiment has also been upbeat all along 2017/2018 across most sectors, but given the mentioned challenges, we could see a turning point. Lower equity prices for a prolonged period tends also to hurt sentiment and corporate spend.

While central banks may slow down the pace of normalization and a quicker than expected resolution in the Sino / US trade war should support the stock market, investor confidence will not be easy to restore in an economy that looks increasingly vulnerable. Additionally, the ultra-accommodative monetary policies in Europe or even China, have also shown their limits, being unable to prevent a slowdown in their respective economies.

Returning to the S&P 500 chart, the configuration moved from sideways to bearish with the crossing of the February low at 2530. The index formed a temporary floor at 2340 with a strong rebound as is typically the case during the more volatile bear markets. Over the short-term the S&P 500 has a good chance of extend the bounce, however it will have to face an important zone of resistance between 2630 and 2815. Only a crossing of this zone, above 2815, would invalidate the bearish scenario.

The market can move in 3 manners: significantly upwards, significantly downwards or horizontally. On a technical perspective, a return to an uptrend in 2019 is the least probable.