Here are the latest indicators:
S&P 500 one-month trend = Bearish
S&P 500 is slightly above its 200-day moving average = Bearish
RSI: (S&P 500) @41.82 = Neutral
Intraday Volatility: High
Daily results of multiple indicators (from Yardeni Research): https://goo.gl/eT3fzA
Comment: When you look at the numbers last week, the S&P 500 went down by only a few points. Unfortunately for the bulls, it felt much worse. Volatility was high once again (John Bogle, founder of Vanguard who ironically was born in 1929, commented that he hasn’t seen this level of volatility in his lifetime). Last week was an amazing roller coaster ride that made stock pickers nervous while traders celebrated.
The odds are good that volatility will continue this week. This increased volatility is a huge warning sign that the stock market has become dangerous. Often, the increased volatility leads to unpleasant results. Nevertheless, most stock pickers are saying to themselves, “The market always comes back.” In fact, it’s possible we could have one huge blowoff top to S&P 3000 so all bullish investors can sell at the all-time high and live happily ever after. That’s what happened to bitcoin when it hit $19,700 for a few minutes before plunging to $7,000.
Unfortunately, the stock market does not make all your dreams come true. Instead of a blowoff top, it’s also possible we will have a drip-drip-drip (one day higher, two days down) market. That will be the most frustrating and damaging to investors. In fact, most investors are not selling right now because they have “hope” the market will “come back.”
First, just because the market comes back doesn’t mean your stocks will. And second, there is no rule that says the market will come back anytime soon. After the crash of 1929, it took the market 25 years to come back to its all-time high. I’m not predicting this will be repeated, but at the same time, anything is possible.
On that note, let me quote from John Hussman’s latest newsletter. Hussman has been bearish for a number of years (www.hussmanfunds.com): “Remember that markets rarely decline in one fell-swoop. Examine prior declines like 1973-74, 2000-02, and 2007-09. You’ll see steep plunges punctuated by advances of even 20% or so that keep investors hoping all the way down. I expect the path to the 1000 level on the S&P 500 to be quite volatile. Envision a series of steep individual plunges, each punctuated by furious advances, some which may persist for weeks or months and extend substantially higher before collapsing into a fresh cascade of losses…”
Going into this week, anything is possible. Nevertheless, I would not be surprised to see a huge rally during the week. But if this is truly the beginning of a bear market environment, the rallies won’t last long.
Bottom line: In my opinion, it’s the time to increase cash, read about previous bear markets, review your portfolio and what you own, and reduce positions in individual stocks that are up by obscene amounts.