Bullish or Bearish? Week of February 12, 2018

Here are the latest indicators:

S&P 500 one-month trend = Bearish

S&P 500 is below its 50-day and 100-day moving averages = Bearish

RSI: (S&P 500) @34.83 = Oversold

Intraday Volatility: Extremely High (Ideal for traders). 

Daily results of multiple indicators (from Yardeni Research): https://goo.gl/eT3fzA

Comment: What a difference a week makes! The financial media are reporting that last week was the most volatile in market history. After nine years, some of the riskiest strategies such as selling naked puts, shorting volatility, and buying on the dip stopped working. As you know, shorting volatility worked for years, until it didn’t. I’m also sure more than a few people blew up their accounts selling naked puts. The surprising part is how long these strategies worked without any pullback or correction.

I could write a chapter on what happened last week, and what might happen in the future. First, it’s too early to say what the market will do this week. In the past, after a pullback (we haven’t had a correction for years), the market bounced back. I’ve been talking to investors who are expecting the market to “bounce back.” They could be right. On the other hand, and this is where it will get interesting, the correction could get worse. As traders, we are open to any possibility. That means we go short (buying puts is less risky if you know how to trade options) if the market continues down. Or we will go long if the market bounces back strongly above the 100-day MA and 50-day MA.

The best advice is to follow the oldest advice: Buy low and sell high. The market was at all-time highs and yet, investors were going on margin, buying leveraged ETFs, and buying at the top. I talked to these investors a few weeks ago and they never imagined that the market could go down. And now, they are hopeful the bull market will continue. Like I said, they could be right, but they also could be wrong. I just hope these investors are properly diversified in case a worst case scenario develops.

If you read my blog from January 29, I had received a call from a market technician who told me that the market was at ‘statistically stupid” levels. As it turned out, he was right. Eventually, statistics win out. The idea that we were 3 standard deviations above the 200-day moving average was ridiculous. Reality finally returned to the markets and many investors are feeling the pain.

As I have written for weeks, this is the time to learn about bear markets, corrections, buying put (and call options) and managing volatile markets. There is a good chance that volatility will be here to stay for a while. But then again, I remember thinking that in 2016, and eventually volatility was artificially suppressed and the markets continued higher. This time, however, interest rates are rising, causing havoc in the bond market. It will be interesting to see how the new guy at the Fed handles it. Pay close attention to the bond market and interest rates.

One of my neighbors went to her broker two weeks ago and sold her ETFs and stocks (she kept her mutual funds) right before the 2,000 point drop. The broker tried to discourage her from selling, and told her that “You shouldn’t panic.” She told him what I had once told her: “It’s not panic if you’re the first out the door!”

On one hand, you don’t want to sell everything in a panic because you might miss out on a tremendous rally. On the other hand, you don’t want to be leveraged up to the hilt when the market takes another hit. Everyone has to find their own personal comfort zone. During times of high volatility, like now, many trading strategies do well while buy-and-hold strategies suffer. It’s a lesson that is learned every few years.

Bottom line: This week is very important. We are at a key pivot point that will determine market direction for months or years. In the past, the market recovered from short-term damage. If the market continues to fall, there are more serious problems than we know. If the market continues to fall, it means the bubble is deflating, and that will not be good news for investors who are being told to “not panic” and “the market always comes back.” My other advice: Listen to what the market is telling you. Only the market is right (and everything else is just noise).

Baseball analogy: The bears got a few home runs last week but the bulls are not giving up. Only time will tell if the bears can run up the score or if the bulls can tie the game with a little help from their friends at the Fed.

I will notify you of my blog posts via twitter @michaelsincere

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