Here are the most recent market indicators:
S&P 500 one-month trend = Down (Bearish) The uptrend is broken and the trend is down. Nevertheless, rallies are still likely.
S&P 500 is below its 50-, 100-day and 200-day moving averages= Bearish
RSI: (S&P 500) @35.50 = Near Oversold. A rally is likely.
Intraday Volatility: Moderate
Comment: You already know that last week was the worst since 2011, and the third worst in history for the indexes during Thanksgiving . The FAANG stocks got slaughtered (along with oil and bitcoin), losing over $1 trillion dollars in value. A month ago, investors were giddy about how much money they had been making, and now they’re anxious, but hopeful. As long as the indexes stay below its 200-day moving average, the bears are in control. That being said, we are near oversold (RSI), so a snapback rally is likely. When that rally occurs (it could be on Monday), wise investors will take the opportunity to reduce positions on losing stocks.
More than likely, and this is important, most rallies may fail to rise above its 200-day moving average. If the indexes are unable to rise above its 200-day MA, that will confirm we remain in a downtrend. Nevertheless, keep in mind that even in a downtrend, there will be these monster rallies (such as the 900-point Dow rally a few weeks ago).
I can’t stress how important it is to learn and read about bear market environments, about shorting, and about the 1929 crash. Many investors are going to ride it out, and more than likely, there will be opportunities to get out with relatively small losses. But if this downtrend continues, and it gets worse, many of the most beloved stocks will reach levels that seem unimaginable at the moment. Last week, the FAANG stocks such as Apple lost a year’s worth of gains. If the downtrend continues, it could get worse.
In life, everything changes and so does the stock market. It is obvious to anyone who is paying attention that the market has changed, and that the “easy days” of the last 10 years are over. It is highly unlikely we will return to those days anytime soon. The sooner you realize that we have entered a new phase, and that increased volatility and whipsaws will be the norm, the better prepared you will be.
This is the time to reduce size if trading or increase cash if investing. They say that no one can time the market perfectly, and that is true, but if I see a speeding locomotive heading towards me, I will get out of the way. The flashing warning signs are everywhere, and although there will be still be rallies along the way, the market has entered a dangerous phase that should not be ignored. Here’s something else to think about: Just as we overshot on the upside, it’s possible we will do the same on the downside (not immediately, but in the future). Keep an open mind for any scenario and most important, be prepared.
Other: Wolf Richter wrote a fascinating piece on the bitcoin crash this weekend. It’s an excellent read: https://bit.ly/2AknCYo
For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA
For insightful analysis of the stock market, read Lance Roberts: www.realinvestmentadvice.com
For insightful analysis of economic conditions, read Wolf Richter: www.wolfstreet.com