Bullish or Bearish? Week of January 31, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = TUG-OF-WAR. It was a wild week! The bulls and bears fought each other all week, but the bulls saved the day on Friday with a 2.43% gain on the SPX. During the week, SPX rose from 4397 to 4431, a respectable 34-point gain. It could have been a lot, lot worse. This week will be interesting as the indexes could go either way. Futures are FLAT on Sunday night but that could change in the morning.

SPX 20-day (WEEKLY) = LOWER. SPX is still below its 20-day moving average and barely held the 50-day (on the weekly). Actually, SPX fell below the 50-day on the weekly but rose back above it on Friday (after that huge rally). Very close call! When SPX falls below its 50-day MA and stays below, it’s a red flag. Note that on the daily chart, it’s downright ugly. But the weekly chart gives us a bigger-picture view. It’s telling us it’s dangerous, but the bulls are still in the game.

RSI: (S&P 500) @45.98 (WEEKLY) SLIGHTLY OVERSOLD. RSI is telling us that SPX is slightly oversold so the indexes could go in either direction this week.

MACD (WEEKLY) = SLIGHTLY BEARISH: The weekly MACD is still above its zero line but is firmly below its 9-day signal line. It’s a red flag but not a disaster. If you look at MACD on the daily, it’s a massacre. However, the weekly MACD says to be cautious, but not to panic.

Daily Intraday Volatility (VIX) = 27.62 = HIGH: Volatility and fear visited Wall Street last week again as reflected in a higher-than-normal VIX. It will take some work this week to calm the markets and bring the VIX back to 20. At the moment, option traders are buying puts to protect long positions.

Comment: Anyone who watched the market last week has whiplash. The indexes were extremely volatile, making extreme moves in the futures market and beyond. It was delightful for experienced traders but difficult for everyone else.

I’m not in the predicting business but I can say that it would be wise to at least think about the possibility of a bear market. This extreme price action is not particularly healthy for the market. Eventually, one side (bull or bear) is going to win this war. The odds are with the bears based on these facts: the 13-year bull market is struggling, geopolitical concerns, the virus, inflation, and rising interest rates.

However, no one said the bulls are going to go quietly. They are going to defend to the death, as witnessed this week. Although it appeared as if the bulls were going to lose the week, they came roaring back with a vengeance on Friday, blowing away any overconfident short-sellers who thought they won. (Sadly, I know exactly how it feels to have a heavy short position on a bullish “Steamroller Day.” It feels awful!)

To prepare for a bear market, there are a number of steps you can take (all of which I outlined in my newest book coming out in May). This includes dollar-cost averaging into index funds if you are an investor. If you’re a trader, you thrive on volatility so you’re hoping this Wild West environment continues. However, be careful!

Also: If you own stocks, it’s a good time to evaluate what you own and calculate how many shares. As many investors learned in January, losses can be extremely painful (i.e., Netflix investors woke up to a 20 percent haircut!) if you’re not diversified, or if your asset allocation is out of whack.

The way to survive volatile market environments is to have a plan. This is not the time to “play it by ear.” If you are a long-term buy and hold investor, and you’re confident in what you own, then stay the course (but expect short-term pain if you don’t reduce positions). If you are a trader, it’s wise to trade small, and not make huge bets on one side or the other.

Bottom line: Prepare for some for very unexpected and wild market moves. It’s possible the markets will calm down, but not likely. After all, it’s been 13 years since many investors felt any pain for longer than a month, so this is a new experience for many.

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of January 24, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = PLUNGE. The bears took over during the week, tanking the SPX from 4622 to 4397, a mind-boggling 225-point selloff. The market has had an awful January, and there is no reason to believe it’s going to be an easy year. It won’t be. Unfortunately, many investors and traders are completely unprepared for a dangerous market (after 13 bullish years, most investors have no experience with volatile selloffs). NOTE: Futures are HIGHER on Sunday night (as the buy-on-the-dippers return), but anything is possible in the morning.

Note: A lot of financial columnists are freaking out because on Friday SPX fell below its 200-day moving average on the DAILY chart. As you know, in this blog we look at the WEEKLY chart, which gives us a longer-term perspective. When SPX falls below its 200-day on the weekly one day, then it’s time to be concerned. Until then, a bounce-back rally is likely, so don’t panic.

SPX 20-day (WEEKLY) = PLUNGE. SPX fell below its 20-day moving average as if it was sliced butter. The next stop is the 50-day on the weekly. Let’s watch to see if it holds this week.

RSI: (S&P 500) @44 (WEEKLY) OVERSOLD. It’s been a long time since RSI has been this oversold (below RSI 50), but here we are. In the past, an oversold RSI didn’t last long as the Fed cut interest rates and took other actions to save the market. Their toolbox seems depleted at the moment but perhaps they can pull a rabbit out of the hat once again and save the day.

MACD (WEEKLY) = SLIGHTLY BEARISH: While the daily MACD is a disaster, the weekly MACD is still above its zero line but below its 9-day signal line. It’s a red flag on the weekly, but no reason to panic yet (according to MACD).

Daily Intraday Volatility (VIX) = 28.85 = HIGH: Not surprisingly, fear visited Wall Street last week, and the VIX spiked higher. It’s not at extreme levels yet (above 40) but option traders gobbled up put options to protect long positions. As a result, the fear index rose dramatically.

Comment: Anyone who has been reading this blog for the last few months should not be surprised by the market selloff. Although the market had seemed unstoppable, it finally succumbed to reality (i.e., inflation, higher interest rates, and COVID) and plunged, taking cryptocurrencies along for the ride lower.

On Friday, many investors panicked, and mindlessly sold, causing the indexes to sink in the afternoon. If you look at a daily stock chart, it’s downright ugly. On the DAILY CHART, SPX fell below its 200-day moving average, MACD tanked, and RSI is in the basement.

However, in this blog we get our clues from the WEEKLY CHART, which gives more significant signals and provides a broader view of the overall market environment. At the moment, SPX is still above its 50-day MA on the weekly so there is no reason to be alarmed.

Although investors are panicking and many long-only traders are feeling pain, especially in the technology sector, we are not in a bear market yet. For that to occur, there has to be even more intense selling. Based on previous selloffs, the odds are good there will be a rally (this is not a prediction, only a possibility) this week.

If that rally doesn’t appear, and the indexes keep falling below its moving averages, then it’s going to get very ugly in the short term. Be prepared for both scenarios. It’s a good time to review what you own and have a trading plan.

After a 13-year bull market, no one should be surprised the indexes are struggling. There will be many head fakes on the way lower (i.e., there will be fantastic one-day rallies that will lure many bulls back into the market). Unfortunately, no one can predict how this “end of the bull market” scenario is going to play out.

The worst case: A long, drawn-out bear market that takes a year or longer to reach a bottom. A crash would also be unwelcome. The best scenario would be a short-term 10 or 20 percent correction. Unfortunately, the market typically goes its own way, doing the opposite of what everything “thinks” will happen.

Bottom line: Be prepared for some rough times ahead. Months ago, I expected a market selloff, one of the reasons I included a lengthy section on handling bear markets, corrections, and crashes in my upcoming book, How to Profit in the Stock Market (McGraw Hill). The book comes out on May 24th.

Meanwhile, I will do my best to help guide you during this treacherous period. Fortunately, I was mentored by a bear market expert, the late Mark D. Cook, who spent months explaining to me how to survive and thrive in volatile market environments. I truly hope that his worst predictions don’t come true, but be prepared for anything, including adjusting (or switching) trading strategies.

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of January 17, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = LOWER. The bears maintained control and dropped SPX from 4677 to 4622, a 55-point pullback. The reasons are not as important as recognizing the market pulled back for two weeks in a row. (FYI: If you want a reason for the pullback, many investors may have been spooked by rising interest rates.) Futures are relatively flat on Monday night but that could change in the morning.

SPX 20-day (WEEKLY) = NEUTRAL. SPX is pointing lower but it is above its 20-day moving average. The 20-day isn’t telling us much right now. However, if SPX breaks below the 20-day, that would be a red flag.

RSI: (S&P 500) @58.23 (WEEKLY) SLIGHTLY OVERBOUGHT. RSI is slightly overbought so there is room for the markets to fall (or rally back to more overbought). There is no clear signal.

MACD (WEEKLY) = NEUTRAL: MACD is above the zero line (bullish) and even with its 9-day signal line (neutral). Once again, MACD is not giving significant signals (with SPX). This will continue until volatility returns with a vengeance.

Daily Intraday Volatility (VIX) = 19.19 = ELEVATED: Only a smidgen of fear remains on Wall Street as market participants believe the Fed has their back. Meanwhile, the Fed is warning investors that they will have to take action in the future to control inflation. Few seem to believe them!

Comment: It’s only been a few weeks into the New Year but the stock market environment has changed. After a tame selloff over the last two weeks, it’s impossible to make an accurate prediction. Traders must manage the market they are given. Hopefully you have a trading plan that deals with any market environment: up, down, or sideways.

Probably because of rising interest rates, some traders have turned cautious, as they should. If the Fed really does raise interest rates this year, many market participants will not be pleased. Rising interest rates affect all financial markets including bonds and real estate. After 13 years of an extremely low rate environment, that would be a game changer.

In the last couple of weeks, rates have screamed higher. Inflation has risen. The Fed may have no choice but to raise rates. They better pray that the economy remains strong or we would have the most insidious of economic conditions: stagflation.

Inflation is bad enough as prices rise, eroding consumer confidence. That means no matter how much money you make, everything costs more. For stagnation to occur, however, there has to be inflation and a slowdown in the economy, something that hasn’t happened for decades. If it does, the Fed will be in a tough spot: They will be forced to raise interest rates as the economy slows. No one wants that.

I’m not making any predictions but you must be prepared for this possibility. Most importantly, the investment strategies that worked so well in the past (such as indexing) may not fare as well in the future. It doesn’t mean panic sell everything. It does mean being diversified. For traders, it may also mean cutting position size. It’s easy to get whipsawed in this market.

Bottom line: The easy trading and investing days are probably over, at least in the short term. It’s not a bad idea to reduce index positions and raise cash. This is not advice but it is something to think about. The main point is you don’t want to be caught unprepared as the market shifts and changes now and in the future.

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of January 10, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = LOWER. The bears took back control and dropped SPX from 4766 to 4677 last week, an 89-point loss. The market rallied early in the week and then lost energy and points. Futures are SLIGHTLY LOWER on Sunday night, but check back in the morning to confirm.

SPX 20-day (WEEKLY) = NEUTRAL. SPX is pointing lower but it is still above its 20-day moving average. It’s a tossup.

RSI: (S&P 500) @59.16 (WEEKLY) SLIGHTLY OVERBOUGHT. RSI gave the clue last week the market was in the danger zone, and it was right. Now RSI is near neutral but still overbought.

MACD (WEEKLY) = NEUTRAL: MACD is above the zero line (bullish) and even with its 9-day signal line (neutral). MACD is not giving significant signals (with SPX). 

Daily Intraday Volatility (VIX) = 18.76 = ELEVATED: A little bit of fear entered the market last week but nothing to write home about yet.

Comment: As I wrote last week, although the market fell in the first week of January, it does not mean we will have a down year. Nevertheless, it’s obvious to market watchers that the market appears to lack energy and enthusiasm.

After another excellent year, 13 in a row, it would not be surprising if the market took a breather. At best, perhaps it could squeak out a gain after one year. At worst, the Bad News Bears could finally be right.

However, one thing is for sure: The market never follows the script. That is why I stopped making predictions and instead, follow the market. That’s also why I spend more time selling options (covered calls and cash-secured puts) than buying.

This is important: The investments that worked in the past may not work in the future. Be prepared for changes, one of the reasons it’s so important to be diversified. If one investment doesn’t perform, hopefully another one will.

I’m watching those rising interest rates to see how it affects market psychology. I also want to see if the Fed raises rates, as they have warned. If they don’t raise rates for whatever reason, the market will probably rally. Unfortunately, if they don’t raise rates, inflation could continue to heat up.

Bottom line: We are entering an entirely different market environment. Fasten your seatbelts!

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com

Bullish or Bearish? Week of January 3, 2022

WHAT THE INDICATORS ARE SAYING 

This is what the technical indicators are telling us this week: 

One-week trend = HIGHER. The bulls retained control and moved SPX from 4725 to 4766 last week, a 41-point gain. As expected, the market rallied early in the week and weakened later as volume and volatility decreased.

SPX 20-day (WEEKLY) = HIGHER. SPX has remained above its 20-day moving average.

RSI: (S&P 500) @66.28 (WEEKLY) OVERBOUGHT. RSI is overbought but still not at extreme levels (over 70 is extreme).

MACD (WEEKLY) = NEUTRAL: MACD is still above the zero line (bullish) and even with its 9-day signal line (neutral). MACD not giving significant signals (with SPX).

Daily Intraday Volatility (VIX) = 17.22 = LOW: The holidays are over but fear is still on vacation as the bull rally continues. The low VIX reflects how complacent investors and traders have become.

Comment: Although I avoid making predictions, I am certain that 2022 will be different than what we have seen in the past. With the Fed planning to raise rates (so they say), and inflation heating up, 2022 may not be as pleasant for investors. At the very least, it should be a more challenging environment.

After a 13-year bull market, investors are hoping that the good times will continue, and at first they may. Last week, the so-called Santa Claus rally brought cheer to Wall Street. Now it’s time for the “January effect.” The theory is that the first week of January determines the rest of the year. FYI: I did research on this “phenomenon” and discovered that it is statistically insignificent.

In other words, even if this week is positive, it doesn’t mean anything for the rest of the year. Instead, pay attention to the Fed, inflation, and whether the virus adversely affects company earnings. That is much more relevant than the so-called “January effect.”

Futures are higher on Sunday night although that could change in the morning. This is the first full week in a while, so it will be interesting how the month of January develops.

Advice: As always, diversify, have cash on the side for emergencies and to buy dips, and buy quality stocks. And use technical analysis to help with buying and selling decisions.

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Stock evaluation program from Barchart: https://bit.ly/3v9Nj9G 

For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts’ latest newsletter:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.com