Mid-term: S&P 500 is well below its 200-day moving average = Bearish. The longer it remains below its 200-day MA, the more bearish it is for the stock market. Until SPX rallies back above, assume we are in a bear market.
One-month trend = Bearish. After a strong downtrend, SPX recently bounced back, but only briefly.
RSI: (S&P 500) @ 42.92 = Slightly oversold. The market could go in either direction this week so be careful.
MACD: MACD is below its Zero Line but rose above its 9-day Signal Line) = Bearish to Neutral
Daily Intraday Volatility (VIX): 46.80 = High. Volatility has skyrocketed as fears increased, but fell last week. Expect volatile trading days until fear subsides.
Comment: It has been hard for many people to believe how quickly our lives, and the world, has changed. Those who can adjust to the changes even under adverse conditions will ultimately thrive. I am hoping that the millions of people whose lives have been upended will find a way to succeed. It will take time, but I am really hoping for the best.
Meanwhile, as long as the indexes are below their 200-day moving averages, I will treat this as a bear market. This is going to be very hard for many people to believe, especially on the days the market rallies.
For over 10 years, we were in a strong bull market, and now it’s over. Many are hoping the bear market will end quickly, and some actually think it already ended. The reality is that if this bear market follows a traditional path, the bear will last anywhere from 6 to 18 months. Judging by the economy and the impact of the virus, I believe it could last longer than most investors realize.
Therefore, if you want to face reality, then rallies should be viewed with suspicion. Although there will be amazing, mind-blowing rallies on occasion, as the bear market continues, the indexes will ultimately grind lower. Those who don’t want to believe or don’t see will keep buying on the dip as the indexes fall. Traders call it “trying to catch a falling knife.” Because the market will drop so slowly at first, bullish investors will feel like a frog being boiled in hot water.
Yes, some stocks will outperform, and if you continue to have a bullish mindset, you might find stocks that are going up. But if this is a traditional bear market, many stocks will continue to drop until the last ones, the Generals, remain. The Generals, the so-called FAANG stocks, will be the last to fall. This will not play out over weeks but over months if not a year or longer.
It’s possible that there will be a cure for the virus in a few months and the economy will come back strong. I hope that happens for the world’s sake. But as long as the indexes are below the 200-day moving average, then it is too risky to go long.
If you are unable to devote the time to trade in a bear market or are frozen in fear, you have several choices. For example, you can hold what stocks or indexes you own until the worst is over. If you own excellent stocks, they may come back in the future. That’s what happened in 2008.
You can also move some or a portion of your money to cash (hopefully on rallies). And finally, you can trade, but trading a bear market is difficult, so trade small if you choose this route. I do not recommend shorting individual stocks if you are a beginner.
Bottom line: It’s a tug of war between an awful economy and the Fed. As a result, each day is a new surprise. If I am right and this is a true bear market, selling into rallies is the strategy of choice. Warning: This is not easy to do! Most important, follow the market. Right now, Mr. Market is confused and injured, so anything is possible. Please be careful out there.
Note: Futures are screaming higher on Sunday night. Let’s see how long the rally lasts. Remember, this is a four-day trading week.
Finally, this is worth reading: Lance Roberts, money manager at (realinvestmentadvice.com), gives an excellent analysis on how the odds are good this is a bear market: https://bit.ly/3aLhZ6H
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