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

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