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.
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