MY TWO NEWEST BOOKS WERE JUST RELEASED: Here is the link to Understanding Stocks (third edition): https://amzn.to/3wO761F . Here is the link to How to Profit in the Stock Market: https://amzn.to/35lnjQy
WHAT THE TECHNICAL INDICATORS ARE TELLING US THIS WEEK
Short-term trend (DAILY CHART) – LOWER. SPX fell from 4108 to 3900, an extremely painful 208-point drop. The daily chart is awful as we march closer towards a confirmed bear market. The good news, as you’ll read below, is that a short-term bounce is highly likely. Futures are PLUNGING on Sunday night. There is real fear in the stock market now. VIX is at 33 now: at 40 and above it will be a full-fledged panic.
Long-term trend (WEEKLY CHART) – LOWER. Because of the massive selloff last week, especially on Friday, SPX fell slightly below its 100-week moving average, a very negative sign. Even with all of the bad news swirling around, a snapback rally is possible this week. A lot depends on what the Fed says at their meeting, and how much they plan to raise rates.
MACD (WEEKLY) = LOWER . The WEEKLY MACD is a lagging indicator, so it is reflecting the negative market environment. MACD is below the zero line and below the 9-day signal line.
RSI: (S&P 500) @38.17 (DAILY) OVERSOLD. The only ray of hope for the indexes is that SPX is oversold, although not at extreme levels yet (but it could get extreme on Monday). Nevertheless, a massive rally is highly likely so be on guard (even if it doesn’t last long).
Daily Intraday Volatility (VIX) = 27.75 = ELEVATED: VIX is telling us that option put buyers have reluctantly increased their put purchases but it is not yet at the panic stage. That could change on Monday.
Comment: Last week was extremely painful for the bulls, who had hoped for a bounce, one that did not appear. In fact, the opposite happened. The only good news, as mentioned above, is that SPX and the other indexes are in oversold territory, so a rally is likely this week. It could be a big one, so be prepared. (The Fed is expected to raise interest rates by 75 basis points, so anything less could generate temporary bullish enthusiasm.)
It’s hard for many investors to believe (because it’s been so long), but the indexes are headed towards a bear market (the Nasdaq is already in one). The strong rallies that fail, the technology massacre, nervous consumers, rising interest rates, and those massive selloffs — all are clues of a looming bear market.
Many newcomers don’t realize how insidious a bear market is, how those one-day rallies give investors hope, which is quickly dashed the next day. We probably have a lot lower to go, but this is important: it can take as long as a year to play out completely. If true, it will test the emotions and strategies of investors, many who vowed to buy and hold indefinitely. After a 13-year bull market, this particular bear market should be vicious.
I don’t tell you this to scare you or to ruin your day, but to prepare you for what is likely. Obviously, every bear market is different but this could be one of the bad ones. I hope not, but it’s likely.
This is a good time to study the market, review strategies, and identify which stocks you want to own at much lower prices. In a worst case scenario (i.e., black swan), many stock darlings are going to get smashed even more than now, some to unimaginable levels (think Netflix).
Savvy investors with extra cash will have the opportunity to pick up great stocks at bargain prices, but it won’t be easy. My advice: Trade small, starting with 10 or 20 shares, as you try to find a traceable bottom. A good place to start are with dividend stocks, especially the Aristocrats and Kings (25 and 50 years of raising dividends).
If you already own great stocks but are trapped in a losing position, if you still believe in the stock you own, you may be holding for a long time.
Bottom line: Expect a “Rocky Road” market environment, one I wrote about in one of my previous option books. Futures are plunging on Sunday night and the VIX is spiking: there is real fear right now.