Mid-term: S&P 500 fell below its 200-day moving average = Bearish
Short-term: S&P 500 sliced below its 50-day MA early in the week = Bearish
One-month trend: Uptrend has been broken and SPX is below its 200-day moving average. The Fed will step in with lower interest rates and perhaps QE4. Will that be enough to bring the indexes above the 200-day moving average? No one knows.
RSI: (S&P 500) @ 19.16= Extremely Oversold. I don’t ever remember seeing the RSI this low. Expect a snap-back rally, and soon.
MACD: MACD plunged below its Zero Line and plunged below its 9-day Signal Line = Bearish
Daily Intraday Volatility: 40.11 = Volatility skyrocketed = Bullish (Fear doesn’t last forever).
Comment: In retrospect, the warnings were everywhere. For example:
- A few weeks ago, the number of call buyers skyrocketed (i.e. they went long the SPX), the most call contracts in history.
- Market made all time highs a few weeks ago.
- Brokerage commissions went to $0, causing retail investors to pile into the market during the last month.
- Long-time bears that I knew threw in the towel and went long.
- Speculative stocks like SPCE and TSLA made all time highs while FAANG stocks struggled.
Now that the market plunged the most in a week in history, it’s easy to look back and see the signs. In retrospect, it really was a melt-up top, and retail investors,, as well as many pros, got caught holding the bag. It was a brutal week, and although I expected a pullback, I didn’t believe it would plunge that much.
And now, the market went from being overbought to oversold. At this writing, Sunday night, the futures are falling. I remember in December 2018 when the indexes plunged, and by January 2019 the Fed entered with their tools and brought the market higher and higher all year long.
The difference this time is the virus. That is the black swan that no one expected. Half the country is scared, the other half doesn’t seem to care. Because of the virus, the Chinese economy looks bleak, but the United States nor the rest of the world will be able to avoid financial damage.
However, the market is so oversold right now that I do expect the Fed to enter at some point on Monday or Tuesday and cut interest rates. I’d be shocked if they didn’t do something. That is why I expect a bounce that could last at least a day, and likely longer. Volatility has returned to the market and the Fed is going to do their best to calm the markets down.
Unfortunately, if the virus spreads to other states (in the U.S.) and to more countries, all bets are off. I do know that fear and panic don’t usually last long, but these are unusual times.
Sadly, there are too many unknowns right now, mostly dealing with the virus. That is why making predictions right now is difficult if not impossible. If we do rally, observe how long it lasts. If that rally fails, it’s going to get worse before it gets better.
Investors remember the previous pullbacks and know how fast the market recovered, and even went higher. “I’m in it for the long haul,” I have heard. “The market always comes back.” I truly hope they are right.
I also am a student of stock market history, and I know that the market doesn’t always follow the script. After 11 years of the greatest bull market in history, the market once again taught investors and traders a very hard lesson. It does that every 10 years or so.
Bottom line: We are in uncharted territory right now with a virus looming in the air. Although I expect a snap-back rally (we are obscenely oversold right now), I have no idea how long the rally will last. Keep your eye on the 200-day moving average. In the past, the market bounced back quickly from rough times, but this time we have a black swan, so anything is possible. Take care and good luck, we are in for a rough ride.
Read the following excellent pieces from two analysts who had been warning us of the dangers:
Sven Henrich (Northman Trader), who has been spot on with his analysis the last few months. He discusses the 2020 crash: https://bit.ly/38fMnnv
Lance Roberts (realinvestmentadvice.com), who has warned for months to take money off the table and increase cash. Lance discusses what to do next: https://bit.ly/39h7Ttw
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