Bullish or Bearish? Week of September 19, 2022

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Short-term trend (DAILY CHART) SELLOFF. The indexes took a negative turn last week, especially SPX, which fell from 4067 to 3873, a disastrous 193-point rout. SPX is once again below its major moving averages, including a break below the important 4,000 support level. In two weeks, we went from hugely overbought to oversold (according to RSI). In a nutshell: it’s ugly. Futures are LOWER on Monday morning.

Long-term trend (WEEKLY CHART) – DOWNTREND. SPX is below its 50- and 100-week but still above its 200-week, the only ray of hope in a world of pain. The 200-week is at 3,579, and if that is violated sometime in the future, it will get even uglier. We have a ways to go before we hit those levels.

MACD (WEEKLY) = DOWNTURN. The WEEKLY MACD took a turn for the worse, as even the 9-day signal line reversed direction.

RSI: (S&P 500) @37.72 (DAILY) OVERSOLD. If you want a ray of hope, it will be found in RSI, which has been remarkably accurate in predicting overbought and oversold conditions (especially oversold). As RSI heads towards 30, be prepared for another snapback rally. Unfortunately, the snapback rallies haven’t lasted long, one of the reasons I am certain we are in a bear market.

Daily Intraday Volatility (VIX) = 26.30 HIGHER: The VIX rally reflects the increased purchases of put options, which means a touch of fear entered the hearts and minds of option traders.

Comment: Last week was an ugly one, and it was not a surprise. As you recall from last week’s comment, I recommended sitting and waiting. Those who bet against the market (or against any old stock) probably did well. This is no place for the inexperienced, and if you are, then trade cautiously.

As I wrote above, I am certain we are in a bear market, and it will take a long while to play out (bear markets typically last 14 to 18 months). I can make an educated guess that if this is a typical bear market, SPX and the other indexes will drop another 20 to 22 percent after the smoke has cleared. There will be many short-term rallies along the way, fooling those who know little about bear markets. Suggestion: Read my book, How to Profit in the Stock Market, to learn more about bear markets).

The Fed kept interest rates ridiculously low for years, and now they are warning they will continue to raise interest rates. According to a number of market professionals, if the Fed keeps raising rates as promised, they will crash the stock and housing market. I personally have no idea if this is true but I do know the higher interest rates will inflict more pain on investors and home buyers.

These are uncertain times so expect more trouble before it’s over. The old rules still apply, and that means trading or investing small, take the time to study bear markets, use dollar cost averaging tactics, and if you are losing money trading, stay on the sidelines. This is not an easy trading environment!

The Fed is meeting this week so it’s guaranteed to get volatile before and after the meeting. If the Fed makes an aggressive move with interest rates, it will get extremely volatile (and unpredictable depending on what Powell says).

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