Caution: Warning and/or serious information
Last week there were several warning signs of an impending sell-off in the S&P 500. Was that what the Federal Reserve said? Probably not. The breadth and depth of the indicators make them meaningful and serious.
Last week’s actions are not alone. A negative backdrop has emerged since the S&P 500 peaked on July 31st. It rolled over in early August, forming a rounded high and falling below the 50-day moving average (a trend measure) on August 15th. Then in August it bottomed at 17-18 and recovered halfway back and rose above the moving average.
However, it then peaked on September 1st and fluctuated around the moving average, which slowed its rate of rise. Then it happened last week.
- First, the S&P 500 fell off the moving average on Wednesday (September 20), restoring its positioning from mid-August.
- Then, on Thursday, it broke two key barriers simultaneously: (a) the bottom of the 5% channel around the 50-day moving average (the channel takes into account volatility around the moving average); (b) The low set in mid-August (a classic concern is lower lows)
- All previous declines caused the 50-day moving average to turn lower for the first time since November 2022 (a possible sign of an impending downtrend).
- At the end of the week, the index decline completed its second rollover with a peak lower than the first (double tops are more important than a single move, especially when the second peak is unable to reach the level of the first peak).
This graphic conveys a picture…
The S&P 500 has a double rollover and downside barriers
John Tobey (StockCharts.com)
So… Are these moves a downtrend prediction or just actual volatility?
Next week’s stock market events should answer this question. It will be a particularly important and interesting period as every five days conclude the third quarter.
Additionally, the week sets the stage for the upcoming earnings reporting season, which begins two weeks later (Friday October 13th – yes, Friday the 13th) with the major banks. Therefore, if revenue and/or profit expectations weaken, this would be a valid trigger for a stock market sell-off.
Note: Moves that last two weeks in a row make sense. The reason for this is that a single week’s movements can seem important, but they can only be based on that week’s special events and investor actions. If so, the moves are usually reversed in the next week. However, if similar moves occur in the following week (and that is until Friday’s close), they may be confirmation that something important is afoot.
What about non-S&P 500 stocks?
Good question. The S&P 500 stock index is made up of larger, successful, predominantly US companies that are diversified across economic sectors and industries. They are also a mix of the primary investment management “styles” of growth and value. So here are the other indices that measure the performance of other groups of stocks as well as the growth and value styles.
The table shows the performance of the various S&P indices over the last week. Apparently the negative performance of around -3% was spread across different company sizes and growth/value styles.
The various S&P stock indexes lost about 3% last week
John Tobey (FinViz.com)
Additionally, the patterns of the various indices show the same negative developments as the S&P 500. Here are the nine index charts…
The nine S&P stock indices – daily charts from the end of June
Financial visualizations (FinViz.com)
How about individual stocks?
With a long list of stocks, there is always a spread in performance results. However, a color-coded performance map shows how big the spread is – particularly between the 65 winners and 435 losers.
From Financial Visualizations (FinViz.com) you can find last week’s performance map here. The size of the company (market capitalization) determines the size of the box for each company’s shares. Even among the popular stocks, the absolute majority direction was clearly downwards.
Only 65 of the 500 boxes are green
Financial visualizations (FinViz.com)
The bottom line: Don’t rush to buy on this stock market decline
Even if it works out next week, the move won’t be a sign to buy in. Market indices are still below their December 2021 highs. More importantly, the current picture of the market will need much more than a week of optimism to turn bullish. In addition, the complexity of fundamental negative factors, uncertainties and risks still exists.
So the best strategy seems to be to keep the cash reserves ready but not take any action yet.
Unconvinced? Read my August 4th article about an upcoming October sale…
MORE FROM FORBESMarket Risks in the October SelloffBy John S. Tobey
Source : www.forbes.com