Here are three charts that sum up what is happening in the US stock market now. The first one is the ETF for the Russell 2000 small cap index, IWM.
The IWM ETF made a peak this year way back in March and has been going sideways ever since. While the Nasdaq and S&P 500 made minor new highs around Labor Day, the Russell 2000 remained range bound. This has caused its long-term 200-day Bollinger Band indicators to now come close together. The width indicator on the bottom of the charts is falling down towards the 10 point.
It is rare for this long-term volatility indicator to shrink like this and once it stops doing it you see a BIG move in price. For stock indices that can mean a 20-30% move. Volatility for IWM may continue to shrink from now into the end of the year, but you can expect a huge 20-30% move, and maybe even more to happen between now and the middle of next summer.
This indicator, though, doesn’t tell us in what direction the move will be. A big rally would suggest that the stock market will take off next year, while a decline would mean that it is likely happening as part of a broad bear market.
It is rare for this setup to take place in one of the major indices.
It is worth noting that the peak in IWM came around the same time that the ARKK ETF peaked and that the manic idea that Robinhood traders were about to rule the markets thanks to things like short-squeezes in Gamestop and AMC. In reality we have reached peaked Robinhood trader power in the market.
The second chart, is the percentage of stocks above their 200-day moving average on the NYSE.
This indicator shows us the percentage of stocks trading above their 200-day moving average that trade on the NYSE. It peaked in early June and has been trending down ever since. This means that the internals of the stock market are weakening, which has been a historic warning signing of an impending major stock market correction or bear market.
We have the start of earnings season coming, with several banks set to report this week. Earnings season typically does provide some bullish action for stocks when its starts and there are typically end of the year rallies, but the risks in the overall US stock market continue to remain to the downside, until there is what amounts to a panic washout bottom.
That is something I would also not expect to happen until next year.
And finally we have to look at the fundamental factors underlying the stock market. This chart from advisorperspectives.com, with the ECWI forward economic indicators, sums that up.
When we came into the third quarter most economists and the Federal Reserve were looking for 6% or higher GDP growth. Now last week real time Fed data has caused the Atlanta Fed to project 1.3% GDP growth. In other words GDP growth has stalled out.
All of this is much of the reason that by the end of June I lost complete interest in doing anymore meaningful buying in the stock market anymore. The time to have bought was last year, until there is a correction or panic bottom in the US stock market, but this chart clearly shows the big picture when it comes to the US economy.
We had a big collapse in growth last year and then a massive surge that came as a result. Now that surge is over.
The collapse wrecked many companies and many lives. Sickness took some people. Someone I knew in high school just died last week, but stress and mental illness also drove some over the edge. At the same time, many companies are not going to be able to recover from the damage they took from the shutdowns and economic brick wall of 2020. Add massive debts, inflation, and so forth and the economy is set to now muddle for years.
Something similar happened after the 2008 housing and stock market busts in the years to follow. The difference this time is inflation.
With only a few exceptions, such as commodity related sectors, I see ZERO reason to be buying stocks in any meaningful way right now. I say this as someone who owns a lot of individual stocks. I also have a cash position I plan on using later and if things look like they are indeed going to tip over in the markets before the year is over am likely to put on hedges. For now I am just watching, and hoping more of a stock market bounce can develop with earnings and perhaps after the next Fed meeting into Thanksgiving, but I take one week at a time.
-Mike
