The Nasdaq has had its steepest drop from a high now since the covid market crash of 2020. A lot of people were out this weekend predicting a bottom or are saying that you need to buy now to get “exponential growth.” That’s the Cathie Wood line and is being echoed by all sorts of Youtube personalities. Others are calling for more selling. The truth is no one can really predict what is going to happen. I thought we could see the start of an earnings bounce/rally last week and it didn’t happen. Maybe it will this week.
But, instead of grasping on to a prediction it’s best just to understand what the current trend of the market is and recognize it and go with it. That is always the most important thing to do.
All three indices are now extremely oversold using various technical indicators. For instance, take a look at the S&P 500 and the daily stochastics at the top and RSI at the bottom of this chart.
Normally, oversold readings like this would trigger the start of a bottom or a big rally and signal a time to buy. The problem is these readings work in a bull market and in a bear market such oversold readings don’t tend to mean much of anything and the rallies when they come end up being buying traps.
The S&P 500 closed below it’s 200-day moving average. The market is in a powerful downtrend and that is no surprise as the internals of the market peaked back last spring. At the same time, inflation picked up this fall, instead of declining as so many predicted, and we are on the path for four interest rate hikes this year as bond yields rise, which hurts the fundamentals of companies that don’t turn a profit and typically causes huge selling in highly valued stocks.
The 200-day moving average is key, because it acts a support in a stage two bull market. In a stage three topping phase they tend to go sideways and in a stage four bear market they slope down and act as resistance.
Many stocks are now in stage four declines. In fact, most stocks are trading below their 200-day moving average as you can see from this indicator showing the percentage of stocks above that indicator.
This indicator is at 36%, meaning that 64% of all of the stocks on the NYSE are trading below their 200-day moving averages. Much of the stock market is trading worse than the S&P 500 and is already in a bear market.
The Russell 2000 is now far enough away from its 200-day moving average that if it were to rally tomorrow that indicator would likely act as resistance and mark the end of such a rally, as you can see from the IWM ETF.
The IWM ETF is now even trading below it’s 200-day Bollinger Band.
The Nasdaq is also substantially below it’s 200-day moving average.
All the major market averages are now in powerful downtrends, which typically end when there is real panic in the market, and we don’t really see that yet.
So, what does all this mean?
The market is oversold enough that a bounce this week could easily happen. We also have more earnings this week and an FOMC meeting on Wednesday. In a setup like this the market typically puts on a bounce into the Fed meeting or if it trades weak into it rally after it.
But such moves would represent short-term gyrations in a larger downtrend.
The reality is the broad market is now technically broken.
Bitcoin, crypto, and speculative high flying stocks, as typified by the ARKK ETF, which specializes in them, all broke down months ago as the internals of the market faded. Now the S&P 500 and DOW have done what they have always done when the internals have declined like this and have broken down too. The current situation is what it is, but it was also entirely predictable. This is how markets make the transition from a stage three topping phase into a stage four bear market. What is different this time, though, then the last two bear market cycles that started in 2000 and 2007 is that bonds are going into a bear market too.
Personally, I think the thing to do is to lighten up on lagging positions and funds on market rallies and bounces and to rotate into the things going up now. Silver and gold both went up last week, but check out this Tweet.
What is going up this year. https://t.co/mDiN7EKiDR— Mike Swanson (@tradermike_1999) January 21, 2022
And look at this:
New post on gold’s #GOLD $gdx $gld rally and next target, but realize commodities across board are going up and being ignored as you can see from $dba… https://t.co/XvVB8LlBVw pic.twitter.com/BQq6QnW8sQ— Mike Swanson (@tradermike_1999) January 20, 2022
To make money buying the thing to do is to focus on the things that are going up even in the face of stock market declines. ONLY focus on the sectors and stocks that are outperforming the market. In a market like this big market laggards CRUSH people that hope and hold.
Two years ago you could just open up an app Robinhood Account and have no idea what you are doing and make money. All you had to do was read some message board hype or buy one of the top 100 stocks listed inside the app that everyone else already owned and get lucky.
Now you have to know what you are doing and Robinhood doesn’t have enough information in it to be able to navigate a market environment like this. You need to use charts and know how to read a few simple indicators, so the millions of app traders are now flying blind. If you got into the markets in the past two years and never been in a market like this then you must grab my book Strategic Stock Trading.