Bearish Action Emerges

The previous week’s reign of volatile intra-day moves remained for a second week.

The difference this week, instead of capping off the week with a positive net return of 0.55%, prices not only once again swung wildly in excess of 1% daily but finished the week -2.04% lower.

That is volatility.

On Thursday I updated our market analysis and stated:

“If the market fails to hold the 50-dma by the end of this week, we will add our hedges back to portfolios, rebalance risk in portfolios and raise cash as needed.“

We did exactly that on Friday by reinstating our short-market hedge and raised some cash by reducing some of our long-equity exposure. While previously we had only hedged portfolios, the action this past week to simultaneously reduce some equity exposure was due to both of our primary “sell” signals being tripped as shown below.

This does not mean the next great “bear market” is about to commence, it just means that currently there is an excess of “selling pressure” in the market which could pressure equities lower.

Most importantly, the market is currently in the process of building a consolidation pattern as shown by the “red” triangle below. Whichever direction the market breaks out from this consolidation will dictate the direction of the next intermediate-term move.

I would be careful “betting” on an upside breakout at this juncture with the Fed, ECB, Japan and now the Trump Administration working at odds with the markets. But at the same time, getting excessively “bearish” isn’t prudent either.

Turning points in the market, if this is one, are extremely difficult to navigate. They are also the juncture where the most investing mistakes are made.

For now, it is important to note the “bullish trend” remains solidly intact. While “bearish signals”are certainly rising, the market has done nothing in the short-term except begin a short-term correction/consolidation process.

With the market still in the seasonally strong time of the year, there is a decent probability that the market attempts a continuation of its bullish advance.

However,it also doesn’t mean we are completely “out of the woods” just yet either. As I noted last week:

“There is a risk the market could reverse next week keeping prices confined within the bullish trend channel. A failure at the trend line, which would coincide with a break below the 50-dma, would likely lead to a retracement back to the 200-dma which is currently running along the bottom of the bullish-trend channel.”

So far, that is exactly what has happened. As noted in the chart above, the market broke through the 50-dma and is currently testing support at the 100-dma. Let’s review what we said last week:

On the bearish side, a failure at current resistance levels would likely lead to a retracement to the 200-dma. Such a correction would also trigger the MACD sell-signal which is already at historically high levels. That “sell signal” will put additional downward pressure on the market.

While the 200-dma has not been tested, yet, the breakdown did trigger the secondary sell-signal as expected. As such we reduced some equity exposure and add our short-hedge back to portfolios.

Here is what we are looking for next to determine our next course of actions.

As long as the market holds at the rising bullish trend and 200-dma, the bullish backdrop remains intact keeping portfolios weighted towards equity exposure.

However, if the market breaks below those “critical support” levels, as noted above, the risk of a deeper correction rises. Such a break will lead to increased hedging and a reduction of equity risk in our portfolio models.

A break of that critical support will likely lead to a retest of the longer-term bullish trend around 2250 which would be a 22% decline from recent highs and an “official bear market.”

A break below 2250 will likely coincide with the onset of the next recession and is an entirely different portfolio management strategy.

During the entirety of last week broadcasts, I consistently recommended cleaning up portfolios, reducing risk and paying attention.

Such has proven to salient advice so far.

If you didn’t see the guidelines we laid out for this process – click here.

It isn’t too late to take some actions next week as I suspect we could very likely see a further bounce on Monday or Tuesday.

Use that bounce wisely.

Charts To Watch

by Jesse Colombo

Here are the key U.S. stock charts to watch in the week ahead.

After breaking below the two most recent uptrend lines in early-February, the S&P 500 attempted to regain one of the trendlines earlier this week, but was unsuccessful and has fallen quite hard in the last several days. The market is currently bouncing around in between the most recent broken trendline and the longer-term trendline that is approximately 150 points below the current price. If the sell-off continues, this is the next most important price target and support level to watch which is currently at ~2,570.