What We are Watching in the Market

After hitting a new all-time high on May 3, the S&P 500 and most of the rest of the market have been hit with tremendous selling pressure. As another round of negotiations was scheduled to take place last Thursday and Friday, President Trump tweeted his intentions to implement new tariffs on Chinese goods. This caught investors off guard, and we saw negative moves by the U.S. indices every day last week before a late rally on Friday gave investors some hope.

China announced intentions for new tariffs on U.S. goods on Monday morning, and that sent stocks reeling. All four of the main U.S. indices dropped sharply and the Nasdaq and Russell 2000 both fell over three percent. Heading into Tuesday morning’s trading session, futures were positive for the first time in the last seven days.

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With this as the backdrop, I am watching several different indicators and scenarios to see how things develop in the next few days and weeks. One thing that I am watching to see when it happens is seeing the 10-day moving average for the S&P cross bearishly below the 50-day moving average.

When the 10-day crossed below the 50-day back in October, stocks rallied back a little and then the 10-day seemed to act like resistance. The index had fallen a few hundred points, from 2,950 to 2,750, when the bearish crossover occurred, but it would go on to fall a lot more. Eventually the index would fall to the 2,350 area. The 10-day wouldn’t cross back above the 50-day until January. From there the index rallied 300 points until the renewed shots being fired in the trade war.

I am also watching for similar crossovers from the 10 main sector ETFs. So far the materials, energy, and healthcare sectors have seen their 10-day moving average cross below their 50-day moving averages. These three sectors have been the weakest ones since the beginning of the year, but if we start seeing other sectors experiencing the bearish crossover it might be a big concern.

Another thing I am tracking is from a platform called Smartstops.net. The software tracks stocks and calculates when the risk is elevated for a stock. The calculations include moving averages, overbought/oversold indicators, sentiment, overall market conditions, etc.

I have a portfolio of 50 stocks saved on the platform. The portfolio includes the most heavily traded and closely watched stocks and ETFs. As of last night’s close, 40 of the 50 were showing elevated risk levels. I will be watching these stocks and ETFs to see when some of them start returning to normal risk levels.

We are at an interesting point right now. The daily charts are showing a great number of stocks are in oversold territory after the selling last week and again on Monday. The weekly charts are showing a number of stocks are in overbought territory or have just moved out of overbought territory.

The overall market sentiment is also a concern. The Investors Intelligence report showed the ratio of bulls to bears was at 3.12 this past week. It was down a little from the previous week, but still above the 3.0 mark which is deemed as a concerning level. The AAII sentiment survey showed 43.1% bullish and 23.2% bearish this past week. The New York Board of Trade Bull/Bear ratio just saw its 4-week moving average eclipse the 3.0 mark this past week, and that is another significant level that suggests the sentiment may have gotten too bullish.

Something investors need to keep in mind is that I am not talking in absolutes here. If the 10-day moving average crosses bearishly below the 50-day, that doesn’t mean you should sell all of your stocks. It means you should pay attention and take action to reduce risk. When the sentiment gets too bullish—again, it is a sign that you might want to reduce risk. The Smartstops software does the same thing, it tells you when risk is elevated and action should be taken.

This isn’t a no-limit poker game where you are all-in or all-out. Investors need to keep this in mind, especially right now with the increased volatility and with the market on edge about the trade war.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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