The stock market has a unique ability of embarrassing the greatest number of people.
Despite what the general public might believe, bear markets do not end when conditions finally improve. They end at the moment of peak bearishness – when everyone has given up hope and is sure the market is toast. When the final bull throws in the towel... that’s when we get a bottom.
The big level I am watching is 420 on the SPY – an ETF representing the S&P 500 index (white dashed line on the chart below). The significance of this cannot be understated.
First, this is the current level of the index’s 200-day moving average. Long-term institutional investors watch the 200-day as a proverbial line in the sand to dictate whether the market is trending higher or lower. A close below this level triggers sell orders and limits new buys in many trading systems.
This is also the breakout area from the beginning of the year that led to the strong rally we saw in May and July. A violation of this level means all of those gains have been wiped out.
It should not come as a surprise that the market found support here last week. But I do not expect it to hold.
While I remain bullish on the market over the long-term, I also want to trade the wiggles. That means timing these shorter-term moves in order to make well-timed buys.
If and when the S&P breaks through this level, expect to see a quick flush lower. Lots of investors have stop losses here, either physical or mental ones, and many bulls will likely throw in the towel when the level fails.
But there is opportunity on the other side…
Remember, markets bottom when things look their worst. During the great financial crisis of 2008, stocks did not bottom when economic conditions improved. They bottomed at the peak of the bad news – when everyone believed the sky was falling in March 2009.
In the COVID selloff of 2020, the bottom was made on March 23, 2020 – right as lockdowns and a wave of overreaching mandates were first announced.
Last year’s bear market found the low on October 13th – the day of the worst inflation report in decades.
In every major market correction, the story is the same...bottoms happen when conditions are at their worst. So that is when we want to buy.
The final leg lower that I expect to play out over the coming weeks will be just such an occurrence. Auto workers striking, 23-year highs in interest rates, record lows in mortgage demand, war breaking out in the Middle East, a rapidly rising national debt, and a technical sell signal in the major indexes - this will likely create the peak bearishness moment I am looking for that will flush out the bag holders and trigger the final sales to end this pullback.
And that is where I will be waiting… ready to buy before the next great bull market gets underway.
Despite what the general public might believe, bear markets do not end when conditions finally improve. They end at the moment of peak bearishness – when everyone has given up hope and is sure the market is toast. When the final bull throws in the towel... that’s when we get a bottom.
The big level I am watching is 420 on the SPY – an ETF representing the S&P 500 index (white dashed line on the chart below). The significance of this cannot be understated.
First, this is the current level of the index’s 200-day moving average. Long-term institutional investors watch the 200-day as a proverbial line in the sand to dictate whether the market is trending higher or lower. A close below this level triggers sell orders and limits new buys in many trading systems.
This is also the breakout area from the beginning of the year that led to the strong rally we saw in May and July. A violation of this level means all of those gains have been wiped out.
It should not come as a surprise that the market found support here last week. But I do not expect it to hold.
While I remain bullish on the market over the long-term, I also want to trade the wiggles. That means timing these shorter-term moves in order to make well-timed buys.
If and when the S&P breaks through this level, expect to see a quick flush lower. Lots of investors have stop losses here, either physical or mental ones, and many bulls will likely throw in the towel when the level fails.
But there is opportunity on the other side…
Remember, markets bottom when things look their worst. During the great financial crisis of 2008, stocks did not bottom when economic conditions improved. They bottomed at the peak of the bad news – when everyone believed the sky was falling in March 2009.
In the COVID selloff of 2020, the bottom was made on March 23, 2020 – right as lockdowns and a wave of overreaching mandates were first announced.
Last year’s bear market found the low on October 13th – the day of the worst inflation report in decades.
In every major market correction, the story is the same...bottoms happen when conditions are at their worst. So that is when we want to buy.
The final leg lower that I expect to play out over the coming weeks will be just such an occurrence. Auto workers striking, 23-year highs in interest rates, record lows in mortgage demand, war breaking out in the Middle East, a rapidly rising national debt, and a technical sell signal in the major indexes - this will likely create the peak bearishness moment I am looking for that will flush out the bag holders and trigger the final sales to end this pullback.
And that is where I will be waiting… ready to buy before the next great bull market gets underway.