The Stock Market Could "Turn Over" Any Day Now - Here's What to Do

The big indexes are trading at just about the same levels they were three weeks ago.

My experience tells me this means the market is at a tipping point as it searches for an ultimate direction. Seasonality and sector rotation are in play right now - as I've been saying for the past few weeks.

Change is in the air; market leadership is changing hands.

My job is to make sure you're on the right side - now, and when the "flip" happens...

This Bullish Old Standby Seems to Be Running Out of Gas

Small caps, as tracked by the iShares Russell 2000 ETF (NYSE Arca: IWM), are struggling. That's significant as we previously cited small-cap outperformance as an indicator of the bullish risk-on trade being in force. But that "on" is now in jeopardy...

The chart below shows that the IWM is in the process of posting the third in a series of lower highs since early July.

The bottom line: IWM needs to move above $170, its record high, to break this downward pattern and confirm that the risk-on trade is still potentially in play.

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stock market

Here's another indication that the market's zest for risk is fading. IWM's 50-day moving average has begun to "roll over" into an intermediate-term bearish trend.

The last time this happened was in February, when the market was heading into its last spate of volatility.

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Out in the broader markets, though, there are two specific indicators that could ultimately decide which way the market goes...

These Numbers Are Mixed - Here's Where We're Headed

First, there's the 2,800 level of the S&P 500. Besides serving as round-numbered support, 2,800 was also the approximate site of peaks in February, March, and June.

Also, its 50-day moving average is rapidly rising to this level; it's currently at 2,792. The last time the S&P broke below its up-trending 50-day moving average was in mid-March, just as the index was beginning a 7% plunge to its 200-day moving average.

market turn over

On Thursday, the SPX bottomed at 2,802, further proof that it's an important support level. And that stance is certainly bolstered by Friday's broad-market surge, which saw it top 2,842.

But there are plenty of sellers waiting for such a positive move, and I expect these sellers to test the market's strength, which could cause stocks to struggle next week.

The second indicator is the CBOE Volatility Index - the VIX. It's just had a busy week. On Wednesday, it surged 27% to crest just shy of 17.

Ultimately, it closed below 15 on Wednesday and fell the rest of the week, to under 13.5 at midday Friday. Staying below 16 on a closing basis is crucial to maintaining upward momentum.

On the other hand, any sustained move above this level could bring a sharp reversal in the market.

Right now, in my research services, I've recommended a balance of bullish and bearish plays, calls and puts - to reflect the uneasy balance of the current market. It's the safest, most profitable way forward right now.

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In fact, my readers had the chance to take down a 19% gain on some calls... and a 107% on half of a big put position.

Go figure.

The bottom line is this: For the short-term, I think every investor can expect that balance to continue, but it makes increasingly more sense to prepare for a move lower, sooner rather than later.

Remember, we're heading into what is historically one of the most volatile two-month periods of the year.

Currently, the portfolio has three calls and three puts. As things stand, we should expect that balance to continue with a slight bias toward puts on concerns over the continued deterioration among some market-timing indicators as we head through one of the most volatile two-month periods of the year.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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