One More Line to Watch

The market’s selling is going to pick up in full force this morning as investors react to Israel’s response to Iran.

The latest retaliation in the Middle East appears in its early stages, as Israel has carried out a strike in retaliation for Iran’s attack last Sunday.

The markets have been calm over the last two days as we were hearing that there was a possibility that Israel may provide a limited response instead of a more aggressive attack on Tehran.

This morning’s strike was considered limited.

However, we now switch attention back to Iran for their countermove. At this point, the best countermove would be diplomacy.

That’s not likely, so let’s prepare for another week by checking in on my favorite market indicator: The percentage of S&P 500 stocks above their 50-day moving average.

50-day moving average SPX chart

What Is It?

This broad market indicator monitors market momentum by tracking the number of S&P 500 companies that are above their respective 50-day moving average.

The application is simple… Readings above 90 tell us that the market has reached a level of positive momentum that suggests the market is overbought. When that happens, stocks need a rest, and you will see the number fall again.

When the number has reached an extremely low level, it is a sign that the market’s momentum has reached an extremely negative reading as the stock market is oversold. The low readings (those below 10%) are indicative of market bottoms. The last reading we saw below 10% was in October 2023 ahead of a strong recover rally in stocks.

Why It’s Important

The market’s movement always comes back to math and science.

I mean it!

Market momentum is nothing more than an exhibit of Newton's First Law of Motion.

It states a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an outside force.

Right now, that momentum will lead to lower prices until this indicator hits a reading of 10% or lower.  That’s when the opposing force, buyers coming into the market, will turn the market’s current decline around.

What Is an Investor to Do?

I always like to give you easy numbers to watch with these indicators: 10%.

10% is the reading from this indicator that you can start going and buying the stocks that you are waiting to buy now.

Names like Nvidia (NVDA), Super Micro Computer (SMCI), Amazon (AMZN), and Netflix (NFLX)… You buy them all when the percentage of companies above their 50-day moving average drops below 10%.

That’s it; it’s that simple.

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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