Stocks have been walking on eggshells for the last two weeks as investors are starting to feel like the bull market rally has become a little too long in the tooth. And they’re right to be worried.
From a seasonal perspective, stocks usually struggle through the months of January and February. The weakness in stocks is often cued-up by the beginning of earnings season.
This quarter’s earnings reports start flowing in next week as banks like Goldman Sachs (GS), Morgan Stanley (MS) and others drop their operating results on Wall Street’s steps.
But there’s more to this January’s feeling of unease.
I could go on and on, but everything that I just pointed out is reflected in the two charts below. Two charts that will help you determine where the market’s next 10% move takes stocks.
The Nasdaq 100 (QQQ) is the best representation of “the market” for almost all investors.
Top holdings include Microsoft (MSFT), Amazon (AMZN), Google (GOOG) and of course NVIDIA (NVDA). To say that the entire market follows the lead of these companies is an understatement.
For that reason, the Nasdaq 100 serves as a perfect “barometer” for the market’s direction. Forecasting that direction can be easy if you just keep it simple.
The index is sitting squarely on its 50-day moving average, testing this critical support level.
The 50-day is critical since it is one of the most-watched technical trendlines in the market.
Investors and traders take their cue to buy or sell stocks or indexes when they move above or below their 50-day.
The last break below the Nasdaq 100’s 50-day moving average sparked a 6% selloff in just seven days in September. At that time, the market had the benefit of looking forward to the certainty of knowing a new President would be elected in less than a month.
Additionally, the market was entering a seasonally strong period of the year. Historically, stocks benefit from a strong tailwind from mid-October through December, as they did in 2024.
Today, the selling would go deeper as the Nasdaq 100 would also move back below the psychologically significant $500 level quickly. Also, the market is facing a seasonal headwind as already discussed.
The sum of those catalysts targets a likely move to the Nasdaq 100’s 200-day moving average. This trendline joins the 50-day moving average as one of the most-watched technical indicators for investors.
That one price that investors should key in on is $512. For the sake of simplicity, which the market loves, set $510 as your “sell signals”.
The CBOE Volatility Index, A.K.A the “Fear Index” is also preparing to cross a “line in the sand” that will result in a correction for stocks.
The VIX is known as the Fear Gauge because it tracks how much investors are paying for protection against a market decline. Think of it this way, it’s like homeowners going out to buy more insurance on their house when they smell smoke coming from the kitchen.
Warren Buffett taught investors to “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”
The VIX is a great too to tell when the market is hitting those extremes, and it’s recent trend higher suggests that we’ll soon see investors react with fear by selling.
Today, the VIX is trading just below 20. A move above 20 is tantamount to a warnings sign that the market is preparing for a correction. That warnings turns into reality as the VIX crosses above 22.50.
In December, we had a short experience with the VIX breaking this cautionary level as the S&P 500 dropped a quick 4%. That drop was fast and met with almost immediate buying from investors that were looking to buy the dip on a hot market.
The VIX is in a defined trend higher meaning that the next break above 22.50 will warrant even higher readings of “fear” before stocks find a bottom.
Consider this. Historically, the S&P 500 makes a 10% “Healthy Correction” every 18 months or so. Our last 10% correction came in October 2023 putting us within a few months of the historical averages.
Bottom Line, the number to watch here is a move above 20 followed by a spike in the VIX to 40 before an “All Clear” signal will be apparent for investors to start buying aggressively again.
