Last week we talked about how the market was drawing the perfect opportunity for a “Dead Cat Bounce”. So far, that forecast has played out to perfection as I targeted both the S&P 500 and Nasdaq 100 to have the potential to rally to where they sit today.
The next move for stocks is the most critical that we’ve seen in more than two years and whether stocks are heading for a deeper decline or worse, the ninth bear market since 1990 for stocks.
Here’s a simple view of how the trends we talk about each day are playing a heavy hand in the future of the market and a simple read on what to watch over the next week or so.
Believe me, this is worth the five minute read.
The market is all about trends, that’s why the saying goes “the trend is your friend”.
Since 1990 there have been eight long-term bear markets. The shorted lasted less than a year just after the Pandemic and the longest resulted in the “Lost Decade” for stocks that followed the .com bubble. In each, stocks suffered at least a 20% drop before beginning the process of rebuilding the market.
Each of the eight bear markets were obviously preceded by a breakdown of the shorter-term technical trends as stocks shift their long-term trend as stocks accelerate lower. We’ve seen much of that play out over the last month as the S&P 500 and Nasdaq 100 have both seen most of their components drop below their 50-day moving averages.
While I talk about the 50-day moving average being the best indicator of the short-term trend for stocks, the 200-day moving average is considered the “third rail”.
Moves below the longer trending 200-day moving average have much larger consequences as they indicator a macro shift in the direction of the market.
Both major indices I’ve mentioned are currently playing a game of chicken with their respective 200-day moving averages, making the next few weeks incredibly important for where stocks will end 2025.
Since 1990 the S&P 500 has breached its 200-day moving average 115 times. If eight of those turned into a bear market then we’ve got a 93% chance that stocks can reverse their recent trend, but it all comes down to how investors react over the next few weeks.
On March 6, the S&P 500 breached its 200-day moving average for the first time since October 2023. The “break” of the technical trendline was immediately reported by CNBC and several other financial media outlets. That’s part of the problem.
You see, investors buy and sell with a herd mentality. They hear that things are breaking down and the “herd” starts to hit the sell button. That’s when the trend starts to accelerate.
The recent shift in investor sentiment also comes into play here. Selling picks up even more speed as more investors get bearish on the economy and stock. It’s the point in time where investors go from being braver and “buying the dip” to retreating to cash and “selling the rips” or bear market rallies.
The next two weeks will shine a light on investors’ fortitude and faith in the market as the S&P 500 attempts to stay above this line in the sand for stocks.
I mentioned investor sentiment as a factor in the tectonic shift in the market, this is one of the largest factors.
Two weeks ago, the CBOE Volatility Index – A.K.A. “The VIX” or “Fear Gauge” – hit its highest readings since the market’s correction in July last year.
The VIX is the simplest way to gauge whether investor fear is reaching a crescendo.
As Warren Buffett has said, "Be fearful when others are greedy, and greedy when others are fearful". Spikes in the VIX are a signal that “others are fearful” but you have to take things into perspective.
The VIX spike a few weeks ago was a good short-term buying signal as the S&P 500 has rallied more than 5% from its recent lows, but the signal wasn’t great.
Just like the S&P 500, the VIX is now trading at its 200-day moving average. A move higher this week will indicate that the spike two weeks ago was just the first in a series.
We saw a smaller spike in the VIX in December which tilts the odds in favor of the market heading lower over the next month instead of continuing its recovery.
Bottom line number to watch now: 20
A move back above 20 is the tipping point for stocks. A shift above 20 in the next week will put the sellers back in control and target a move to 5,400 on the S&P 500.
Economic data is boring for investors… until it isn’t. Right now, the data is far from boring.
The Conference Board’s Consumer Confidence Index came in lower than economists expected this week. The Board summer it up with this headline…
“Consumers’ expectations for the future at a 12-year low”
Over the last three months we’ve seen an erosion of consumer confidence as you and I have started the process of planning for the possibility that a recession is looming.
This week’s reading is below a reading of 80 that is used as the signal that a recession is ahead.
How does consume confidence play into the direction for stocks?
Consumer spending makes up 70% of the U.S. economic activity, meaning that our purchases have a larger effect that corporate earnings.
I covered the effects of a slowdown in consumer spending and “which sector to avoid like the plague” one month ago, click here to read the whole story.
Friday’s release of the PCE Index and Consumer Spending will be the next make-or-break for stocks.
Widely known as the Fed’s favorite read on inflation, the monthly report has been indicating that the trend in the drop in the inflation rate is in danger of reversing. A return of inflation would be a body blow for stocks.
As we started the conversation, momentum and trends are everything when it comes to the market.
Newton’s First Law of Motions says that “an object in motion will remain in motion with constant velocity (same speed and direction) unless acted upon by an unbalanced force.” Applying that to today’s stock market, we’re heading for a bear market unless shorter-term momentum changes the trend.
Remember when I said the market is driven by trends? Believe it or not, the easiest way to monitor the market’s momentum is to look at the faster moving 50-day moving average of the S&P 500.
This trendline turned bearish in mid-February, indicating that broad market momentum was favoring the bears. Today. The trendline is struggling to shift into a neutral or flat trend, which would at least signal that stocks are nearing a pause in their decline.
This week’s test of the 200-day moving average will be the deciding factor on that market momentum.
What to Watch: Do not start buying until we see the 50-day moving average of the S&P 500 start to move higher. Yes, you’ll miss calling the “bottom”, but as a wise Alan Ackerman once told me…
“No investor remembers the money they made calling a bottom because they rarely succeed in calling a bottom”.
In other words, these type of markets deem that its wise to sacrifice the first 5-10% of a new bull market rather than lose another 5-10% on a false bottom.
Stocks are facing their most difficult environment in more than three years and possibly longer.
Keep an eye on the S&P 500 at its 5725 level as this will be the trigger for sellers to take control of the market again.
