In my email over the weekend I explained that stocks were in for a week of increased volatility along with a shot to much lower prices. As of Monday morning, things had kicked off exactly as planned as stocks are trading more than 2.5% lower.
Folks, this is just the beginning.
Let’s take just five minutes to go through the two most important factors in what is driving the markets, and it’s not earnings or the trade war.
The Technical Winds Have Become Treacherous
There’s a phenomenon that happens when a storm is approaching when the wind suddenly shifts and picks up its velocity. Sometimes it comes with a temperature change, sometimes not, but it’s that sudden shift that is the cause for concern.
We’re seeing that right now in the market as the technicals for stocks just entered their “warning” state.
For months I’ve been talking about the bearish implications of the Nasdaq 100 and S&P 500 as their 50-day moving averages were trending lower. There’s a reason, market situations like the ones we’re seeing now begin to stress the importance of prices trends over everything else.
The current bearish trends of those 50-day moving averages have now put the market in the position of shifting the longer-term trends against investors.
This morning (Monday, April 21) the S&P 500 and Nasdaq 100 officially moved into a long-term bear market as both indices moved below their 20-month moving averages. If they remain at their current levels or lower by the end of next week we’ll mark the first bear market since 2022.
In addition to the Nasdaq 100 and S&P 500, the semiconductor, financial, homebuilding, retail and consumer discretionary sectors have also made the move to long-term bear market trends.
In fact, this is the worst technically positioned market that investors have seen in more than two years and potentially the worst since the .com bubble burst more than 20 years ago when you include the political, economic and geopolitical situations that are driving uncertainty in the markets.
Just last week I heard an army of analysts talking about how the markets were starting to feel like a bottom was near. They added that it was time to start buying some stocks at their current prices like NVIDIA and the other Magnificent Seven stocks.
Wrong!
Stocks are driven heavily by investors’ sentiment, especially in times like this when the fundamentals are clouded by uncertainty.
The influence of these cycles is so heavily that they become easy to follow as they drive stocks through a bull or bear market. This is important to you as investors right now as we are shifting between two of these sentiment cycles.
For months, investors had been “hoping” that stocks would hit a bottom and rally. Analysts told us how robust the economy was and that valuations were attractive.
Just a few weeks ago, JP Morgan Chase (JPM) and Fidelity reported that each company’s retail investors were buying the dip in March, a sign that investors were still doubting that the market would move from a correction to a bear market. That doubt is about to turn on investors as their diligent buying of the dips results in mounting losses.
Doubt is the “second Stage” of a bear market cycle. It also gives way to the “Acceptance Phase” which is when investors start to abandon hope, selling stocks heavily as they move towards the “Despair Phase”, which is when all stock market bottoms are placed as investors have become so disgusted with stocks that they don’t want to buy them anymore.
Here’s a chart of the cycle.
The Acceptance Phase doesn’t trigger in one day, but over the next few weeks as investors begin to tally their losses in 401k’s, IRAs and other investment accounts they will begin to take what profits they still have or close positions to avoid even further losses.
That is the process of Acceptance setting into the mindset of investors. The results, accelerated moves lower with heavier volume.
Names like NVIDIA, Microsoft, Amazon, META and other well-known and widely loved stocks will see larger declines as there are more investors holding those names creating more potential selling pressure.
Expect that the earnings season – just getting under way – will have plenty of mentions of lowered expectations or guidance as companies prepare for consumers and businesses to slow their spending. That ripple effect takes stocks down even further.
From a technical perspective, the S&P 500 has a primary target of 4,500 (roughly 12% lower than today’s price) and the Nasdaq 100 (QQQ) a target that is 18% lower at $350.
I always urge investors, friends and family to have a sit down with their advisor to discuss what stocks they can sell to raise cash and avoid further losses. This is the first move that professional money managers make when the market’s turn mean.
Gold, Utility stocks and other Safe Harbor assets help to lower volatility and provide income during long-term bear markets.
Just last week I provided the names of a few retail stocks set to outperform the broader markets that can be considered Safe Harbor stocks. Check them out here.
I will be providing a short guide on additional Safe Harbor positions on Wednesday, don’t miss it.
