Remember Dow 10,000?
I do the anticipation, the excitement, and then the selloff.
The memory of the 10,000 mark crossed my head over the weekend as I read the point-counterpoint debate over whether the market has finally entered a new bull market. Do you want my vote? I'll give it to you in just a few minutes, first some market data.
The S&P 500 hit the 4,300 level last week for a brief moment in time and then retreated as large-cap technology started to take its foot off the gas. That's right, the same group of stocks that has lifted the market to its 2023 highs was the cause of weakness. A little ironic, but it makes perfect sense.
The bigger news was the fact that the small-cap iShares Russell 2000 ETF (IWM) finally saw some buying. This is the one area of the market that has remained dormant over the last six months as the rest of the major indices made a run at their highs.
The lack of performance from the IWM historically signals that investors are unwilling to take risks in the market. One of my Ten Commandments of Trading states that "Markets are driven higher by speculation, not fundamentals". This means that ANY healthy bull market requires the participation of small-cap stocks.
We got it last week, but the battle isn't over yet.
Everything from the CBOE Volatility Index (VIX - commonly called the fear index) to the Wall Street analysts' outlooks have taken a dramatic shift.
The VIX cratered to its lowest readings since before the pandemic as it moved below 14. This rounded out a 20% drop in the Fear Gauge in just over a week. It feels like the market is overcorrecting, or beaming with confidence that things can only go up from here.
That's a dangerous bit of sentiment.
The shift in analyst chatter is likely because so many of the Wall Street professionals have been left on the sidelines or worse, the short side of the market.
Last week Bank of America switched to a bullish outlook. Who knows who will be next?
Morgan Stanley and Goldman Sachs continue to look at the landscapes as filled with risks that could topple the market on any given week. I'm in the same camp.
Then there's this.
I think almost everyone is aware of the Magazine Cover Effect, right?
Well, hot off the press, here's this week's issue of Barron's.
This is a classic example of the type of magazine covers that far too often mark market tops. There really is no truer read of general market sentiment than to see one of these in the wild.
This does not mean that the market has to place a top. It does indicate that sentiment is perhaps too optimistic, especially given the large number of uncertainties that are still in this market.
This is what you need to know about the market this week.
The Russell 2000 Index ETF (IWM) is running into resistance at its 20-month moving average.
This is important because it is the technical "line in the sand" between a bull and bear market. The ETF's critical trendline is sitting just below $189. A break above this long-term moving average will attract more buyers into the "risk on" area of the market. Watch this closely.
More importantly, the IWM needs to close above this long-term trendline at the end of the month in order to officially see the small-cap index switch from bearish to bullish.
The Economic Calendar is Heavy
This week's calendar holds everything from a FOMC decision on Wednesday and according to the Fed fund futures and the CME Fed watch tool the market is expecting a pause, check it out for yourself:
More importantly, the IWM needs to close above this long-term trendline at the end of the month in order to officially see the small-cap index switch from bearish to bullish.
The Economic Calendar is Heavy
This week's calendar holds everything from a FOMC decision on Wednesday and according to the Fed fund futures and the CME Fed watch tool the market is expecting a pause, check it out for yourself:
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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.