Stocks Change Direction I am publishing this week’s newsletter a little late because I thought today’s market action would offer confirmation of a short-term trend reversal. Based upon the market action over the last week, I believe we are in the early stages of a stock market correction. The extent of which is yet to be determined.
Last week I wrote about how the recent market advance was looking suspect and odds were high for a short-term market correction. Soon after I published that newsletter, the S&P 500 reached it’s summer highs (resistance) and then stalled.
The three main breadth indicators that I follow have all turned negative. Below are charts of those three indicators with a chart of the S&P 500 index below each.
The NYSE High-Low Index turned negative early.
The Bullish Percent Index turn negative last week.
The NYSE Summation Index turned negative last week as well.
One of the main charts that I follow to determine market bottoms and tops is the VIX (Volatility Index). The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market. When sentiment reaches one extreme or the other, the market typically reverses course.
Below you will see the VIX chart shown above a chart of SPY (an S&P 500 ETF). Market tops usually occur during low VIX readings, when investors are complacent, and bottoms usually occur during high VIX readings.
As you will notice the VIX fell to the levels that it was at when the initial market correction occurred back in August. Once the VIX reached this level, it formed a base, then rose up over it’s 9 day moving average. The VIX’s recent upturn suggests the start of a market pullback of some degree.
Below is a 2 hour chart of the same VIX chart. You will notice the VIX formed a rounding bottom, then advanced above it’s downtrend line.
Stocks are now in a short-term correction. There are a lot of investors that bought into stocks near the high who will probably be quick to sell. This could accelerate the selloff in stocks. This pullback in the market could provide an opportunity to buy back into stocks at a much better entry point (lower prices).
Currently, we have most client accounts invested primarily in money market funds. Money market funds are safe investments that do not fluctuate in price and are a good place to park our money while we wait for stock and bond market conditions to improve.
I am looking to evaluate the current short-term stock market pullback. I believe that the opportunity lies in our ability to buy into stocks and bonds at lower prices, once this correction runs it’s course.