Analysis, Perspective, Trading Strategy
A Bear Market in Spirit Only – For Now
By Joe Duarte on April 8, 2018
We may not be in a bear market by the numbers but may be in
a bear market… in spirit. As a matter of fact, this is one of those periods
where the stock market is no fun for anyone and where the misery seems
ready to last forever. So even while the bulls are feeling the pinch
of the current “correction,” and the bears are still growling relatively
quietly, this currently isn’t a bear market by the numbers. In all honesty
no matter what you call this market, the real question isn’t whether
this is a bull or a bear market, but whether the selling is going to
In fact, bear markets – often described as periods where prices are
twenty percent or more below the market’s peak - are usually recognized
in hindsight when they are well entrenched and most investors have
lost significant amounts of money. As things currently stand, the S & P
500 (SPX) is down 9.3% from its January 26, 2018 high, while the Nasdaq
100 (NDX) 10.5% and the Dow Jones Industrial Average (DJI) are off
10.5% and 10% from their respective highs. Moreover, none of the major
indexes have broken decisively below their 200-day moving averages,
the traditional dividing line between bull and bear trends.
That said; two things are fairly obvious. One is the fact that almost
everyone is now bearish, while the other is that the market is trading
dangerously close to what traditional markers describe as the threshold
of a bear market – the 200-day moving average of the major stock indexes.
This, of course raises the question of whether we are near the proverbial
market bottom which is often marked by such thick bearish sentiment
as what some indicators are currently measuring. The flip side is that
sometimes the bears are right and this may be one of those times.
Breadth Looks Exhausted
Whether this is a bear market or otherwise the New York Stock Exchange
Advance Decline Line (NYAD), the most accurate indicator of the stock
market’s trend since the election of Donald Trump looks very tired.
And if this pattern of lower highs and lower highs continues, the most
likely outcome is a further decline in the market.
The worst aspect of the NYAD chart as of the close of business on
April 6, 2018 is the confirmation by three oscillators – RSI, ROC,
and MACD – of the exhaustion of the upside momentum generated from
the late February bottom. Indeed, if NYAD breaks below its 50-day moving
average it would not be surprising to see it test its 200 day moving
average and perhaps fall further. Of course, the way the market has
been trading of late, this could happen in a day or two. If that was
the case, there is no telling as to what may follow.
The 200 – Day Battleground
Over the last few years, the 200-day moving average has been ignored
as a major indicator of the long term trend. But as with all things
in this market, the once venerable indicator could soon regain its
significance. This could manifest in a couple of ways. First, SPX could
crash below this key line and continue to even lower levels. If this
happens, then we would know we are in a bear market. On the other hand,
the 200-day moving average, as it has been many times in the past,
could be a great place for a fake-out. If this scenario plays out we
would see a break below the line, which would last for a short period
of time and in hindsight would prove to be the proverbial bottom to
the current correction.
But while it is important to consider those two potential outcomes,
at this point all that is pure conjecture. Based on current data, there
are four significant findings on this SPX chart. First, the index closed
at its 200 day moving average on April 8. Next, momentum and money
flow indicators, ROC, OBV, and ADI, and raw volume seem negative. The
first three are in short term down trends, and the fourth one, raw
volume has more pink bars (selling) than grey bars (buying) in the
last two weeks, while the pink bars are higher than the grey bars.
Better Safe than Sorry
A bear market in spirit is a tough market to watch, much less to
trade. Indeed there are few alternatives at the moment other than to
stay patient. Until proven otherwise there are more sellers than buyers
in this market, although this could change at any moment. Indeed, for
all anyone knows we may have already hit the bottom or may be close
to it. The point is that in this market, only one thing seems clear;
the risk/benefit ratio is completely tilted toward risk.
Therefore, if you want to stay in the game, keep high levels of cash,
trade in small amounts, and stick with short term trades. Right now,
buying into a 4% counter trend rally that lasts 2-3 days could mean
getting caught in a nasty reversal that may head down 8% in a couple
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
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