Stock Market: Last week’s alarm bells were serious

Stock Market: Last week's alarm bells were serious
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Last week, the S&P 500 showed several warning signs of an upcoming sell-off. Was that what the Fed said? Most likely, no. The breadth and depth of the indicators make them important and dangerous.

the background

Last week’s actions do not stand alone. The negative backdrop has been building since the S&P 500 peaked on July 31. It then pulled back in early August, forming a round top and falling below the 50-day moving average (trend measure) on August 15. It then bottomed on August 17-18 and rebounded halfway through, rising above the moving average.

However, it peaked on September 1st and fluctuated around the moving average which slowed its rate of rise. Then it happened last week.

  1. First, the S&P 500 on Wednesday (September 20) fell away from the moving average, re-establishing its mid-August position.
  2. Then, on Thursday, it simultaneously broke two important barriers: (a) the bottom of the 5% channel surrounding the 50-day moving average (the channel represents fluctuations around the moving average); (b) Low set in mid-August (classic anxiety factor being low lows)
  3. All previous declines caused the 50-day moving average to fall for the first time since November 2022 (a possible sign of an upcoming downtrend)
  4. By the end of the week, the indicator decline completed its second reversal with a lower top than the first (double tops carry more significance than a single move, especially when the second top is unable to reach the level of the first top)

This graph presents the picture…

So…do these moves indicate a downtrend or just fluctuations in movement?

Next week’s stock market movement should answer this question. It will be a particularly important and interesting period because all five days end in the third quarter.

Furthermore, the week sets the stage for the upcoming earnings reporting season which begins with the major banks in two weeks (Friday, October 13th – yes, Friday the 13th). Therefore, if revenue and/or earnings expectations weaken, it would be a valid driver for a stock market sell-off.

Note: Moves that last two consecutive weeks are meaningful. The reason is that one week’s movements can seem important, but they can only depend on a certain set of events and investor actions in that week. If so, the moves are usually reversed in the next week. However, if similar moves occur the following week, (meaning all the way until Friday’s close), it could be confirmation that something important is afoot.

What about non-S&P 500 stocks?

Good question. The S&P 500 stock index is composed of primarily larger, successful U.S. companies diversified across economic sectors and industries. It is also a combination of the basic investment management “styles” of growth and value. Below are other indicators that measure the performance of other groups of stocks as well as growth and value patterns.

The table shows last week’s performance for various S&P indices. It is clear that negative performance of around -3% is spread across company sizes and growth/value patterns.

The different indicator patterns also have the same type of negative developments as the S&P 500. Here are the nine charts of the indicators…

What about individual stocks?

There is always a spread of performance results among a long list of stocks. However, looking at the colour-coded performance ‘map’ allows you to see how wide the gap is – especially between the 65 winners and the 435 losers.

From Financial Visualizations (FinViz.com), here’s a map of last week’s performance. The size of the company (market capitalization) determines the size of the fund for each company’s shares. It is clear that the trend was downward for the vast majority, even among popular stocks.

Bottom line: Don’t rush into buying when the stock market is down

Even if it happens next week, the move would not be a sign of a jump. Market indicators are still below their December 2021 highs. More importantly, the current market picture will need more than one week of optimism to turn to the upside. Plus, there’s still all this complexity of fundamental downsides, uncertainties and risks.

So, the best strategy is to keep cash reserves ready, but not take any action yet.

Unconvinced? Read my August 4th article about the upcoming October sale…

More from ForbesStock market risk sell-off in Octoberby john s. Toby

Follow me LinkedIn.

During my thirty-year career, I have managed and advised multi-billion-dollar funds. Using a “multi-manager” approach, I worked with senior investment managers. I now manage my personal accounts and write about my analyzes and decisions.

Through my 50+ years of personal/professional investing experience, I have developed the skills I use to find opportunities and avoid risks. Because the markets are constantly changing, I choose the strategies (safety, income, value, growth) that the circumstances require.

My only regular activity is to look for developments and trends that are ignored or misinterpreted by investors. These are positions that consistently produce higher return opportunities (or higher risk levels).

I am a Chartered Financial Analyst (CFA) and hold an MBA from Stanford University Graduate School of Business and a BA in Finance from San Diego State University. I am a former member of the CFA Washington, D.C. Board of Directors and served on the AAUW Investment Advisors Committee for eight years. I am in my ninth year with the City of Vista Investment Advisory Committee.

For more, please see my LinkedIn bio at http://www.linkedin.com/in/johntobeycfa

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