My Take on Today’s Market Action

Today’s market action was notable for several reasons.

The death match playing out between the Dip-Buyers and the Rally-Sellers has reached a critical moment. Today, for the first time since June of 2016, the S&P 500 broke below its 200 day moving average. Back in 2016, during the drama of the presidential campaign, the market recovered and went on to make a series of new highs. It tested the 200 day after the election results were known, but the 200 day held.

Why is this a big deal? Because there is a vast community of investors who take their cues from technical indicators like this one. If they become sufficiently agitated, they have enough selling power to run the Dip-Buyers out of town, at least temporarily. But it’s too soon to give up on the bullish crowd. They would need confirmation that this downdraft in the market is sustainable. The way they’ll do that is by clocking the 50-day vs. 200-day lines. If there’s a crossover between these two moving averages, the chart watchers will start to get serious.

Other bothersome indicators

• There was 10x as much down volume today as up volume. This is a rare enough occurrence to deserve notice, and further inquiry. It’s the kind of dominant selling that is usually found in the middle of bear markets, like 2008 and 2000. It may not mean very much, but it’s not nothing.
• There were 12 new highs today (after eliminating 3 foreign companies and one ETF).  And there were 129 new lows. Here again we have a 10x ratio of down versus up.
• Only 45% of NYSE stocks are trading above their respective 200 day moving average. And only 25% of stocks are trading above their 50 day moving average.

What’s an investor to do now?

The first thing is to not panic. These indicators are bad, but that doesn’t mean the market is headed straight down from here. The Dip-Buyers are on the pads, but they are not likely ready to tap out.

The second thing is to get your Plan B updated. When fear is high, mistakes increase. A solid Plan B will help you get through this episode. What’s a Plan B? It’s the steps you will take at every key moment in the market, like we saw today. Yours will be different than mine, or any other investor for that matter. The important thing is to have one, and make sure it’s up-to-date. Without it, you will be making huge decisions based almost entirely on how you feel right now. Not the best way to go. (See my article about buying the dip or selling the rally here.)

Probabilities

I do extensive research on probability estimation. I use a Bayesian model for the stock market and the economy. I can tell you this much: the probability of a bear market arriving within the next 12 months has just gone up. Recession risk has also gone up, but not quite as much. Consider signing up for my newsletter if you want the details.