Last week I was a nervous bull. I’m sorry to say that the markets haven’t done much to calm my nerves this week. And while there are strategies you can adopt in such a volatile marketing, things are getting more serious.
I introduced the concept of stock market situational awareness last year and we defined threat categories of white, yellow, orange and red. I believe that the market action this past week has moved us upped the threat level from yellow to orange.
The characteristic of the orange threat level is that you have identified something of interest that may or may not prove to be a threat. It’s definitely a time to be on your toes.
Here’s why I believe that the threat level has increased.
Our proprietary indicator that shows the percentage of stocks with good chart patterns has experienced its first major drop since September.
The SSI is our Stock State Indicator. If a stock has an active SSI it means that that the stock triggered a Re-Entry Rule in the past and it has not yet been stopped out. The above chart shows that about 10% of the stocks in the S&P 100 and NASDAQ 100 triggered their Smart Trailing Stops in the past week. That’s a concern.
As for the broad stock market, as represented by the S&P 500, it never triggered a Re-Entry Rule after being stopped out in August of 2015 and it is currently threatening to break below its recent lows. Also, the Smart Moving Average continues to roll over. A sustained drop below 1,830 on the S&P 500 would have me seriously concerned.
One new signal this week is that the NASDAQ Composite has been stopped out again after having triggered a Re-Entry late last year. It’s a big concern.
The US dollar, on the other hand, continues to soar … which puts downward pressure on all assets priced in US dollars – including US based equities.
Personally, I’m not throwing in the towel on the US stock market yet myself. My good friend Dr. Steve Sjuggerud has pointed out repeatedly that sentiment is not supporting the idea that a stock market crash is imminent. That said, I’m happy to trim my sails when my stops get hit and I’m not adding any new positions at the moment.
On a final note for today, I’d like to add a word of caution to any bottom fishers out there who are thinking that markets like China and oil can’t go much lower.
The Shanghai Stock Exchange recently dipped below 3,000. There’s not much support between 3,000 and 2,000 as the long term chart below shows. After 2,000 there’s nothing stopping it from going to 1,000.
As I write this morning, oil is solidly below $30. The next levels of support below $30 are at $20 and $10.
I can tell you from personal experience is that one of the worst things you can do for your portfolio is to try to catch falling knives. That’s exactly why I created the Re-Entry Rule.
These markets will eventually trigger Re-Entry Rules but it’s not going to be anytime soon. If you’re feeling tempted by them today, proceed with extreme caution.
Watch out for emotional decisions. In these times of increased turmoil and rapidly-growing volatility, the levelheaded, mathematical precision of TradeStops is far and away the best way to safeguard your financial future.
Richard M. Smith, PhD