The S&P 500 Index posted a modest, 0.6% rally on March 17 to get itself into the green for 2016.
Is this an auspicious sign, coming as it did on St. Patrick’s Day?
Or are there other, more ominous indications of tougher times ahead for stocks?
That’s the big dichotomy at the heart of this weekend’s Saturday Spotlight presentation by Wall Street Daily Chief Income Analyst Alan Gula.
It’s impossible to predict the future.
But we can use technical indicators to give us a better understanding of what’s happening in the present and to help shape our preparations for what’s to come.
That’s one of the great things about Alan’s presentation: He provides historical context.
Indeed, that’s one of the great things he does for subscribers to The Shockproof Investor.
As he does in that premium research service, today Alan gives you an easily understood action step that will help you help yourself amid what remains a volatile market.
Three Big Questions
Looking at it from a technical perspective, this week’s price action has been pretty consequential.
The S&P 500 Index has broken above its 200-day moving average, enjoying a bounce based on factors such as a weaker dollar, a rebound in the commodity complex, and a decidedly “risk on” message from the U.S. Federal Reserve in its most recent policy statement.
So Alan asks an important question at the outset of the Saturday Spotlight.
“Are we seeing a major stock market top?”
Based on his reading of a chart of the S&P 500 since 2014, Alan notes the formation of what he calls a “rounded top.”
The world’s most widely followed equity index established an all-time high in May 2015. Since then it’s made a series of lower highs and lower lows.
What we’re seeing is a “pretty symmetrical” line.
(To my eyes, it looks a lot like a three-point line on one of those NCAA Basketball Tournament floors that are all over our TVs this weekend.)
Alan’s first question leads to two more:
Will we see fresh all-time highs later this year?
Or will the rally fail, just like it did at the end of 2015?
“…A Very Critical Juncture”
Alan uses Johnson & Johnson (JNJ) to tee up a discussion of 200-day moving averages.
“At any given point in time, a certain percentage of the stocks in the S&P 500 are above their 200-day moving average. And this percentage can give us clues as to where the index is headed.”
We then take a trip down memory lane, to the 2007-to-2008 period. The big takeaway is that the S&P 500 peaked in October 2007.
But at that time only about 64% of component stocks were trading above their respective 200-day moving averages.
That figure was down from about 85% in early 2007 and about 75% in June 2007.
In other words, many stocks had already started to decline – before the market peaked.
And during the bear market rallies that characterized trading in late 2007 and into 2008, not once did the percentage of stocks trading above their 200-day moving averages get above 60%.
Flashing forward to 2011, we see the percentage of stocks trading above their 200-day moving averages fall off drastically – before the S&P 500 Index rolled over into a lot of volatility during the summer and bottomed on October 4.
When the ratio of stocks trading above their 200-day moving averages broke above 60% on January 10, 2012, it signified, essentially, “that the healing process had begun.”
The S&P 500 posted a 10% rally over the ensuing three months, and the bull market resumed.
So, where do we stand as of March 17, 2016?
Only 56.68% of S&P 500 components are trading above their 200-day moving averages. And that number hasn’t risen above 60% since July 2015.
As Alan notes, “We’re at a very critical juncture here.”
The Bright Line
The bottom line is this: “If the percentage of stocks above their 200-day moving averages can’t get above 60% and stay for more than a few days, then I think there’s a significant risk that this rally fails and we head back down to make new lows.”
Alan provides a final bit of really useful information in his presentation: If you’d like to track this very critical data point on your own, go to www.StockCharts.com.
Look for the “Create a Chart” menu box. Keep it set to “SharpChart.” Then, type “200” into the adjacent search bar. You’ll see a list of selections.
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You’ll want to choose “$SPXA200R,” or “S&P 500 Percent of Stocks Above 200 Day Moving Average (EOD).”
This is a great way to keep track of the health of the rally.
You certainly could have made good use of this data in December 2015.
A Plan to Keep Your Wealth Growing
In the “Just One Question” feature of the March 15, 2016, Wall Street Daily Insider, I asked Alan, “What’s your plan when panic rules the market?”
Indeed, The Shockproof Investor is designed to preserve and protect wealth amid market upheaval.
Here’s an excerpt from Alan’s response – the “money quote,” if you will:
The real question is whether investors have a process to incrementally increase their risk exposures when signs of panic appear.
In order to buy stocks when there’s some sort of panic, investors need to either have cash on hand or hold conservative investments that they can sell and replace with riskier ones.
This is why the asset allocation (mix of stocks and bonds) process is even more important than stock selection.
Will you be able to buy that stock on your shopping list when the time comes? Or will you be facing debilitating losses in your overall portfolio and be forced into a defensive stance?
Preparing for panic is best done when the market is complacent.
My model portfolio has an allocation to Treasuries and preferred stocks. Those are the assets I’ll be gradually selling when a bear market materializes.
Click here to learn more about Alan, The Shockproof Investor, and how you can prepare for potential downside action in the market.
Chief Income Analyst Alan Gula dissects the case of KaloBios Pharmaceuticals Inc. (KBIOQ) in another insightful piece about market inefficiencies.
What caused KaloBios’ stock to spike in November 2015?
According to Alan, “The answer is an acute ‘short squeeze.’”
The key takeaway: “It’s important to recognize that a sharp rally in a stock doesn’t necessarily signal all is well. In most cases, these stocks aren’t rising from the ashes.”
Global Markets Analyst Martin Hutchinson revisits ZIRP (zero interest rate policy) and NIRP (negative interest rate policy), noting that income investors “have now suffered for nearly a decade” due to extremely loose monetary policy.
“By keeping short-term interest rates so low,” writes Martin, “policymakers hope that long-term rates will follow suit.”
It’s a global effort to stimulate economic growth. What it’s done is inflate asset prices.
And bond investors are earning inadequate income.
Martin expands on his recent analyses of the Trump Phenomenon in the U.S., noting, “All over Europe, parties like Marine Le Pen’s National Front in France are setting records for nationalist support. Meanwhile Poland and Hungary are already ruled by nationalist governments.”
The rise of nationalism all over the globe is a reaction to center-left policies that have prevailed over the past two decades.
And those who support such movements are experiencing a decline in living standards due to “globalization – a product of free trade that’s been exacerbated by ultra-low interest rates and excess regulation.”
“Yet nationalism, too,” writes Martin, “carries severe economic and political dangers.”
Senior Analyst Greg Miller has a fascinating take on a critical macroeconomic issue that’s at the root of stagnating incomes as well as mounting frustration reflected in the presidential nominating process.
Greg cites a report compiled by Deloitte for the Manufacturing Institute for the following sobering conclusion:
[Not only is there a current shortage of manufacturing jobs, but between a skill shortage and the replacement of retirees, over two million jobs will go unfilled over the next decade because there aren’t enough qualified Americans who want these jobs.
That’s two million jobs that will go overseas, or never be created at all, weakening the American economy.
Senior Analyst Jonathan Rodriguez takes a fresh look at a troubled company whose stock definitely qualifies as a “falling knife” right now.
That doesn’t mean you can’t profit from trading it.
Remember: The trend is your friend… even if it’s to the downside.
What Jonathan has in mind is “an aggressive short” with a “downside too juicy to ignore.”