U.S. Stock Market - Is The Correction Over?

The rebound in U.S. stock prices late last week was impressive, but does this mean that investors now have the green light to add to their equity holdings in anticipation of a new sustained uptrend?

A review of recent price history may prove helpful.

On Thursday and Friday of last week, the S&P 500 Index rebounded 3.40% from its intra-week low. The entire recent correction from mid-January’s peak to last week’s low in the S&P 500 was -6.10%. For the Nasdaq Composite, the numbers are very similar (-6.55% correction followed by a 3.95% recovery). However, the correction in the Russell 2000 Index was significantly more at -8.45%, and the rebound was significantly less at 3.12%.

Is it important that small-cap stocks have underperformed larger cap stocks since mid-January? I think maybe yes, but it’s clearly not the whole picture.

For your review, I have attached four key daily prices charts below. These include the S&P 500 Index, the Russell 2000 Index, the Gold ETF (GLD), and the Silver ETF (SLV). The 20-day, 50-day, and 150-day moving average lines have been drawn in all four charts.

Here are my observations:

1. The 150-day moving average line has provided excellent support for about 15 months in the S&P 500 Index and the Russell 2000 Index. In fact, the last time the S&P 500 closed below its 150-day moving average line was November 15, 2012. And for the Russell 2000, that date is November 21, 2012. Last Wednesday, February 5^th, both of these key indexes successfully tested their 150-day moving average support lines, although just barely for the Russell 2000 Index.
2. The S&P 500 Index rebounded sharply from Wednesday's intra-day low and is now knocking at the door of overhead resistance in the form of declining 20-day and 50-day moving average lines.
3. While the Russell 2000 also bounced nicely from support at its 150-day moving average, unlike the S&P 500, the Russell 2000 needs to rally quite a bit more (+2.2%) in order to test its overhead resistance at the 20-day and 50-day moving averages.
4. The Gold (GLD) and Silver (SLV) ETF’s are both now above their 20-day and 50-day moving averages after basing price action which has lasted more six months.

Except for a few brave analysts (Citi’s FX Technical Group is notable), Gold and Silver still appear to me to be the most hated investment classes among so-called Wall Street experts. And while equities aren’t quite as loved as they were six weeks ago, the stock market is clearly still the preferred class by most sell side analysts. If we view sentiment as a contrary indicator (which I do), then equity prices are immediately vulnerable to another selling spree and gold/silver prices will continue to outperform most investment classes at least over the near term.

In the interest of full disclosure, I am long Gold/Silver mining shares and/or short the S&P 500 in all my managed accounts. The short S&P 500 position is executed with the Pro-Shares SDS double short ETF.

S&P 500 Index with 20-Day, 50-Day, and 150-Day Moving Average Lines

 

Russell 2000 Index with 20-Day, 50-Day, and 150-Day Moving Average Lines

Silver ETF (SLV) with 20-Day, 50-Day, and 150-Day Moving Average Lines

Gold ETF (GLD) with 20-Day, 50-Day, and 150-Day Moving Average Lines

U.S. Stock Market - Monthly Chart Sell Signals Now Triggered !

In my last post dated Saturday, January 25th, I indicated that conditions were right for possible monthly chart sell signals to be triggered within my computer-based trading system for the first time since July 2007. In fact, monthly chart sell signals have now been triggered and they all became official at Friday's close, January 31st, in the following popular indexes and ETF's:

Dow Jones Industrial Average

Dow Jones Transportation Average

Semiconductor Holders Index ETF (SMH)

Among major bellwether stocks, monthly chart sell signals were triggered for January in AMZN, AXP, BA, BMY, COF, C, FDX, GS, HD, JNJ, JPM, MS, NOK, X, and YHOO. 

Has a new bear market begun? My computer-trading system is flashing its strongest possible sell signals for both the weekly charts and the monthly charts. I believe the stage is set for a major correction of at least 20% from the recent record highs. While it may be too early to project a new bear market, where average losses could reach 50%, I am already on record as saying that a new bear market has in fact begun. I see no compelling reasons to own U.S equities right now with the exception of Gold/Silver mining stocks.