****Market Pullback OR Change to Down Trend?****

February 5, 2018

Monday, February 05, 2018

 

Dear Friends,

 

What’s happening with the market selloff? Let’s stick with facts

As of Friday’s close, the S&P 500 index:

  • Down -4.5% from its 52-week high

  • +1% above the intermediate-term trend line, the 50-day simple moving average (SMA)

  • +8.2% above the long-term trend line, the 200-day SMA

 

Look at the chart below of the S&P 500 index:

  • Let’s keep the analysis on the basic level

  • Markets fluctuate (thank you J.P. Morgan)

  • Markets oscillate from oversold to overbought (duh)

  • Typically, we want to buy when markets are oversold and sell when overbought

  • I like RSI and Stochastics indicators to look at the market as overbought or oversold

  • RSI and Stochastics are oscillators – they make it easy to see if the market is overbought or oversold using these oscillators

  • RSI is overbought when +70, oversold when -30; Stochastics +80 and -20

  • I have circled in red how both the RSI and Stochastics indicators have been telling us since September that the S&P 500 index is overbought

  • We know that the S&P 500 index would at some time turn down; since it has been overbought for a while -- we just do not know when

 

Another way to look at overbought / oversold:

  • Trendlines tend to work like gravity

  • In an up trending market, when the distance between a trendline and the market itself gets to wide, expect that the gap will be closed

  • E.g., look at the chart below - the S&P 500 index at its recent peak was pretty far extended above the 50-day SMA (blue line) and 200-day SMA (red line)

 

Predictions – my guess:

  • I believe, obviously I can be wrong, that this is a normal ordinary pullback in an ongoing uptrend, because:

    • The long-term trend, the most important trend (red line) is still in an uptrend (sloping upwards)

  • I would like to see: The downturn stall at the 50-day SMA. On the S&P 500 index that’s at 2,718.03; on the Dow Jones Industrial Average, that’s at 25,049.69

 

If you have a concern:

  • Call the office 800.578.3181

  • Consider dialing back your overall stock exposure. 

  • Do not make panic moves to go to all cash in one day – we have almost always seen this kind of move never work out

  • Our suggestion, do not move more than 20% in one day; if you are 80% stocks now, move to 60% -- you can always call the next day and dial back 20% more the next day, etc. Just please do not make big moves in one day

 

One reason for the down turn in stocks – fear of interest rates rising;

  • Below is a one-year chart of the 10-year US Treasury Yields

  • Notice the big move up in rates from 2.31% yield in December to the current 2.84% yield today

  • Also notice how we are in overbought territory in the 10-year yields, which tells us that this move is extended

Perhaps another worry is the declining US Dollar

  • Despite interest rates rising, the US Dollar has no doubt weakened

  • From 101.26 in April 2017 to its current 89.04

  • Note that the oscillators (circled in red) are telling us that this move is in oversold territory and therefore perhaps the end of this downturn is near

 

 

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Founded in 1992, Jackson Wealth Management is an independent, fee-only investment advisor. Founder George P. Jackson has been the CEO/CIO of the firm since its inception with the goal of delivering value to his clients and his associates. 

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