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

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

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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