Last week I discussed the "Best Six Month Strategy" and what would trigger a market exit.
That trigger was a MACD sell signal on the S&P-500. With the big crash on Wednesday, that trigger was hit. When you couple that with the headline problems in Washington and the falling odds of getting any big agenda items passed, there "should" be a greater willingness to move to the sidelines.
However, greed is an interesting emotion. As long as the rebound continues, we could see investors hang on with hopes that this year will be different. Strong S&P earnings over 15% for Q1 are another reason traders are still buying the dips. It may take a couple additional days of losses to really start the exodus to safer locations. That may already be underway since fund flows into the bond market were $8.6 billion last week ending on Wednesday compared to a net outflow from equities of $1.6 billion. This was before the MACD sell signal was triggered at Wednesday's close.
The sell signal on the Russell 3000 also broadened and the rebound in the index mirrored the Dow. This is the broader market and this is a true directional portrait. The R3K closed just over 1,400 and any drop back below that level could poison sentiment and send the entire market lower.
The Russell 2000 small caps are rebounding the weakest from the Wednesday crash. The MACD is in full sell mode and without the Russell 2000 participating the broader markets will have a tough time moving higher.
As you can imagine the market drop impacted the number of S&P stocks still trading over their 50-day average. The crash knocked that percentage down to 44% but they recovered to 51.6% at Friday's close. For that much of change it suggests a lot of stocks were already trading right near their 50-day.
The crash also reduced the number of S&P stocks with a buy signal on the point and figure charting system. The 68.4% number is the lowest level in 2017.
Lastly, the earnings cycle is almost over. There are only a few companies left and this is the last week of material earnings. The market should be moving into its post earnings depression phase. However, 15% earnings growth is a powerful motivator for investors. They could decide to continue holding their positions until there is confirmation of the trend change.
The political headlines are causing the most grief. As investors become more convinced there will not be a tax reform package passed in 2017, if at all, they will be less inclined to continue holding winning positions that are shrinking in a trendless market.
I warned last week about adding long positions and that recommendation still stands. This could be a pivotal week for the markets.
Enter passively and exit aggressively!
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