S&P 500 landed on a very famous moving average – 200 SMA – yesterday what serves as an important support level recognized on the daily charts. Naturally, a stock market reacts to the positive/negative news in short-term and thus, this level will unlikely hold.
The yield on the 10-year Treasury bond fell to a 20-month low on Tuesday and raised concerns over a slowing economy which lures interest in safe government bonds. This is a negative sign for a stock market and may result in a recession, however, how sure are we about that?
Mr. President Donald Trump announced another tariff – this time it is 5% on all goods from Mexico that will gradually rise to 25% unless the illegal immigrants stop crossing the border. Well, this tweet is going to decrease the price of the S&P 500 in the short-term, but is it going to cause a recession?
Instead of trading the news and temporary flutters, let’s look at the long-term picture to be able to correctly distinguish between short-term winks and long-term trends!
The above picture represents an 11 years weekly chart of S&P 500. As you can see, the 200 SMA (yellow line) depicts a clear border between the recession and correction. During the last financial crisis when the economy was struggling, the S&P 500 was moving under 200 SMA. Once the market recovered, its price was bouncing from individual moving averages depending on severity. The significant corrections as we know them were hitting the 200 SMA. Also last Christmas the stock market bounced from this support level and here we are – 5 months later dropping towards this level again.
Unless the price pierces down the 200 SMA we cannot talk about bear market or recession. However, does it mean we are in bull market in medium-term? I don’t think so either.
The RSI and MACD indicators are showing clear Bearish Divergence (see the purple lines), which is a strong signal of further consolidation within the stock market. The economy is obviously peaking. The macroeconomic worries of inflation plus political plays of tariffs are not helping.
Therefore, the stock market is in a sideways mode at the moment and likely at the peak of a stock market cycle.
The active swing traders may take advantage of equity put/call ratio, which signals a bottom of the market. A rise in CPCE means there were more equity puts traded than equity calls. The most certain level to prove this strategy happens above 1.0 (see a dashed red line). Of course, more technical indicators should be taken into an account to support the theory.
If you are a long-term passive investor, this would be time to go for defensive high-quality dividend stocks. If you are a trader with higher risk appetite, have a look at gold related trading (mining stocks). One way or another, I think the best is holding and accumulating dollars or pounds or euros or whatever. CASH IS THE KING NOW!