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The S&P 500 Crosses A Dangerous Line

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The S&P 500 Crosses A Dangerous Line

Here is a very quick summary of the last 3 years of my writing:

  1. Since that time, signal after signal has appeared that risk was rising for investors.  Despite apparently strong economic numbers, it was late in the game.
  2. The stock market has been on borrowed time since early 2016.  That was when the Federal Reserve propped up the economy.  They could have let it follow its normal cycle.  They didn’t.  The market rejoiced.
  3. The only thing that had not happened to tip the market over was the only thing that ultimately matters.  In other words, the actual price of the S&P 500 and the broad stock market had not fallen significantly.
  4. Late last year, the S&P 500 had a “crash test.”  It fell 20% from its peak.  That included a 15.6% decline in just 3 weeks in December.
  5. The rally that followed, starting on Christmas Eve, 2018, served to return investors to their complacent state.  That is, they believed that the “crash test” was “the crash.”

Last week, a market price signal that has been associated with every major S&P 500 decline since the year 2000 occurred.  Specifically, the 20-day moving average fell below the 50-day moving average.  That is technical talk for “prices are weakening.”

I normally plug 1 or 2 charts into a story.  This one is all about the visuals, so I am providing 4 charts.  Here is that “20/50 Bearish Crossover” in the S&P 500.

Here it is from back in the year 2000.  This was early in the life of a 3-year bear market.

That bear market continued in 2001.  Same signal occurred in June of that year.  Note that while the horror of 9/11 occurred a few months later, the market was already way down at that point.

Here is 2008.  June again.  Note that the S&P 500 was at the 1,500 level in late 2007.  By the end of 2008, it was under 900.

And, here we are in the present.  On the left you see the 20/50 cross from October of last year.  A 20% decline resulted.  And then, right on my 55th birthday (5/30/19), the 20/50 cross happens again.

Related: The Difference Between Investment Risk and Volatility

Maybe this charting mumbo-jumbo (not to me, but to many investors) is all just a coincidence.  Or, maybe this time is different.  But here is the question: can you afford to ignore it?

And while one never knows in the era of algorithms, tweets and endless Wall Street optimism, the bell has rung.  As I have said since January 2018, reward potential exists.  But now, it will come in different forms.

THE TAKEAWAY: investing can be fruitful.  It always can.  However, the way you profited the past 10 years will not be nearly as effective.  A different, more flexible approach will be required.

Many thanks to Tyler Isbitts for his research for this article

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