Last Week’s Alarm Bells Are Serious

Last week, the S&P 500 produced multiple warning signs of a coming selloff. Was it what the Federal Reserve said? Likely, not. The breadth and depth of the indicators make them significant and serious.

The backdrop

Last week’s actions don’t stand alone. A negative backdrop has been forming since the S&P 500 topped out on July 31. It rolled over in early August, forming a rounded top and falling below the 50-day moving average (a trend measure) on August 15. It then bottomed on August 17-18 and rebounded halfway back, rising above the moving average.

However, it then topped out on September 1 and see-sawed around the moving average that was slowing its rate of rise. Then, last week happened.

1. First, on Wednesday (Sept. 20), the S&P 500 fell away from the moving average, reestablishing its mid-August positioning.
2. Then, on Thursday, it simultaneously broke through two important barriers: (a) The bottom of the 5% channel surrounding the 50-day moving average (the channel accounts for volatility around the moving average); (b) The low level set in mid-August (a classic worry factor is lower lows)
3. All the previous declines caused the 50-day moving average to turn down for the first time since Nov. 2022 (a potential sign of a coming downtrend)
4. By the end of the week, the index decline completed its second rollover with a top lower than the first one (double tops carry more importance than a single move, especially when the second top is unable to reach the first top’s level)

This graph provides the picture…

So… Are those moves a downtrend forecast or simply volatility in action?

Next week’s stock market action should answer that question. It will be an especially important and interesting period because all five days close out the third quarter.

Moreover, the week sets the stage for the coming earnings report season that begins with the major banks two weeks later (Friday, Oct. 13 – yes, Friday the 13th). Therefore, if revenues and/or earnings expectations are weakening, that would be a valid driver of a stock market selloff.

Note: Moves that last two weeks in a row are meaningful. The reason is that a single week’s moves can look important, but could be based only on that week’s particular set of events and investor actions. If so, the moves are normally reversed the next week. However, if similar moves occur in the following week, (and that means all the way through the Friday close), they can be a confirmation that something important is afoot.

What about the non-S&P 500 stocks?

Good question. The S&P 500 stock index is composed of larger, successful, primarily U.S. companies diversified across economic sectors and industries. They are also a blend of the primary investment management “styles” of growth and value. Here, then, are the other indexes that measure performance of other groups of stocks as well as the growth and value styles.

The table shows last week’s performance for the various S&P indexes. Clearly, negative performance of about -3% was spread across company sizes and growth/value styles.

Also, the patterns of the various indexes have the same type of negative developments as the S&P 500. Here are the nine index graphs…

How about individual stocks?

There is always a spread of performance results among a long list of stocks. However, looking at a color-coded performance “map” allows viewing how wide the spread is – particularly between the 65 winners and 435 losers.

From Financial Visualizations (FinViz.com), here is the performance map for last week. The size of the company (market capitalization) determines the size of the box for each company’s stock. Clearly, down was the supermajority direction, even among the popular stocks.

The bottom line: Don’t rush to buy on this stock market dip

Even if next week turns up, the move won’t be a sign to jump in. The market indexes are still below their December 2021 highs. More importantly, the market’s current picture will need much more than one week of optimism to turn it bullish. Additionally, there is still all that complexity of fundamental negatives, uncertainties and risks.

So, the best strategy looks to be keeping the cash reserves at the ready, but not taking any action yet.