Warning: Trouble Ahead

It's over. The bear-market rally of the past two months ended last week.

 

We knew it was going to happen. Heck, we had the canary in the coal mine, the volatility index, investor sentiment, and a host of other technical indicators all screaming it was time to get defensive. And the screams came just in time...

 

Last week, the Dow Jones Industrial Average, the Nasdaq Composite Index, and the S&P 500 all lost about 3.5%. The semiconductor index was down about 5%. Retail and financial stocks fell more than 6%. Brokers lost 7%. And homebuilders gave up 10%.

 

The bad news, of course, is it's going to get worse.

Here's another look at the monthly chart of the S&P 500 plotted against its 20-month exponential moving average (EMA)... 

 

 

If the S&P 500 is trading above the line, then stocks are in a bull market. If stocks are trading below the line, then the bear is in charge.

 

Stocks entered a bear market back in December. The S&P 500 declined for five straight months, and then put on a blistering two-month rally.

 

Today, the S&P is back up near the line. If history is any sort of a roadmap, then investors are in for a very long summer.

 

Take a look at what happened in the last bear market. Stocks broke down, rallied back up, and challenged the line... then cascaded lower again.

 

Get ready for the cascade.

 

Of course, stocks don't go straight down. After such a nasty beating last week, stocks should enjoy a brief bounce higher early this week. In fact, the odds look pretty good that we may see the S&P rally back up and test the EMA at about 1,407.

 

At that point, though, traders ought to look at exiting long positions and adding on a few short sales.

 

Best regards and good trading,

 

Jeff Clark

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