Stock Indices Balanced at Critical Support Levels

Advertisement

Last week the S&P 500 fell about 1.3% while the implied volatility index (VIX) ramped higher by 55% on the back of geopolitical fears around North Korea. While this spike in volatility seemingly caught plenty of investors and traders flat-footed, I have been highlighting the deteriorating near-term picture for stocks and various sectors in this column for weeks.

SPY ETF: Stock Indices Balanced at Critical Support LevelsAs a reminder, the month of August has an above-average tendency of being binary in terms of its performance, as random spikes of volatility are not uncommon. Yet absent a volatility shock, the vacation month of August can also be one of the biggest bores all year. This, in my experience requires traders to tread lighter in August with smaller and fewer positions.

Over the past few weeks we have seen stock sectors and groups of stocks from transports to healthcare, industrials, small-caps and more turn near-term bearish as per my proprietary market trend scanner. This has largely kept us out of attempting to buy stocks with the exception of a little dabble in financial stocks.


Click to Enlarge

Of course when volatility spikes — as it did last week — this tends to affect most stocks and sectors as investors scramble to protect themselves by either buying protection in the options market and/or selling down baskets of stock holdings. To wit, last week’s sharp 55% rally in the CBOE Volatility Index (VIX) was a good reminder that volatility is a mean-reverting ‘organism’, which is to say that when it is too low for too long a spike higher is likely and when volatility is too high for too long it tends to drop.

This now however also begs the question whether with the VIX having mean-reverted last week, it is now time to buy stocks once more? I say it’s a little too early.

As a result of last week’s drop in stocks, the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) have both dropped toward their 50 day simple moving averages.

Watching the SPY ETF


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Unless the SPY bounces here and gives us a meaningful bullish reversal, it does look destined to move lower toward the $241 area around the blue 100-day moving average (i.e. another 1% to 1.50% lower from last Friday’s closing price, for now). But instead of guessing what the index’s next move will be, I say take a step back and wait for either lower levels to re-buy or for stocks to signal that buyers are really stepping back in by way of a strong one or two day rally.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

As of last Friday, the only S&P 500 stock sector left in the near-term bullish column as per my proprietary market algorithm trend scanner are utilities. One of the key warning signals flashed on August 1st as small capitalization stocks as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) flipped from near-term bullish to near-term bearish. Those who heeded this signal could have saved themselves the 4% drop in the IWM ETF over the past week and a half.

Now the IWM sits right at a key up-trend line as marked by the purple-dotted line as well as its red 200-day simple moving average. While a strong bullish reversal could bring about a good buy signal around these levels, absent such a move, it in my eyes simply is too early to buy and a next downside target around $130-$132 could come into play.

All in all, while I see some further downside ahead for the SPY in the near term and an at least somewhat increased volatility environment to take hold in coming months, the underlying economic fundamentals as well as bullish intermediate and longer-term trends remain intact. Until this changes, the buy-the-dip trade as well as sector rotation game should continue.

Check out Serge’s Trade of the Day for Aug. 14.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.

Take Serge’s quiz to find out which trading strategy best suits your personality.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/stock-indices-critical-support-spy-etf/.

©2024 InvestorPlace Media, LLC