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Weekend Reading: Markets Send A Warning

Written by Lance Roberts | Nov 4, 2016

markets-warning

Over the past few months, I have repeatedly written about being stuck within an ongoing trading range and warned of the dangers of a downside break. From last week:

“The problem with going nowhere is that it makes managing money much more difficult. With the market having broken the bullish trend line from the February lows, as shown below, along with remaining overbought with a sell signal in place, the risk to the downside outweighs the potential for a further advance currently. With downtrend resistance from the previous highs pushing prices lower, the risk of a break below 2125 is elevated. Being a bit more cautious given the current technical backdrop will likely be prudent.”

sp500-marketupate-110216-3

Well, it didn’t take long as this past week the markets broke through that support and are now testing the 200-dma. With sell signals in place, the downside pressure currently remains as shown in the chart above by the vertical dashed black lines.

As I stated in yesterday’s post I expected a bounce on Thursday.

“Importantly, the violation of that crucial support suggests a further correction is likely. However, by the time a break is completed, the market has already become short-term oversold and a “sellable bounce” is very likely. As Bloomberg noted:

The index’s longest-ever run of losses was eight days, matched at the height of the financial crisis in October 2008. The S&P 500 started falling on Monday, September 29 and saw lower closes at the end of every trading day until October 10, in what was its worst week in history.”

With the markets now matching an eight-day decline as of Thursday’s close, there is an extremely high likelihood of a bounce, particularly next week following the election. In order for the markets to regain their bullish footing, and reverse some of the technical deterioration, an advance above 2150 would be required with an eventual breakout to new all-time highs.

Given the stronger dollar, weak economics, over-valuation, and rising rates, there is mounting evidence that we have seen the highs for this current market cycle. Therefore, it is advisable that rallies back towards 2125 are used to rebalance portfolios, raise higher levels of cash and reduce overall portfolio risk. After all, we can’t “buy low” if we didn’t “sell high” to begin with. 

In the meantime, here is what I am reading this weekend.


Fed / Economy

 


Markets

 


Interesting Reads

 



“Passive Investing Is The Path To Mediocrity” — Doug Kass

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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube

2016/11/04
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