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Zooming in on the stock market Thumbnail

Zooming in on the stock market

The U. S. stock market has trended down as expected after tapping its 200-day moving average. 

I shared this observation last week on Twitter: 

And today, it looks like we have an answer from the market. 

Some investors mistakenly believe these well-known highly followed indicators provide no information, but they ignore the reality that if investors and traders use these indicators to signal to buy or sell, it necessarily has some clout. That is, when the S&P 500 stock index tapped its 200-day average price and then pulled back, it could simply be there was enough interest in the indicator it to drive the price trend. 

This is now the second time the S&P 500 tapped its 200 day and then trended back down. It previously did it in August, and the index has remained below it since April, signaling a primary downtrend. 

A professional money manager has all the incentive to watch market price trends to identify trends early in the stage and capitalize on these directional drifts until they change. 

Our managed portfolio has been positive in a year the S&P has been down over 20% by doing that very thing. 

Identifying the stock market's primary trend is of great value to investors who want to avoid the ravages of a bear market, then enter stocks aggressively after the stock market has bottomed. Timing is essential to maximize the asymmetric risk/reward of a new bull market.

So, with all this incentive to catch a potentially profitable price trend, let's take a closer look to see what's going on and what may be next. 

Our time frame for most of our positions is months, but sometimes it's only days or weeks, and it all depends on what happens after we enter a position.

If it trends down, I have an exit point below the current price I'll sell if it's reached because the market is telling me I'm wrong, and the trend isn't drifting in my direction. 

If it trends up really far, really fast, it may trigger a countertrend profit-taking exit, and be sold in just days or weeks. 

For the purpose of this observation, below is the S&P 500 stock index showing a candlestick for each day over the last 30 days. I labeled the inflation report that came out on November 10th  following the below-expectation inflation data release. I also highlighted two levels that may be important. 

The +5.5% gap up in SPX following the below-expectation inflation data release was a significant day. That one-day return was an outlier by many metrics.

According to Goldman Sachs,  the +5.5% SPX move was:

(1) the largest positive return since 1948 when one-month realized vol was not already over 30;

(2) the first time since 1970 when a +5% day had not been preceded by a -3% day within the prior three weeks (and in this case there had not been a -3% day for two months!); and

(3) the lowest-ever closing VIX level (23.5) on a day when the SPX moved +/- 5% (and second-lowest VIX among the 300 times the SPX moved +/- 4%).

November 10th was a significant day. 

If the index fails to hold above it, then the market may not be giving so much clout to lower-than-expected inflation.

If it breaks below 3,900 and fills the gap below that, then we'll likely see more downside.  

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.