In my subjective opinion (aided by a bunch of technical charts), at this time large, medium, and small cap stocks are in a downtrend. Treasury bonds and most other bond indexes are also in a downtrend, and finally the Junk bond Indicator is in a steep downtrend.
The big fireworks began at the recent Fed meeting. When Powell suggested that the Fed was NOT considering increasing interest rates by 0.75%, and only increasing by 0.5%, markets surged – for a day. However, the following day markets reacted just as strongly – but in the downward direction. And all major indexes (except large caps) penetrated their March lows.
The stock market remains negative. Small caps and technology stocks have already experienced bear market declines of more than 20%, and large and mid-cap stocks have had double-digit declines. Importantly, unlike the bear market brought in in 2020 by the pandemic, the Fed cannot simply guarantee liquidity and solve the problems causing the current decline. Inflation now embedded in the economy has a number of causes, including supply chain issues, excessive government spending, and the war in Ukraine. These will take some to resolve.
Now this is important – Although a typical bear market lasts at least 6 months, stocks DO NOT GO DOWN IN A STRAIGHT LINE. As a matter of fact, some of the biggest stock market surges usually happen as short-covering rallies in ongoing bear markets. (This is most likely what caused the big ‘up’ day when Powell spoke.) Investors who mistake these rallies as the start of a new bull market or jump back in because they fear missing out on strong ‘new’ market gains, will risk suffering significant losses when the next down leg in the bear occurs.
We recommend the same approach we have touted for many years. Do as we do. Sell positions as they reach their predetermined stops. And FOCUS on capital preservation until market conditions stabilize. (See the market minute.) The Junk Bond indicator is extremely negative right now, but eventually – market conditions will improve and tools such as the Junk Bond indicator will change to a positive configuration. This will provide investors a much greater likelihood of success as they move back into the stock market.
He who loses the least in a bear market is the winner.
Ron’s Market Minute – The Famous Junk Bond Indicator
Here it is.
Technicians believe that the Junk bond indicator tells us the direction of stocks before they move. Note in the indicator that the index is below the 21-Day Moving Average. When the index dips below the 21-Day MA, markets tend to be weak or down. Note that for the past four months the indicator has been below the moving average and steeply dropping. There is no indication that we’re near a bottom.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
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