The S&P 500 had its largest drop in price in 8 months yesterday as investors dumped shares on the possibility that President Trump had blocked justice by allegedly asking for the end to an FBI investigation on former cabinet member Flynn. If found to be true, this offense is considered impeachable. The fact that this Index broke its 50 day moving average on volume is not a good sign. While the longer-term uptrend for the markets remains, we would refrain from adding new positions until the index breaks back above this key 50 day moving average.
In addition to a 1.82% drop in the S&P, the news brought a huge spike in the Volatility Index (VIX) which closed at $15.59 The VIX is a gauge of investors fear and for the last three weeks, the markets complacency brought the index down to record lows (see below). The index can creep up as fear continues however, and as the fear reaches a high, it can signal that the markets are ready to rally. Most recently, this occurred on April 12th when a high of $16.28 was reached on Geopolitical fears. Charts of the S&P 500 and Nasdaq below will show the subsequent rally.
This is not to say that $16.28 is the magic number for when the selling will end as last fall, the index had a multi-day spike prior to the election which brought the VIX above 23 and last January's bloodbath in the markets brought this index to 33. (the average is somewhere in the middle at around 25). What is does say is that fear in the markets can be a buying opportunity for those that have not put money to work. For those that have positions, we will advise below.
DAILY CHART OF VOLATILITY INDEX (VIX)
We are always a believer of learning from history and below we have highlighted the stock markets response to the last time fear over Trumps abilities caused investors to sell shares. With political news now back in the spotlight, it will of course be critical that we see good news emerge such as a retraction of the possibility that Trump has committed a major offense before the selling is stemmed. The last turnaround came on the heels of a very strong earnings season and with all but a few companies having already reported, it's back to following headline news out of Washington. As always, the markets hate uncertainty so it will take a definitive action or news before the selling ends.
DAILY CHART OF S&P 500
The Nasdaq was hit the hardest today as Technology stocks sold off and pushed the index down 2.57%. Again we've highlighted investors concerns about Trump in March followed by Geopolitical concerns regarding N. Korea but used the Nasdaq Composite.
DAILY CHART OF NASDAQ COMPOSITE INDEX
Many of the stocks on our Suggested Holdings list have held up remarkably well given the damage in the broader markets. At this time, it is important to pay attention to those stocks that withstand the market pressures. This is because when the near-term uptrend resumes, these stocks tend to be your biggest winners.
For those who held onto positions during yesterday's sell-off, we would be diligent about using a negative RSI and MACD coupled with a break below the stocks 50 day moving average on volume as a sell signal. If the stock is able to remain above the key 50 day mav with the RSI above 50 and MACD above 0 you can remain with the stock depending on your tolerance for volatility.
Lastly, one negative sign is the fact that the Small Cap Russell 2000 Index broke below its 50 day moving average As we stated over the weekend, a drop below its 50 day moving average would indicate a "risk-off" attitude among investors.
To conclude, your stronger stocks should be able to weather this storm as the longer term uptrend of the markets remains. Pay attention to the technical indicators of each individual position for sell signals and lastly, watch the VIX for signs that fear has reached a height that signals a resumption of the markets near term uptrend.
Mary Ellen McGonagle, Editor
MEM Investment Research