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Posted March 07, 2022

Sean Ring

By Sean Ring

Russian Bear Causes Nasdaq Bear?

  • On Monday, the markets opened (and closed) ugly with all the majors down.

  • In particular, the Nasdaq composite enter an official bear market.

  • That means the Nazzie is down 20% from its most recent high.

Good morning on this fine Tuesday!

I think we all knew Monday was going to be a shocker, but this was a sharp selloff.

Almost immediately, and then throughout the day, the stock market got hammered.

No kind words from Father Fed; no soothing chants of last-minute buying; no talk of putting off rate hikes.

And this is where I think Fed accommodation turns into Fed obstinancy.

Because if youre a central bank tasked with keeping your stock market afloat - and dont give me the price stability and economic growth stuff - then you should be having second thoughts.

Unfortunately, American politicians figured out its much easier to get re-elected when theres a bull market on.

Thats because most Americans retirement savings are in a 401(k) or Roth IRA.

Its the same reason the Bank of England constantly gooses the housing market in the UK.

Because thats where the British keep their retirement savings.

Safe as houses is a prominent UK saying concerning investments.

Well see about that shortly, methinks.

But back to the big equity market in the US.

The trouble is now apparent to everyone.

Hopefully, some of the froth will be taken off the market.

But the danger is this: when investors get antsy as a whole, we dont just revert to the mean.

We usually fly right past it in an overcorrection.

And yet, theres an opportunity here.

In this edition of the Rude, Ill lay out my thesis for Q2 of this year.

WTF Was That?

Like the drunk who says the following day, I shouldnt have had that last one! were conveniently using an invasion on the other side of the world to mask what was already a huge problem.

When you shut down the world economy over a virus of both dubious origin and lethality, youre going to have consequences.

When you print money like a sugar-addled toddler, youre going to have unintended outcomes.

And when you combine both of those things, youre going to have supply chain issues.

None of that is surprising to any of us well, maybe it is to the leftists in Congress who think we magically shoot oil out of our asses.

Nevertheless, when you add up all those things and then top it all off with an invasion, youre going to have economic dislocations.

One of my LinkedIn buddies - goodness, I hate that place and must stop visiting - exclaimed to me, See, Seanie, oils up $15! Told ya!

To which I replied, I think you forgot about the $115 that came before it.

Thats the end of that conversation.

Anyhoo, the stock markets are really getting into a bearish mood.

Since revenue minus expenses equal income, and expenses are rocketing, this shouldnt shock anyone, either.

Heres a rundown of yesterdays mess, which looks like the market version of the Red Wedding:

Credit: Stockcharts.com

Theres nothing good there.

And that little green bit at the bottom that gives you hope?

Well, thats the VIX, the last thing we want popping now.

But before I get to the VIX, lets quickly view the Nasdaq.

Nazzie Bear

As of yesterdays close, the Nasdaq entered an official bear market.

That means its more than 20% down from its most recent high.

As the Nasdaq constituents - especially Big Tech - are a massive part of the S&P 500, this portends less confident times for our primary equity index.

The S&P 500 had a terrible day as well, but isnt down over 20% yet. Its merely in correction territory, not bear market territory. Yet.

The VIX

The VIX is a measure of the volatility of the SPX.

Its derived from the prices of SPX index options with near-term expiration dates and generates a 30-day forward projection of volatility.

Basically, its a fear indicator. The higher it is, the more fear there is.

I put a horizontal line on the chart below at 15.

Anything below that level, everything is hunky-dory. Above it, were mildly concerned.

Above 30, were very concerned.

Right now, the VIX is at 36.

Were right to be concerned.

As an aside, those two huge spikes over 80 were the 2008 Financial Crisis and the Covid Crash of 2020, respectively.

The VIX at this level is another piece of evidence that the market is uncomfortable with the economic situation.

The NYSE Percent of Stocks Above the 200-Day Moving Average

As JC Parets of allstarcharts.com says, if this indicator is below 15, you want to be out of stocks.

Sure, but by that time, the markets have usually already crashed.

Interestingly, and Im just eyeballing it here, it looks like when this indicator falls below 27, it almost invariably goes to 15.

Right now, were at 32.57.

That means under one-third of the NYSE-traded stocks are over their 200-day moving average.

So Im watching this like a hawk.

Fibonacci Retracements - So Where Are We Going?

Ill spare you the course on the Fibonacci numbers and levels, as Im running out of room.

But heres a great explanation from Stockcharts if youre interested.

Andrew Pancholi of the Market Timing Report put a chart in his latest newsletter that I found compelling.

I replicated it here:

Before I explain it, let me tell you that Fibonacci levels are alert levels.

Theyre not absolute signals by any means.

If there were only one signal, we wouldnt have three levels to look at, right?

So Im looking at the market from the 2009 bottom to the 2021 top with the bright blue lines.

And Im also looking from the Covid bottom of 2020 to the 2021 top with the black lines.

Whats interesting is that two Fibonacci levels coincide nearly exactly, and thats at the 3212-16 area, which Ive circled in red.

Its important to note this doesnt necessarily mean the market will fall to this level.

Were just trying to put the odds in our favor.

Nevertheless, I must admit I like the idea of shaving another 1,000 points off the SPX.

That kind of move matches my view that the market is overpriced. So its confirmation bias at its height, be warned.

A Bit of History

Another straightforward chart I like is the 200-day MA plotted over a long period of the SPX.

Actually, the 9-month MA is roughly the 198-day MA (22 x 9 = 198), but we dont have to split hairs here.

What youll notice is that before both the Nasdaq Crash of 2000 and the Financial Crisis of 2008, we had plenty of time to get out before the bottom.

We had months, not days or weeks.

And I dont even think the world is ending yet.

That last red stick is this months candle, so its certainly not complete yet.

So if the market is going to take a nap for a bit, were still early.

Lets keep our heads about us when everyone else is losing theirs.

Wrap Up

Ive presented evidence that corroborates my macro view that the market is entirely overcooked and is due for a more significant move down.

With the Nasdaq entering bear territory, the SPX in correction, the VIX elevated, and NYSE Percent down to near-dangerous levels, and an idea of where the next SPX stopping point may be, its a good story.

But its only a story.

If the Fed comes back in with a new punch bowl, all bets are off, and the story immediately changes.

If peace suddenly breaks out between Russia and Ukraine, all bets are off.

I dont think thats likely until Putin accomplishes his goal. NATO and the US certainly arent keen on peace. Theyre upping the ante.

Finally, youre ultimately allowed to disagree with everything I wrote.

But before I go, my erstwhile mentor and friend Addison Wiggin did an excellent "Crypto in Wartime" Wiggin Session with James Altucher last week.

I didnt cover crypto in this Rude, so why dont you head on over there to watch it?

James is as informative and entertaining as ever, while Addison tees it up for him.

Heres the link, so get another cup of joe and enjoy it now.

By clicking this link, you will receive a free subscription to Wiggin Sessions and offers from us and our affiliates that we think might interest you. You can unsubscribe at any time. Privacy Policy.

Until tomorrow.

All the best,

Sean

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