Market Status as of March 20th

One of my core beliefs is that working with market conditions is key. Fighting against the market is not a recipe for success. There are periods to be fully invested in the market and periods to be less invested and to protect the principal.

We are in one of those latter periods now.  

Coming into last week, my primary indicators were on the defensive. When conditions are bearish, the course of action is to generally hold cash.

Let's take a look at some charts.

This past week's market action:

The Value Line Arithmetic Index closed below its 30-week moving average. This is bearish.

The percentage of stocks on the NYSE that are bullish is currently 34.95%. Any reading less than 50% is bearish.

Historically, the NYSE Bullish Percent has bottomed under 30%, often around 20%. There have been a few occasions (2008, and 2020) when this indicator reached single-digit levels...so don't assume the selling cannot intensify from these lower levels - it can!

The following chart shows the percentage of stocks above their respective 200-day moving average, 150-day moving average, and 50-day moving average for the S&P 500. Note how each is below 50%.  

This too is informing us of a market that remains under pressure.

Sector Analysis

The sector bell curve (a unique way of displaying sectors as measured by buying and selling pressure) remains a sea of red and continues to skew to the left as the selling has continued. This picture is bearish.

There are currently two sectors with SCRT scores > 80: Technology (XLK), and Communications (XLC).

Big Tech has been the beneficiary of falling rates and the safety trade. It was rising rates that brought tech down and now we are seeing the opposite trade.

As the following graph shows, there has been a sharp decline in the yield on the short end of the curve. The 2-year Treasury has fallen from 5% to 3.93% in the span of a week. This is a record amount of volatility in bonds.

Given the damage being done to banks, some believe that the Fed will step off the gas on increasing rates after injecting $300 billion of liquidity back into the system to help stabilize the banks.

This week's meeting of the Federal Reserve will certainly be an interesting one.

The Fed Funds rate remains below the inflation rate which would normally suggest that the Fed has more room to go on the upside....but now it looks as though the Fed is going to have to decide which battle it wants to fight - inflation or financial stability.

Meanwhile, there has been a massive reversal in value stocks, including weakness in energy and, of course, the financial sector.

Commodities also got pounded and are now in a stage 4 decline. This should be good news for inflation, as energy is a major component of the commodity index.

Gold is acting well and is up over 8% for the month of March and is approaching its highs.    

Conclusion:

Understand that whatever the Federal Reserve decides to do this week is a wrong decision. Continuing to raise interest rates will likely bring further pain to regional banks and the real estate sector.

Doing nothing or actually lowering rates means inflation, which is still running hot, will continue to run unabated.

For dividend investors, the drop in short-term yield has helped narrow the spread between bond yields and dividend yields, but it still favors bonds given the market turbulence.  

I do not predict the market or at what level the various risk indicators will turn more favorable. What I can predict with 100% certainty is the systematic process that will I will follow to add new buys to the portfolio when such action is called for.