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Date: November 4, 2016

8 Straight Down Days – Quiet Bear Market?

The S&P 500 is now down 8 straight days. Pundit chatter in the media and on Twitter has been fairly negative. Option traders are bearish. The volatility index is up almost 100% since September. Either a bear market has quietly begun or the market is approaching yet another good dip to buy in an ongoing bull market. I think you know where I stand.

Seasonality studies are abound that the market just entered the best six months. Additionally, it’s also the best three months. With stocks stinking it up, is something amiss? No. In election years, the seasonal tailwind doesn’t usually begin until well into November, sometimes as late as Thanksgiving. It’s been three consecutive down months for stocks, but the pullback I have discussed for months has just amounted to 5%. Better times are ahead sooner than later.

Finally, the stock market’s decline has put it within a few points of touching the average price of the last 200 days, also known as the 200 day moving average. While most people just use it to measure the long-term trend, more than a few investors actually buy and sell based on if price is above or below.

As you can see in the chart, stocks have been above the average since the post-BREXIT rally began in late June. The BREXIT decline was a quick poke below that line which caused more than a few investors to sell right at the lows. That is typical. The first foray below the average sees stop loss orders triggered and then stocks immediately reverse and head higher. Pundits in the media turn this into a “key” test, as if the whole bull market is on the verge of ending because price may close a few pennies below a line.

spy1

The takeaway is to watch if stocks trade below the 200 day moving average, cause a quick bout of selling and then immediately reverse. Long-term, I would be more concerned than I am now if price was below the average and the average was moving down.

Look for my special report on how the stock market is a better predictor of presidential election results than any poll or pundit.

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Author:

Paul Schatz, President, Heritage Capital