The Weekend Edition is pulled from the daily Stansberry Digest.
Dusting off our market health indicators...
For the first time since last spring and the rebound from the Liberation Day panic, the S&P 500 Index traded below its 200-day moving average (200-DMA) on Thursday. That's the simple technical measure of its long-term trend.
This confirms an earlier warning sign. The S&P 500 also fell below its shorter-term 50-DMA last month...
It's a similar story for the Nasdaq Composite Index and Dow Jones Industrial Average. Only the small-cap Russell 2000 Index remains above its 200-DMA, and barely.
This action doesn't guarantee anything about future market direction. But it is a signal about the general trend in the market and a good first look at strength or weakness.
Traders like our colleagues Greg Diamond and Chris Igou frequently write about the utility of moving averages. For example, Chris wrote last May in DailyWealth Trader that as the S&P 500 broke back above its 200-DMA, it signaled a new bull run beginning...
The 200-DMA is the trend. So if it's rising, we know the trend is up and we'll want to own the overall market.
Second, the 200-DMA can act as "resistance" or "support" for price movements. It's "resistance" when a stock rises up to it from below but then turns lower and starts a new downturn.
However, if the stock breaks through that resistance, the trend line typically becomes support.
Chris was right. The S&P 500 gained about 18% from when he wrote that on May 15 through late January, when the U.S. benchmark index made its most recent all-time high.
Now we're looking at U.S. stocks breaking through "support"...
One day does not make a trend, but things have already been heading this way for a bit.
Our colleague Mike Barrett wrote in February in Select Value Opportunities that the "market downturn is just beginning." And he updated his subscribers on March 4, using the 200-DMA as an indicator...
In a healthy market, [the S&P 500 and Nasdaq 100] trade above their 200-DMA trend lines. (Note: The daily price action moves faster than the slope of the 200-DMA. So this indicator helps us keep track of how the price action is trending.)
Both indexes are now pushing downward. They're also converging on these all-important trend lines... As of [February 27], the Nasdaq 100 was just 4% above its 200-DMA. And the S&P 500 was within 5% of its 200-DMA. We expect both indexes to continue falling toward their respective 200-DMAs.
Keep in mind that these trend lines often mark technical support – a kind of price "floor." And it's likely that investors would resume buying stocks as the major indexes test their 200-DMAs. Look for this to occur later in March or in April.
More recently, on Monday in the Digest, we continued...
As of today, the benchmark index is only 4% away from a new record high, and is trading about 1% above its longer-term, 200-day moving average. This could be a good sign (if the technical support level holds), or a warning sign of more downside.
With the S&P 500 finally below its long-term moving average, our concern is raised. Barring a quick snap higher in the next few days, this means the U.S. benchmark index will be in "no man's land," without a clear technical support level. That's not a great place to be.
This Sell-Off May Have Further to Go
Several indicators are worth following... I especially like to track the number of individual stocks in the S&P 500 or the entire New York Stock Exchange that are trading above their 200-DMAs.
This gives us a good look at market "breadth" or health, essentially the number of stocks trending up versus down. This indicator offers a window into what could happen next in the market. And I find it especially useful when thinking about significant market tops or bottoms.
It's simple, really... When the market is flagging (like right now), I want to see more stocks below their long-term trend. If more are still above their 200-DMAs, it means more stocks still have room to fall.
Today, around 45% of S&P 500 stocks are above their 200-DMAs. That's good news, bad news...
During major downturns, market bottoms typically coincide with much lower readings, like closer to 15% last April and during the bear market bottom in 2022... Even fewer stocks were above their 200-DMAs during the COVID-19 panic bottom in 2020.
We used this indicator to mark that bottom nearly to the day.
But we're not saying this is a major downturn right now. Yes, there's a lot of uncertainty around the war in Iran. That has triggered this drawdown. And as we write, the resolution to the immediate conflict is as uncertain as it was a week ago.
However, plenty of times, stocks have turned around at breadth readings around this level.
Plus, the S&P 500 is roughly 7% off from its all-time high. A garden-variety "correction" in the market – without a recession – requires a drop of at least 10%.
In no man's land, we have to wait and see. At the very least, be prepared for some more downside ahead... before things ultimately get better.
All the best,
Corey McLaughlin with Nick Koziol
Editor's note: A critical market cycle that has signaled major losses for decades is about to trigger again. According to Marc Chaikin, CEO of our corporate affiliate Chaikin Analytics, we're entering a dangerous period for U.S. stocks... and it could unfold quickly. On March 25, he'll share the exact day you need to be prepared by – and the one move to protect your portfolio.
