What Stock And ETF Investors Need To Know About The Recent Stock Market Weakness

The S&P 500 is down only 4.1% from its all-time high on September 2, an improvement from the 5.9% decline at the October 4 low. Is this modest decline the beginning of the major bear market we have been warning is likely in the coming months or the years, or it is just another buying opportunity in the 12 year old (and counting) bull market?

Unfortunately, no one knows the answer to that, since 100% certainty is not possible in investing. The best we can do is look at key technical indicators to try to assess probabilities.

From a technical (i.e., chart) standpoint, bull and bear markets are a process. Technical indicators move sequentially as prices move. The first signal a bear market is starting, as happened in early 2008, is when the price of a major stock index such as the S&P 500 falls below a long-term moving average such as the 250-day moving average (250-dma). Currently, the S&P 500 would have to fall over 7% to drop below its 250-dma.

Next, a shorter-term moving average, such as the 20-dma, falls below the 250-dma. Then a medium-term moving average, such as the 60-dma, falls below the 250-dma. Usually around that time, the 250-dma line will change from sloping upward or flattish to sloping downward. These sequential changes are typical indicators of a bear market starting.

Many other technical indicators we monitor, including breadth indicators, provide additional evidence that a bear market is likely starting.

Ignoring these technical signals can be very costly for investors. Waiting until stocks are down 20-30%+ to determine if a bear market is starting, as most investors do, can be a very expensive mistake!

So let’s look at what some of these key technicals indicators are telling us right now.

Daily And Weekly S&P 500 Charts

First, let’s look at the daily price chart of the S&P 500 (top main clip), along with the Percentage Price Oscillator (PPO, second clip) and Relative Strength Index (RSI, third clip). This is always the first and most important chart to focus on.

S&P 500 daily