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U.S. in BEAR Market, Recommend Defensive Asset Allocation

23 October 2018 3:24 PM | MCR Market Report (Administrator)
How quickly times change.  Just 14 days ago the S&P 500 was reaching new all-time highs, but all was not well beneath the surface.  We had been monitoring the fact that fewer and fewer stocks continued to participate in the uptrend (most notably technology and healthcare stocks).  However, the average stock in the S&P 500 was down, and in other indexes the statistics were even worse.  Along with the poor breadth statistics, there are a number of key statistics we'd like to point out.  As most of you know the 200-day moving average is a generally recognized demarcation between a bull and bear market for just about any average.  On October 11th, the 200-day moving average for the S&P 500 was briefly broken, followed by a strong rally on October 16th.  In a "normal" correction, the rebound should have carried the S&P back to near the 50-day moving average, however that did not occur.  The rally was followed by a very weak follow-through and then sold off the following 3 days.  Today the market has opened down more than 2%, with all major averages down.

The indicator below is our proprietary indicator that shows the percentage of stocks in the index off their highs.  The red line is the percentage of stocks in the S&P 500 currently down more than 20% off their 52-week high (already in a bear market).  The current level hasn't been reached since the market exited its correction in early 2016 following the Brexit panic.

Another chart tells a similar story, this indicator is the % of stocks in the S&P 500 above their 200-day moving averages.

To see the technical damage that has truly occurred in the market, let's look at the Russell 3000 index.  The Russell 3000 tracks the largest 3000 stocks in the U.S. with over 98% of the entire U.S. market capitalization.

Over 49% of stocks in the U.S. stock market are down more than 20% and currently in a bear market!  30% of stocks are in correction mode, down more than 10%, but not quite 20%.  And only 20% of stocks are within 10% of their 52-week highs.  This is not a healthy market. 

Percent of stocks in the Russell 3000 above their 200-day moving average:

Furthermore, the U.S. market has been the hold out (along with Japan), as global markets have declined.  Germany's DAX has plunged 10% over the last 50 days with France and China not far behind.

In short, the safest place to be at the moment is Short-Term U.S. Treasuries via ETF's 'FLOT' and 'BIL'.  We are monitoring Utilities and precious metals ETF's such as 'GLD' as well, updates to follow!

Good luck trading!  We hope you find our commentary and analysis useful.  Please don't hesitate to reach out with any questions or comments.

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