The market is vacillating all over the place right now as traders are still digesting this morning’s Producer Price Index (PPI).
But the market has been using this week to go off the rails, and it has caused one of my favorite indicators – Market Breadth – to lead me to the conclusion that the S&P 500 is in store for a 7% drop.
This chart shows the percentage of companies in the S&P 500 trading above their 50-day moving average (MA50). Essentially, it tells you if everything is trading higher than it has over the last two months.
Take a look at this StockCharts.com snapshot of the Market Breadth at the market open- you can find it there under $SPXA50R to see it anytime.
There’s something extremely familiar about this chart…
The Market Breadth just hit a reading of 96%. Now it’s playing a game of dip, duck, dodge, and dive as it made its way down to 80%.
We saw a bit of buying come into the market yesterday, which caused a bit of a hitch, jumping it back over 80%
This is the market trying to fake you out a bit.
When we see this drop to 80%, people sit back and think to themselves, “Is this really gonna keep falling?”
Yes, it is – roughly a 7% drop in the S&P 500, to put a number on it.
They are feeling the euphoria that comes with a bear-market rally and hoping this year was all a dream and we can start buying again.
It is a part of the self-fulfilling market moves that we have been discussing this week.
I predicted that it could quickly drop down to 70%, which is a point of no return.
People will begin to panic sell to avoid any major losses in their portfolio, which takes us to a minimum of a 30% read on the market breadth.
How does this translate to a move in the S&P 500?
Well, it’s roughly a 7% drop… (Don’t worry, I’ll tell you how this all shakes out in a moment.)
Well, this is what the Market Breadth looks like as I write this:
For the Market Breadth to fall from 80% to 40% so quickly, it tells us everybody and their mother was trading right at their MA50.
The market was teetering at these levels, and all it took was for a hot PPI to come in to really send everything over the edge.
Remember, this was not caused by momentum, it is just the breaking point that will fuel momentum as we move into next week.
As mentioned, we are going to start to see the indexes start to drop, with the S&P 500 going first. Assuming the Consumer Price Index (CPI) comes in hot, that is (which is a safe assumption, since PPI today was on the heavy side).
You can expect to see the aforementioned 7% drop in the S&P 500 within the week.
Now I know shorting the S&P 500 with a price of nearly $4,000 is a bit intimidating…
So, this is how you get a trade out of this…
Look for stocks that broke below their MA50 today. They are the cause of this drop, and you will surely find a trade waiting within those charts.
I will be talking about a list of these stocks next week, and we might even have a free trade from it – so make sure you are there in the main room at 9:45 a.m. EST and we can profit on it together.
December 09 2022