To say the S&P 500 (SPY) has been performing poorly this year, wildly understates the situation at hand.
In case you missed it, the index suffered a devastating blow that us traders call the “Death Cross.”
Go ahead – turn on CNBC and I’m sure all you’ll hear about this morning is S&P 500 panic and of course the Fed, which I’ll get to later…
For those of you who don’t know, the “Death Cross” occurs when the 50-day moving average drops below the 200-day, typically signaling impending volatility to the downside.
And with more than 57% of stocks in this widely watched index trading below this key threshold, it is officially impossible to argue that this market isn’t acting bearish.
I know many of you, sometimes myself included, like to buy the dips…
After all, it is tempting when your favorite stocks go “on sale,” perhaps even down to a price you planned to target.
Let me show you why I’m holding off on buying the dip for the time being…
What happens after a death cross?
The SPY is at a crossroads, and let’s just say we’re going to be seeing red for a while.
Take a look at the 60-trading day returns from similar landmark moments…
These represent a much larger than normal percentage decline than any other “regular” time.
Typically, we’d look for a healthy and robust bounce higher, if we thought this was the bottom.
But that’s where the 20-month moving average comes in to spoil the party.
As we speak, it is giving us some danger signals, suggesting there is plenty of downside yet to come.
Even more importantly, as I mentioned last week, investors are going to start feeling more and more like the market is just faking them out every time that we rally and bust.
That means we’re inching dangerously close to the acceptance stage of the Sentiment Cycle on the bearish side.
As always, there is hope!
I have no tolerance for despair here in the Penny Hawk.
Opportunities are on the near-term horizon including plays on a bunch of new stocks about to break below $10.
Just look what happened to SOFI after it fell below those levels…
Look at that precipitous tumble downward.
This trend is relatively common among stocks that fall below $10…
Which is why our next chart could be extremely helpful for finding new trades.
Take a look at some of these names getting mighty close to the $10 mark.
One that really stood out was Robinhood Markets, Inc (HOOD).
This one peaked around $70 just a few months ago and has been mostly trending downward ever since.
I think that has a lot to do with how investors feel about the shaky business model from which it operates.
And institutions don’t tend to forget once a stock breaks below the $10 seal.
Given how quickly my Night Traders had a chance to profit off their SOFI April 14, 2022 $10 puts – 114% in only 10 days – I wouldn’t be surprised if we take a position on one or more similar stocks from this list soon.
Depending on how quickly they move to the downside, they could easily shape up to be our next Penny Nation opportunity as well.
I’ll be back tomorrow with more additional updates.
Be sure to tune into The Long and Short of It at 9:30 a.m. (ET) on Money Morning LIVE.
Founder, Penny Hawk
P.S. Around the time the Omicron variant was taking the world by storm, I discussed how reoccurring risk impacts the markets. And given the new variant popping up in Europe, China, and numerous other regions, I think it is a worthwhile to check out this refresher before COVID makes another comeback in the United States. Click below to view the clip…
March 16 2022