The stock market is taking a breather from the recent bloodbath.
The key moving average that primed us for a bounce is the 252-DMA. If you take an entire year, remove the weekends and holidays, you arrive at 252 days during which the stock market is open.
As you can see in the chart below, this has been a line of great significance ever since stocks started going bananas in 2012:
As you can see, the 252-DMA has been “the line in the sand” three times since 2012. It was unlikely we’d take this line out the first time the market broke down.
However, the technical damage of this breakdown has been severe. We’ve learned a number of things:
1) When selling pressure comes in, stocks crater VERY quickly.
2) There are not a lot of buyers looking to enter the market during dips this time around.
This second point is key. The primary drivers for this latest leg up in stocks (the one that began in early 2013 has been individual investors and corporate stock buybacks.
We now are losing both groups. Individual investors put a record amount of money into bond funds last week. This money had to come from somewhere and most of it can from stocks.
Regarding corporate buybacks, it is now clear that the massive buying binge was the result of executives trying to juice stocks higher so they could cash out their options at the greatest possible price. We know this because while Corporate executives have been pushing their companies to buy stock at a record pace, on a personal level they have been dumping their personal stakes.
So… we’ve got a weak and fragile market, losing two of its biggest drivers… at the same time that the Fed is ending QE. This is a recipe for a potential bloodbath. If we wipe out the “bubble” portion of the market move from 2009, we’re going to 1,250 on the S&P 500.
That’s over 30% lower from where we are now.
The market is primed to drop. Now is the time to prepare.
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Best Regards
Graham Summers
Phoenix Capital Research