Danger Ahead?

It’s another feel good Monday with stock prices ending the day in the plus column. However, the major indexes are in a downtrend. The question is whether it is the beginning of a summer swoon or just a short-term counter trend within the post COVID rebound.

Quite frankly, the DOW and S&P’s charts are dangerous looking. Current levels are coming to the point of a triangle with a flat bottom. From experience, the flat part usually gets broken and prices move aggressively in the direction of the break.

The DOW and the S&P 500’s Monday lows were within arm’s length of their respective 50-day moving averages and clear support levels. In our opinion, if senior indexes breach their 50-day marks and the support of a flat bottom, it’s likely to be bad for prices and set up the potential for a 10% correction, maybe more.

The last time something similar happened was in October 2019, only on the bullish side last time. The S&P 500 had a flat top at a little more than 3000. Wall Street took the market low, bottoming out in early October and then the rebound started. When bulls finally got to the plus side of the lid, the index rallied more than 10% during the next three-months.

Investors might consider taking short-term profits and/or adding inverse exchange traded funds (ETFs) like ProShares Short S&P500 (SH) if the index closes below the 50-day benchmark of 2,983. Or, ProShares Short Dow30 (DOG) if the DOW finishes trading below its 50-day of 24,950.

Both ETFs are designed to return the opposite of the underlying index’s daily performance. For example, if the S&P 500 drops 1%, then SH should gain 1% or if the DOW gains 1%, then DOG should lose 1%.

Normally, we would highlight a sector-based ETF and one its holdings in this space but cannot do so based on our view that the S&P 500 and DOW are in dangerous positions. In our opinion, inverse ETFs are the easiest way to trade a falling market. You don’t need a margin account or to see if stock is available as required to short equities.
Truthfully, we hope that we are wrong and flashing yellow light turns green instead of red. Another 225 points tacked on the NASDAQ could flip the narrative and put the index in the opposite position, an ascending trendline with a flat top.

In the meantime, there is too much risk to the downside and too little upside to take a definitive position until the market declares a winner. As of now, bears have the edge.

May all your trades be profitable,