How the U.S. could be in both a bull and bear market

There was some consternation among equity bulls when the S&P 500 violated its 200 dma as it could have been the signal of a major bearish episode.

 

Technical analysts offered some relief when they pointed out that it’s the slope of the 200 dma that matters. The historical evidence shows violations of the 200 dma when the moving average is just a correction in an uptrend. However, an index that’s trading below a falling 200 dma is a warning flag that a bear market is under way. The arrows in the accompanying chart show the occasions when the S&P 500 fell below a falling 200 dma. Often these signals occurred when the index violated a rising moving average, which later turned down, marked by the red arrows.

 

The bulls may have felt vindicated when the S&P 500 regained its 200 dma late last week. This episode is a lesson for investors to regard similar circumstances as a buying opportunity. But that’s not the entire story as the market is becoming increasingly bifurcated.

This chart shows the S&P 500, NASDAQ 100, Dow Jones Industrials Average, the mid-cap S&P 400 and the small-cap Russell 2000 with their respective moving averages. The good news is the S&P 500 and the Dow regained their 200 dma. While the S&P 500 moving average has been rising, the same isn’t true for the Dow. The NASDAQ 100 is holding above its 200 dma. The bad news is the S&P 400 and the Russell 2000 are below falling moving averages. The strength of the S&P 500 has been held up by megcap growth stocks. In the absence of the effects of megcap growth, the other major U.S. equity averages are signaling bear markets.

How you position yourself in light of this bifurcation in market internals depends on your time horizon and whether you are a momentum or value investor.

The full post can be found here.