An important ‘test’ for the market

From Justin Brill, Editor, Stansberry Digest:

The broad-market sell-off continued today…

All three major U.S. indexes closed sharply lower again.

The benchmark S&P 500 Index fell 2.1%… the Dow fell 2.1%… and the tech-heavy Nasdaq fell “just” 1.3%.

More important, as you can see in the following chart, today’s decline pushed the S&P 500 below its 200-day moving average (“DMA”) for the first time since April…

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As longtime readers may recall, the 200-DMA is considered a rough gauge of the market’s long-term trend. During bull markets, stocks tend to spend most of their time trading above the 200-DMA. During bear markets, they spend most of their time trading below it.

The S&P tested this level three different times following February’s “volatility panic,” but it never broke solidly below it. In fact, outside of a few days early this year and two days during the “Brexit” panic in June 2016, the S&P 500 has not broken below this level in a meaningful way since the broad market correction in early 2016.

Seeing this support level fail again today is concerning…

But it could simply be another “false” breakdown like those we’ve seen several times over the past couple years.

Why do we say that? Take another look at the chart above…

At the bottom, you’ll see the S&P’s relative strength index (“RSI”). This is a simple momentum indicator with values ranging from 0 to 100. Values below 30 indicate an asset is “oversold” and may be due for rally. Values above 70 indicate an asset is “overbought” and may be due for a correction, or at least a pause.

As you can see in the earlier chart, stocks are now extremely oversold. In fact, they’re now stretched to the downside to nearly the same degree that they were stretched to the upside back in late January.

This is a bullish sign.

Of course, this doesn’t necessarily mean stocks will head higher tomorrow. It’s common to see a “divergence” form – where stocks go on to make a new extreme that isn’t confirmed by a new extreme in the RSI – before a significant reversal begins. But this reliable indicator says at least a short-term bottom is near.

As always, no single indicator is foolproof. So make sure you continue to follow your trailing stops, just in case. But history is clear: Anyone who panics and sells stocks now is likely going to regret it.

Of course, this isn’t the only reason we remain cautiously bullish today…

As regular Digest readers have no doubt become sick of hearing, all of the reliable long-term indicators of stock market, credit market, and economic health we follow remain positive today.

While a broad market correction of 10% or more is always a possibility, these measures tell us the chances of a true bear market or a recession are still extremely low.

So-called “seasonality” could now provide a tailwind as well. As Morgan Stanley analysts explained in a research note today, we’re now entering an historically bullish time for stocks…

Seasonality is about to get ‘helpful’: October is technically a positive month for risk assets, but with some fascinating bifurcation: it often starts badly, but ends strong.

From 1998-2017, the average return over the first 10 days of October was -0.4%. The rest of the month? +2.0%.

Finally, we’ll also note that third-quarter earnings season is about to kick off in earnest tomorrow. And analysts are expecting strong sales and profit growth for the third straight quarter.

In other words, if you want to profit from the ‘Melt Up,’ you must be prepared for more volatility…

Of course, for most investors, this is easier said than done. You’re likely to panic and sell too early… or worse, hang on too long.

That’s why we’re preparing a special event this month…

On Wednesday, October 24, Steve Sjuggerud will sit down with some of the biggest names in finance – in front of a live studio audience – to discuss exactly what you should do with your money during the final stage of this long bull market.

We guarantee this event will be unlike anything you’ve seen from us before. Whether you’re currently leaning bullish or bearish, you don’t want to miss it. You’ll even get the name and ticker symbol of one of Steve’s favorite Melt Up recommendations – a stock that he believes could soar as much as 1,000% in the coming months – just for tuning in. Reserve your spot for free by clicking here.

Regards,

Justin

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