Overbought Market
The stock market is overbought, and a pullback is long overdue. A 5-10% correction is the most likely scenario, and that isn’t something you should panic about. (Actually, there’s never a good time to panic, as that causes bad decisions.) Here is what the current investing landscape looks like.
- The current selloff, as of the close today (4/15), is still less than a 4% decline.
- VIX (fear index) is just under 20. A VIX above 20 indicates an increase in volatility to where we will likely see a pullback. How much is yet to be determined.
- Last week the Consumer Price Index was higher than expected which increased interest rates and triggered this sell-off. Also, the Producer Price Index was a little lower than expected. This caused sellers to pump the brakes a little on Thursday, but then on Friday the sell-off continued.
- Traders are nervous that, if inflation is not under control, then the Fed will not cut rates by June and may push back cuts until the fall to see if this is a momentary blip or if inflation is stickier than they anticipated. There’s even talk that there may not be any rate cuts this year.
Time Will Tell
This week and next should give us a better idea of whether or not this selloff will develop into something bigger. Larger institutional investors could be using this recent CPI number to create selloff in the retail investor world in order to get better prices for their own portfolios. This scare tactic is a fairly common scenario used by institutional investors over short-term time frames.
What’s Next?
Here is a daily chart of the S&P 500 as of the close today (4/15). The first price support level is just under 5000, which would be a +5% correction; and the 10% correction comes in just under 4750. The price has broken below the 50-day moving average, and the relative strength (RSI) is now below 50. This increases the likelihood that RSI will touch 30, as it did last fall, and increase the odds that price action will reach the 10% correction level.
Whatever happens, we should be prepared to go on either defense or offense depending on which direction this breaks. As the saying goes: Don’t panic, and look for opportunities.
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This post is for informational purposes only. It is not intended as investment advice as each person’s financial situation is different. I strongly recommend working with a financial advisor who can deliver current information to you quickly and offer help with sorting through the various investing options. Bret Wilson is a Financial Advisor with Wilson Investment Services, based in Rockwall, Texas.
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