Traders and investors are very worried right now, even though some of the biggest rallies occur during bear markets. Most market players are not nimble enough to play the downside and reap the profits. In bear markets, both bulls and bears usually lose money. That’s just a fact.
Big institutions buy stocks for the long haul. Pensions, banks, hedge funds, trusts and foreign entities are not day traders. They buy stocks and hold them for years, letting them appreciate and pay out dividends. However, when risk tolerance changes and interest rates rise, the argument for holding stocks may change as well.
Additionally, we are used to rising volatility, which is normal during bull markets, especially corrections. Big money will buy volatility or index puts and hold them for the short-term to weather the storm. This is a cheap way to buy protection without having to sell long-term holdings.
Signs of a 2018 bear market
But last week we saw something quite different. On April 24, we saw higher volume levels, very heavy selling and very little buying of protection. Volatility buyers were noticeably absent, but stock sellers were quite active. Stalwart names such as Caterpillar, Google, Lockheed Martin and Boeing were distributed heavily while the dip buyers stood back and waited.
This is classic bear market activity. Now, I’m not saying we are in a bear market, but evidence is piling up in its corner. Big institutional money is starting to get nervous with each pull down toward the 200 ma, and for good reason. That marker has held firm since it first crossed over after the Great Recession (the last real test of the 200 ma was in early 2016). The SPX 500 has risen 25% over the past several years.
But back to the 2018 bear market action and why it’s happening.
Today is the end of the month, a marker that I use to help determine the long-term trend. If we close below the March low, then we will see some of the monthly indicators roll over. They are not severe, but a trend is a trend, and that is likely to show up in the months to come.
I’m also looking at price action. It has not been inspiring since late January, and with yields up, commodity prices up and sharp price moves in the stock market, it may be time to put on the bear suit. I’m willing to give this long-term bull the benefit of the doubt, but the doubts are growing.
If this is indeed the beginning of a 2018 bear market, don’t panic. Read the charts and indicators and let the market – not your emotions – determine your options trades.