S&P 500’s 50-day moving average remains below its 200-day moving average

US equities are painting a gloomy picture with S&P 500 entering the bear market territory. The inflation numbers announced last week ruffled the stock market and led to a meltdown with leading indices last week ending lower by around 5 per cent.

On June 17, 2022, S&P 500 closed at 3,674.84 up by 8.07 points to end the session 0.22 higher. S&P 500 after falling more than 20 per cent from recent high has entered a bear market. On YTD basis, S&P 500 is down by 22.90 per cent.

Even while the market is falling, there could be a sharp upward movement of prices which are typically called bear market rallies. As per a recent note titled “2022 Mid-Year Outlook: U.S. Stocks and Economy” on Charles Schwab website, the falling trend in stock prices may continue even while there could be bear market rallies. There could be likely counter-trend rallies in an ongoing correction or bear market – says the note.

An important indicator of the restart of the bull market is the “breadth thrusts’. The note talks about this by stating that the percentage of stocks trading above their 200-day moving averages has turned up, but early stages of sustainable bull moves are typically marked by broader “breadth thrusts”.

In addition, the S&P 500’s 50-day moving average remains below its 200-day moving average, implying that the primary market trend remains down. For all three major indexes, breadth has weakened considerably.

S&P 500 is in a traditional bear market grip based on the level of the index using closing prices and the weakness under the surface is clearly in bear market territory.

The Nasdaq, Russell 2000, and many of the speculation-driven segments of the market are definitively in bear markets.

Sharp rallies are par for the course during bear markets, so investors could be in for more of the same. Another leg down for the market could be precipitated by a weakening earnings and profit-margins outlook.

In the meantime, this is not a market likely to reward excessive risk-taking and , therefore, adhering to the disciplines of diversification (across and within asset classes) as well as the power of periodic rebalancing could be a better approach.

Given high inflation, rising short rates, and weakening growth outlooks, one may keep giving weightage to factors such as strong free cash flow, healthy (cash-rich, low-debt) balance sheets, positive earnings revisions, and low volatility.

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