For much of the past six weeks I’ve been telling folks to wait for a pullback in the stock market before putting new money to work in it. And, for most of the past six weeks, the market has refused to cooperate.
Stocks kept pressing higher. Overbought conditions got even more overbought. And, anyone sitting with cash on the sidelines was feeling pretty foolish.
That changed over the past week.
After peaking near 2940 last Wednesday, the S&P closed at 2786 yesterday. That’s greater than a 5% drop in just one week.
Conditions have quickly shifted from overbought to oversold. And, traders should consider putting money to work right now.
Here’s why…
We’re finally getting the sort of extremely oversold conditions that often mark the end of a decline phase and the beginning of a new rally phase.
For example, yesterday the CBOE Volatility Index (VIX) closed above its upper Bollinger Band – for the third straight session. When it closes back inside the bands it will generate a broad stock market buy signal.
Also, the McClellan Oscillators for both the New York Stock Exchange (NYSE) and the NASDAQ closed Monday below their lower Bollinger Bands. This is an extended, oversold condition. And, it often signals we’re near the end of a decline phase. Take a look…
The red arrows point to times where both the NAMO and the NYMO closed below their lower Bollinger Bands at the same time. Here’s how the S&P 500 behaved following each of those times…
Oversold conditions on the McClellan Oscillators didn’t always mark the absolute bottom of the decline in stock prices. But, they were close enough to the bottom to create low-risk entry points for new purchases.
With the VIX on the verge of a buy signal, and the McClellan Oscillators below their lower Bollinger Bands, it seems to me the downside risk to the market right here is minimal.
For the past several weeks I’ve been arguing that traders should wait patiently to buy stocks until we get the sort of oversold conditions that can set the stage for a year-end rally. We now have those conditions.
Stocks could still work slightly lower from here. But, I’m confident the market will be higher several weeks from now.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, one reader responds to yesterday’s Market Minute with an October trading tip…
Hi Jeff. Yep, nothing like a hurricane to mess up your position. I always go short the first 10 days of October. I’ll sit tight for now. As always, thanks for the great insight. Love your service!
– Dave
And another reader shares their take on natural gas…
I am bullish on natural gas, we just lost a major gas pipeline in Western Canada, about 20% of Canadian supply, and also Nat Gas is the cleanest of the fossil fuels. Be very careful shorting here.
– Martin
Do you have a specific trading approach, depending on the time of year, like Dave does? Or do you have any trading tips? And as always, send in any other trading questions, stories, or suggestions right here…