More Woes Ahead for U.S. Stocks

By Rick Pendergraft

The pullback continues. Last week’s selling has caused a clear crossover of two moving averages that signals more downside is likely.

The S&P 500 has dropped sharply throughout the month of June and this has resulted in the 10-month moving average crossing bearishly below the 20-month moving average. This type of crossover doesn’t happen all that often, as you can see in the chart below.

The last time the bearish crossover happened was in March 2001. Sure, the S&P had already dropped 400 points from its high, but it dropped another 400 points over the following year and a half. So we could have a long way to go before we see an end to the bear market.

I will caution that we are likely to see rallies like we saw in the spring of ‘01 and fall of ’01. In fact, I look for one in the near future, given the number of stocks that are oversold after the last two weeks of selling. In fact, I ran a scan of stocks in the Nasdaq 100 and S&P 500 to see how many of them were oversold based on a 14-unit slow stochastic below the 30 level.

The results were astounding. In the NDX, 75 of the 100 met the criteria and in the S&P, 357 met this requirement. Just for kicks, I ran the opposite scan as well, stocks in the two indices that had slow stochastic readings above 70. There were a whopping total of four in the NDX and 26 in the SPX. These are incredibly one-sided ratios and suggest a bounce is due. But don’t get caught up in the bounce and think that the bear market is over.

If you haven’t heeded the warning yet, you should take steps to preserve capital. If you use options, look at buying some long-term puts on ETFs like the Spyders (SPY), Diamonds (DIA), or Nasdaq (QQQQ). If you are averse to using options, look at some of the double inverse ETFs that are out there. Here is a quick list:

• ProShares Ultrashort QQQQ (QID)
• ProShares Ultrashort Dow 30 (DXD)
• ProShares Ultrashort S&P 500 (SDS)
• ProShares Ultrashort Russell 2000 (TWM)
• ProShares Ultrashort Semiconductors (SSG)
• ProShares Ultrashort Financials (SKF)
• ProShares Ultrashort Basic Materials (SMN)
• ProShares Ultrashort Technology (REW)

These funds will rise in value as the associated ETF falls, and these ETFs are leveraged so the move is double the down move. In other words, if the QQQQ falls one percent, the QID will rise by two percent.

Now is not the time to sit idly by, now is the time to protect your assets.

Comments

[saltymoney]

Rick, if you think there are going to be a lot of rallies on the way down, you couldn't be more wrong than to recommend the UltraShort funds long-term. Read the SAI or do the math. Volatility will always drag these funds down. If you're looking to get in for the long haul, pony up and buy a non-leveraged inverse fund like SH.