Here we go again. Just when the stock market is moving lower and forecasting a potential correction, we see buying emerging, driving the bears back to the woods.
The reality is that I was looking for the S&P 500 to potentially correct 10%, down to around 1,792, something that has not materialized in about two years. It would, in my view, represent a good buying opportunity to accumulate shares at a discount. Yet despite declining as much as seven percent, the S&P 500 just couldn’t give up, staging a bounce-back.
So here we are with the S&P 500 breaking back above its key 200-day moving average (MA) of around 1,906. This appears to be encouraging the market, making it somewhat optimistic.
The way I see it is the recovery of the 200-day MA by the S&P 500 was key, but I would be more impressed if the S&P 500 could retrace the 50-day MA of around 1,966. Of course, this move could easily occur, as the S&P 500 was a mere 20 points away on Wednesday.
What’s also interesting is the comeback in both the technology and small-cap areas.
Technology has been strong over the past several sessions with the NASDAQ bouncing back to above its 200-day MA and coming within 1.49% of its recent high. If technology can regain its luster and offer some leadership to the broader stock market, we could see the S&P 500 move back to above 1,700 in the best-case scenario; albeit, it will take some work for this to happen.
Small-caps have fared the best in October, largely due to some technically oversold buying and excessive selling capitulation of small-cap stocks.
The Russell 2000 is up 0.94% in the month, while the other key stock indices are negative. The Russell 2000 has also moved out of correction territory, which is encouraging.
Now, while the buying is positive, the key will be the sustainability of stocks, their ability to hold and move higher. My concern is that there has not been a significant catalyst to support the rally.
Yes, the selling was overdone, but the earnings season hasn’t been on fire across the board. The economy is getting stronger, especially in the jobs market, but there are still pockets of weakness in manufacturing and consumer spending, which is impacting gross domestic product (GDP) growth.
Plus, across the pond you have growth issues in Germany and France, the two pillars of the eurozone and major factors for why the eurozone continues to survive. The slowing in Germany is clearly being impacted by the economic sanctions against its major trading partner Russia, and this will not change in the immediate future. My concern is that the weakness in Germany and France, along with the closing of the Russian borders, could send the eurozone into another recession.
If the European stalling occurs, you can play this weakness by buying put options on several exchange-traded funds (ETFs), including iShares Europe (NYSEArca/IEV), iShares MSCI Germany (NYSEArca/EWG), and the SPDR S&P Russia ETF (RBL).
As for the domestic stock market, I suggest you look to sell into the strength and take some profits. Of course, you can also hedge via the use of put options on ETFs like the SPDR S&P 500 ETF (NYSEArca/SPY) for the S&P 500, PowerShares QQQ (NASDAQ/QQQ) for the NASDAQ, or iShares Russell 2000 (NYSEArca/IWM) for the Russell 2000.