The selloff that began last week has aggressively pushed into correction territory, as many of the major US and global indices are off more than 10% from their highs. Heavy selling pressure this week has led to wider trading ranges and larger volumes, especially nearing the closing bell. Volatility again spiked significantly, so much so that many of the leveraged, short VIX strategies are nearing insolvency – a “black swan” event for many participants. This week, we saw a chart reversal in both the Relative Strength and Rate of Change Cash Comparison charts, which had been extending to new all-time highs after their breakout last year and continuing through January 2018. The reading for the Cash Comparison is now Neutral. We would need, as first movers, for either the Cash Comparison or Long Term Momentum to reverse to a Negative reading to potentially interrupt the Bull market. As we were anticipating a correction, and seeing how the price action has unfolded, we still do not expect this correction to last long or turn into a Bear market (defined as a drop of over 20%). We warned to tread lightly if entering these choppy markets last week, and we echo these sentiments further this week, especially as several indices and sectors might be breaking through longer-term moving averages, which usually serve as key supports. We would like to see where the risk shakeouts finally leave us before putting capital back to work.
The Tactical Indicators had an intense reversal this week. The 10-week has moved rapidly through its Neutral zone all the way to the Low Risk levels, with a 22% reading as of the time of this printing, but with markets continuing to sell off amidst concerns. From a high watermark of 78% in the High Risk zone, we have cycled all the way to Low Risk in about a week. The MSCI All Country World Index has sold off almost 10% since achieving all-time highs and is showing more weakness in intraday trading into the end of the week. We have clearly traded down through the 500 level, and the Overbought/Oversold Indicator is now in its Neutral zone. Moreover, the extreme reversal of the ACWI now brings us below the Bull Trend Average. As we have used the analogy of the pulled rubber band snapping back in the past, the moves appear so hard-hitting because of how overextended the markets were. In context, most corrections do not turn into Bear markets, particularly when the long-term Bullish market conditions still hold. We remain vigilant in monitoring the situation for what may lead to a longer and more severe selloff or for support to level off the short-term selling.
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