What may fuel another decline in the market?
Sep 05, 2022Higher interest rates and tightening of liquidity by a reduction in QE by the Fed have sent the S&P 500 down 18.75% to date. The S&P 500 reversed off its 200-day moving average on August 16th . After Fed chairman Jerome Powell said on August 26th that interest rates would have to stay elevated to continue to combat inflation, the index took another dive. The index fell 1.05% on Friday following the jobs report when the Labor Department reported that the U.S. economy added 315,000 jobs last month which was lower than expectations.
If not interest rate, what will continue to fuel the market’s downward spiral? One article from MarketWatch suggests that the next down leg may be driven by lower corporate earnings and not higher interest rates. “Morgan Stanley strategist Mike Wilson says there’s more pain in store, but for a different reason.” Morgan Stanley’s leading earnings model shows significant downside risk to EPS growth ahead.
In the CreativeVest Discord Community, we discussed how if the market broke the 50 SMA (Green Line) that it was likely to find support along the top of the market bottoming consolidation and potentially rally back up to the 50 SMA where it may find resistance. It did exactly that on Friday and then reversed rather quickly back down to the Thursday lows. It seems possible that the market could continue to find support around the top of the consolidation and bounce back up to resistance at the 50 SMA or possibly just continue to plunge lower.
As investors/traders it doesn’t really matter what happens in the market. Either way we want to have a plan of action. For me, my expectation is that the market continues to find support and maybe even moves sideways for a few days bouncing between support and resistance before breaking lower. I want to add to my short positions at the top of the bounce near resistance at the 50 SMA. However, if it continues to break lower, I want to find logical areas to add to my position on a breakout to the downside. I look to add to my position in a couple of ways. In the Model Stock Portfolio, I will add to my SQQQ position. In the USIC (United States Investing Championship) portfolio I will look to add to existing short positions or open new positions.
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