Every month, I make a fresh "map" of the market that helps me
define the highest-probability scenarios for the S&P 500 over
the coming weeks. The Market Timer Map is based on key technical,
fundamental and sentiment drivers.
Earlier this week, I looked at the bullish drivers that would
propel the S&P to new highs above 1900 before summer. Today,
I'm focused on 5 bearish trends that could temporarily de-rail the
bull train this month if he doesn't get up and get going soon.
In the spirit of "keeping your enemies closer," we want to know the
bear case well and be ready to join them in the short-term if it
looks like a bigger correction is going to unfold.
5 Bearish Warning Signs
1) Russell 2000 Small Cap index breaks down below 200-day moving
2) 10-year Treasury yields fall to 2.6% as fears about war and
3) Heavy "distribution" of growth stocks from Technology to Biotech
4) Heavy sector rotation away from growth areas to defensive,
5) A mature bull market, with big gains on the table, entering
"worst six months"
When you add up these bearish drivers, it's hard not to turn a
little bit cautious in the short-term, or at least have one eye on
While I remain bullish in the long-term, I am preparing myself and
my Market Timer group for ways we will capitalize on a potential
correction. Here are the three questions I'm focused on right
There are clearly big disconnects going on in the market as many
institutional investors flee growth stocks and run to bonds and
safer sectors. The defensive flight to safety, away from Consumer
Discretionary, Financials and Tech to Utilities, Staples and Energy
is enough to make a bull like me a little nervous.
And we have to wonder if the money that is rotating into big caps
is just masking the broader market break-downs. In other words, is
the S&P 500 destined to follow the Nasdaq and the Russell 2000
back toward its own 200-day moving average, or lower, once all the
rotation and reallocation is over?
More . . .
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Right now, the S&P is still trading above levels that argue for
new highs. Specifically, there are several levels of support where
institutions have shown great buying interest between 1780 and
Since the April 4 highs at 1897, buyers have come in at 1815, 1850
and 1860. As I write on Friday afternoon, the index has bounced off
of its 50-day moving average at 1865 yet again.
But this ship could easily turn quickly south and start plowing
through those supports. For me right now, I will shift more
defensive on a close below 1850. And I will start thinking
correction if we lose 1820.
Because even though 1780-1800 will offer some support, if the
S&P gives back the ground it has gained in the past four weeks
since 1815, then the tide is probably turning against the bulls for
So to answer "how soon?" it's all about the strength of the price
trend. A strong S&P will lift the Nasdaq and Russell 2000 with
it. A weakening S&P could get the ball really rolling for a
A trip down to the 200-day at 1782 would only be 6% off the highs.
And even a test of the Feb lows at 1740 would only be 8.3%. The
S&P could definitely find good support in those areas and stave
off a double-digit correction.
In fact, there will probably be good bounces off those levels the
first time they hit. But if the market climate takes a worse turn,
whether due to poor economic data or geopolitical crisis, then the
next "magnet attractors" of price will be 1700 and 1650.
If waves of selling take over in the next few months - and they can
easily do so if there is what I call a "buyer's strike" where
cash-rich investors stand aside to "wait and see" - then we will
visit each successive level of these supports.
A break in each gives way to the next. And 1650 could give way to
test 1600, and then last June's lows at 1560 will be the target
As Mr. Market is fond of doing in these sell-offs, he won't make it
easy for bulls, or even bears, to find their footing. And the
relief rallies that catch bears off guard - or fool bulls who think
they've missed the turn - will just be another joy ride on the way
So just when investors all move to the same side of the boat,
bullish or bearish, Mr. Market will pull the rug and tip us back
the other way. You have to be able to anticipate these moves.
If such a volatile ride unfolds, I can picture a scenario where the
S&P does get all the way back down to those June lows near
1560. Because that would be a good test of the longer-term breakout
that happened when the index surpassed the 2000 and 2007 highs. And
I will be a big buyer down there looking for S&P 2000 by 2015.
How to Prepare?
The best way to prepare for a correction is to have a plan. When I
draw up my monthly map of the market that defines my
highest-probability scenarios for major price action, my goal is to
be on the right side of the 2-5% swings that can happen every week.
Often, grabbing those key entry points that give you a well-defined
risk/reward "edge" can put you in the right positions for a larger
5-10% move if key support or resistance is broken.
What I do is identify key support and resistance levels in advance
and determine windows of probability for the S&P to trade
within, given those price ranges. I also assign odds to a more
meaningful breakout above, or breakdown below, the outer levels.
What my "Scenarios & Probabilities" map gives us is a
systematic decision-making tool. I am either a buyer at key support
levels of bullish leveraged index and sector ETFs, or I know when
the level is violated and the next support is in play.
And that's when I decide if we will flip to bearish leveraged ETFs.
By far the most important dynamic of market timing, besides knowing
how to identify and use support and resistance, is how you allocate
capital. My map not only defines my risk, it also tells me how much
to bet to make the most of every opportunity.
I wouldn't enter a trade without it. Especially a trade that is
headed into correction season.
And Then, When I Pull the Trigger . . .
You can be there with me, receiving email alerts from our private
service where I follow the map mentioned above:
Zacks Market Timer.
In 2013, this portfolio more than quadrupled the average hedge
fund. Yet now the profit potential could be even more explosive.
Unlike last year's steady bullish climb, 2014 looks to be a full
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We aim to profit from quick swings in industries, sectors and the
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If that sounds interesting, I encourage you to check it out now.
The next big market turn could come as soon as Monday. In fact, for
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Zacks Market Timer
Kevin, a Senior Stock Strategist at Zacks, is a recognized
authority in global markets and renowned for predicting market
swings. A former market-maker in the $4-trillion-dollar-a-day world
of interbank trade, he developed the ability to track the movement
of money, and trained his reflexes to take advantage of it. Today
he directs the
Zacks Market Timer,
providing commentary and recommendations.
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