Did Trump Just Trigger a Stock Market Top? These 3 Indicators Will Help You Decide.
Did a social media post by President Donald Trump just threaten to bring down the three-year bull market in stocks? No.
Was the stock market set up so that just about any bearish news could creep in and tip the whole thing over? Yes.
Because that’s how it always happens. And to paraphrase an old saying, how did the stock market collapse? Slowly, then all at once.
Not for a moment should you think I “know” what’s going to happen. I gave up being Nostradamus a long time ago. But I want to remind you that today’s markets are not like those of our parents. Or our grandparents, for that matter.
Today’s market is the latest threat to a very narrowly driven up move in U.S. stocks that has just reached its third anniversary. The “AI trade era” might be what we remember this as. But will we remember it in the past tense very soon? Or, is this just another so-called “buy the dip” moment?
That’s what went through my mind as a Truth Social post from Trump shook up Friday morning trading. And I thought about what my go-to indicators were for moments like this. I could not list them all, as we don’t have that amount of space and time.
Risk management is my primary objective. Because everyone can find an endless number of ideas, picks, and predictions. They range from consistently excellent to consistently hazardous to our wealth.
So here, I’m going to simply list three different indicators I’m watching right now. They are not about trying to guess the next move in the S&P 500 ($SPX) and Nasdaq-100 ($IUXX) indexes, or even the bond market. Remember what I said just above: The “offense” is the easy part.
The focus for me when we get a “warning shot” like Friday’s is to monitor things that help me decide if this is the end of something, or the start of something bigger (to the downside).
This is borne of having survived (and even thrived) in sustained down markets starting last century. And if there’s a top takeaway here, it is that what starts as protecting capital in rough waters can soon convert to exploiting a severe market decline. But first we have to have one. One day is certainly not enough.
Let’s start with the most important indicator, since it is what is holding up the entire stock market. I find it hard to believe that there is “help from below” in terms of smaller large-cap stocks and small-caps. They have not rescued the big dogs in a long time. For a day or week, perhaps. So I’m not counting on a sustained transition from growth to value, big to small, or anything of that sort.
I’m looking at the Invesco QQQ Trust ETF (QQQ), but not in the usual daily price time frame. I’m shortening it to a view of 4-hour price bars. I look at everything from 1 minute to 1 month, depending on the task at hand. Here, it is to see if I can get ahead of the daily and weekly trends that are more popular. Because if those are to get “infected” in the near future, they will catch that bear bug from the shorter-term charts. It is a domino effect.
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Above, I see the worst-looking fade in the 4-hour view we’ve seen since the Liberation Day chaos of April. It’s a start, and a warning. And it is exactly why I always have some type of “disaster protection” in my portfolio. Always. Because buying insurance on an asset base is a lot cheaper when no one expects the storm to come. Friday, some dark clouds began to form.
Next, I’m looking below at the 20-25 largest stocks in the S&P 500. Why? Because we’ve reached the point where they represent about half of the entire index! That’s unusual. And it also means that the index only relies on about 5% of its 500 stock holdings to sustain its recent success. This group is a mixed bag currently. But I’m watching carefully.
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Finally, here’s the one I think could be the real “tell” in the weeks ahead. The average S&P 500 stock (equal-weighted index) has been lagging all year, and all AI bull market long. This is a weekly chart, since I don’t want to get “whipsawed” in evaluating that key point above: that the non-mega caps probably are not capable of rescuing the stock market.
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Again, one day is not enough (unless Monday is like October 1987, another reason I always have some sort of disaster hedge – old habits die hard). But if that Percentage Price Oscillator (PPO) indicator at the bottom goes from teetering as it is, to rolling over, that will send a very strong signal that a new phase has begun. One that will favor knowing how to play defense.
Defense always matters. Many investors are just out of practice when it comes to considering it seriously. They haven’t had to. Maybe that’s about to change.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
