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Is a Stock Market Correction Looming?

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Introduction

SPY, otherwise known as the SPDR S&P 500 Trust is an Exchange Traded Fund (ETF) that groups America’s largest 500 corporations. The ETF is incredibly diverse with many stocks contributing towards different sectors of the economy including oil, software, finance, and more. It has a combined market capitalization of roughly 390 Billion Dollars and is a good representation of the performance of America’s Stock Markets. The SPY ETF has time and time again returned 7% on an annual basis and is regarded as one of the safest investments in the stock market due to its minimal volatility.

RSI

RSI, otherwise known as Relative Strength Index, is an indicator which is used to determine whether a stock is oversold or overbought. This is done on a scale of 0-100 with higher numbers being a sell signal and lower numbers being a buy signal. According to the RSI indicator, the SPY ETF is incredibly overbought with its RSI being overextended at 74. This signal is worrisome considering that RSI has accurately predicted Market Crashes/Corrections dating back to 2001. In 2001, the RSI indicator was resting at 69, the Nasdaq later collapsed 44% in the following months. In 2008, the RSI indicator was valued at 72. The SPY ETF then lost 38.49% of its value. And in 2020, the RSI indicator was valued at 69, the SPY ETF then fell 32%. These consistencies suggest that a bearish market is approaching according to RSI.

MACD

MACD

MACD, commonly referred to as the Moving Average Convergence Divergence, is another indicator that takes into account the moving averages of security from different periods of time.

These specific periods of time are usually the 12-day moving average and the 26-day moving average. Whenever the 12-day moving average crosses over the 26-day moving average, the MACD is suggesting a buy signal. On the other hand, if the 12 crosses under the 26, this is known as the death cross, otherwise recognized as a sell signal. According to the MACD on the SPY ETF, the 12-day moving average is positioned to cross under the 26 within weeks. This is a bearish signal considering how accurate the MACD indicator has been. In the year 2001, the 12 crossed below the 26, this led to what became known as the Dot Com Bubble Burst. In 2008, the same scenario played out which consequently led to the Housing Bubble. And in 2020, although the indicator was less notable in this situation, the 12 did cross under the 26 resulting in the most recent financial crises. Now, the MACD is hinting towards the same situation with the 12 headings under the 26 which can lead to another bear market.

Key Levels

SPDR S&P 500 ETF

Every stock or ETF has both support and resistance points. Support lines are specific points where a stock will bounce up from. Resistance lines are specific points where a stock will retrace back down from. Sometimes, these lines may double to being both resistance and support lines. However, in a situation where there is no support or resistance line, a dire fate is awaiting. This is because a complete upward trend is unsustainable. For example, Coinbase’s IPO was initially a success with consistent gains without any bearish candlesticks, however, this success was followed with a brutal sell off resulting in a loss of billions of dollars. The SPY at this point in time is seeing the same situation. It is in an unstantable bullish run with no resistance or support lines. This is due to its consistent gains in the last few months which will consequently result in a market correction.

Increasing Inflation Rates

Historically, the dollar loses 3% of its value on an annual basis due to inflation. However, 2021 is an anomaly with the highest inflation rate of 5.4%. This rapid increase in inflation is due to customer spending relative to production. In other words, the end of COVID-19 has led to more demand in public spending which is greater than the supply. For example, the value of used cars in the past year has gone up 32% due to the recent influx of consumers. Inflation is worrisome towards the stock market because the margin of profit from investors will be cut short due to the recent rise in inflation. In other words, the cash within the stock brokerages of investors is deprecating due to increased inflation. This means that investors are likely to pull their money out of the markets which can lead to a sell-off. This consequently led to the rise of tangible assets like gold and silver which have increased in value due to inflation concerns. The increase in inflation makes the market outlook bearish.

Rising Interest Rates

Interest Rates for the past year have remained at an all-time low for homeowners. However, interest rates are likely to increase due to a rise in inflation. This is because mortgage lenders will require a higher interest rate in order to compensate for the higher inflation rates. Higher interest rates thus lead to companies investing less back towards their business which results in lower profits. Interest rates are particularly bad for technology stocks due to how technology stocks normally do not report profits early. This makes technology stocks extremely vulnerable to a rise in interest rates. As rising interest rates fears continue to take place, the markets will react bearishly.

Conclusion

From technical analysis and fundamental analysis, the market is looking very bearish. Despite a thriving come-back from the Covid-19 outbreak, market analysis has time and time again been very consistent and accurate. Time will tell if the market gains will be extended, or if a market sell-off will embark.

Disclaimer: This is a guest post. The views expressed in this article are solely those of the blogger and do not represent positions of Stocks Telegraph.

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