Investors remain bullish on the SP500 but we have a bullish extreme and we saw weakness at the close last week will we see a correction this week or will the uptrend continue.?
On the chart below we can see dips in the best have been held by the up-sloping trendline and the 50 day moving average on Friday we closed below the trend line and at the 50-day moving average, with the VIX rising.
We have a stronger USD which if it continues to strengthen will pressure the SP500 lower.
On the chart below we can see we are at a weak time of the year seasonally historically, September tends to be one of the worst months for the SP500.
The crowd is not only heavily bullish of the SP500 and there very bullish with a large number not hedging positions:
A Bullish Extreme and the Buy the Dip Mentality
The SP500 is a bullish extreme and traders have been conditioned to buy the dip and recent retracements have seen prices bounce back quickly but now we have weakness and the Pavlovian buy the dip mentality is not working and this could trigger a significant correction.
In terms of stocks, fundamental reasons for more weakness include:
We are the most overbought in history in terms of P/E ratios.
We have the Fed this week and we expect them to indicate that stimulus will start to be reduced this year.
We have weakness in Chinese stocks which if they continue to sell off will weigh on risk sentiment generally and global stock markets.
We have a slowing global economy that will continue to slow up which is bearish stock markets.
A large number of inexperienced investors are buying call options and a large number are buying out-of-the-money options with short expiry dates which is normally a sign of overconfidence of the crowd and warn of a major correction.
The chart below shows movements in SP500 Futures on Monday morning and we are seeing a sell-off if this continues when the market opens we would expect a correction to the 4200.00 level and expect rallies to be held by resistance levels indicated.
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