Recession Fears Persist - Trading Week Update

Today we didn't see big movements in the indexes as we did yesterday. There were attempts to rally but the only important index to close with a marginal gain of .08% was the Russell 2000, the rest all ended in negative territory.

The big financial institutions are already publishing forecasts about the probability of a recession in the next few months. Goldman Sachs estimates a 35% probability of a USA recession in the next two years. Morgan Stanley a 25% probability in the next 12 months.

Below is the updated table just to keep in perspective how far we are from officially calling a Bear Market in all of the main indexes. The ones in yellow are already in Bear Market territory (20% loss or more compared to the previous high).

A reaction rally wouldn't be strange at this point. It could be triggered by the index getting to oversold conditions (-3 Keltner Channel, orange dotted arrows) or by hitting an important support, in this case 3,900 (pink dotted arrow). Always remember that a reaction rally doesn't necessarily mean a change in the Market direction.

S&P 500, daily chart, you can click on the image in order to magnify it

The weekly S&P 500 chart is also in oversold conditions. The index used to produce much more powerful rallies in the past when getting at those levels, now it seems to be tracing a downtrend pattern, lower lows and lower highs.

Unless we see a V-shaped recovery, which I think it's highly unlikely, it will take time for the Markets to calm down and trace a bottom. There isn't a formula for bottom building formation, it will be a matter of tracking closely the index and the clues that the Market provides. At this point, the Correction continues and if there is a powerful negative catalyst, all of the indexes will officially in Bear Market Territory.

I'm on the sidelines, all cash, not the most exciting position in the Markets. The next few days, weeks or months will be about waiting until there are some signals that a Bull Market can start again.

S&P 500, weekly chart, you can click on the image in order to magnify it

One of the most important leading indicators that could give a clue about a potential recovery is the New Highs and New Lows indicator (NH-NL). Despite the diminishing selling pressure, the numbers stopped improving, in fact today, the New Monthly Lows just increased again.

It takes time to see the New Monthly Highs increase. Thousands of stocks were making New Lows, they won't immediately change direction and start making New Highs. The problem today is that the New Highs aren't increasing significantly and the New Lows started to increase again. Let's see how the trading week closes tomorrow.