After February’s very strong month, the market has had tough times lately. In the beginning of March, the major averages hit all-time highs and the Nasdaq Composite even climbed above the 5,000 mark, a level not seen since the dot.com bubble in March 2000. The party didn’t last and in the next day, we started to see the beginning of a down move. An excessive bullish sentiment and profit taking were just two factors leading to the reversal. Last Friday, the situation got worse when the Labor Department delivered a much stronger-than-expected jobs report despite the bad weather conditions in some parts of the country. When everyone thought that the rates would continue to stay at current levels for some time, the report caught many by surprise and the market plunged on very strong volume in an unequivocal distribution day. While a stronger economy is good, stronger rates mean less consumption due to higher borrowing costs to families and businesses. Since then, we have had a follow-trough to the downside in the major indexes with just one up day due to the overall oversold conditions, in a typical bounce move (probably today will be another one). Wall Street’s favorite gauge of market uncertain, the VIX, spiked to levels not seen in a month tough it managed to stay below 20. The breadth has been weak, and if in the beginning of the move leaders have hold quite well, when the selling pressure hit full speed, they had no place to hide and got hit as well. Amazon (AMZN), Netflix (NFLX) and Apple (AAPL) are just a few examples. There are some places that continue to show resilience like the biotech sector but one must be very selective at this moment. Yesterday and today the overall picture looks rosy and we didn’t see too much damage. Next week all eyes will be on the Fed as they hold their two-day March meeting and market participants will try to discern the dovishness or hawkishness of the outcome. Therefore until next Wednesday market will likely be in wait and see mode. That being said, in the long term I think the primary trend is still strong and I keep my bullishness in place. Short-term a defensive approach is highly recommended. If you are a breakout swing trader I would even be more cautious as breakouts tend to fail in these conditions. Regardless of the strategy that you follow, remember that even the best ones won’t work in all market environments and timing as proven to be a good ally.
Below are daily charts of the VIX and the S&P 500.